After so many years of writing these columns, I know when I've hit a nerve by the amount and swiftness of the feedback I get from readers. My last column resulted in my receiving a lot of e-mails and calls from building material dealers across the country who said they were seeing the same bad behavior by their local banks. Dealers are concerned the rebound in the housing market is in great peril because bankers appear to be doing everything they can to discourage lending, and many were very reluctant to speak out because of reprisals from their own lending institutions. For many in our industry, the bankers have become the business emperors of our time.
There are three stories told to me that I feel need to be shared with our readership because they show the profound dysfunction in our banking system.
I received the following e-mail from Mike Nohejl, a partner in Manning Building Supplies of Florida, a large independent dealer with a sterling reputation. I asked Nohejl for permission to share his story with our readers, and he kindly agreed.
He wrote: After reading your article on banks I thought I would relate my recent experience with Wells Fargo, where I have three personal accounts, plus a Manning Building Supplies business account. FYI I am a partner in MBS. I wanted to deposit over 6 figures for at least a year for a decent return in a FDIC-insured product. The bank officer actually laughed! When he saw my rather unfriendly reaction, he told me they can get money from the government for "free," so why would they pay to borrow money from me? Great customer relations line. It is no wonder the economy is so slow in rebounding. Banks don't care if they insult their "good" customers, God help the poor soul who actually needs a loan!
This one e-mail proves the point I made in my last article: Banks have no motivation to lend, and he is absolutely right--God help the poor soul who actually needs a loan!
Another true story: A 30-year, well-established builder in Lake County, Fla., contacted one of our salespeople about a problem he was having at the bank. The builder had been selected by a Grade A customer to construct a large custom home in Clermont, Fla., and the homeowner was strong with outstanding credit, significant equity in the project, and a substantial amount of up-front cash.
Everything was slated to go forward. However, at the last minute the bank demanded that the builder obtain letters of recommendation from some of his major suppliers before the bank would issue final approval on the project. The builder was humiliated to ask our company for such a letter, even though we gladly provided him one. This proves my point that the banks are out of control.
Banks get federal money from you and me, the taxpayers, with no strings attached, yet they attach ropes to every nickel they lend. Something is wrong when an outstanding builder with a proven track record is forced to grovel to his vendors for a letter of recommendation because some bank desk jockey wants to throw up another roadblock to a project.
My final story comes from one of Central Florida’s remaining independent builders, who still operate within their own communities. The builder relayed to us that most new-custom-home buyers upgrade amenities on their home plans like granite countertops, higher-quality windows and doors, flooring, and moldings. Upgrades used to be the goal of every custom home builder to increase the price and profit on a house. That is not so today.
It seems over the last couple of years, appraisers don't recognize upgrades in amenities, so custom homes with all the bells and whistles are being appraised at the same rate as that of a starter home. As a result, customers with great credit and strong equity are being denied lending on a home because the amenities are discounted out of the price. For this builder, it means many homeowners who want to build a custom home must pony up $20,000 to $40,000 out of pocket for the upgrades or the deal is blown. This is why so many custom home deals are being lost.
Here's a comparison that shows how dumb no valuation for amenities in home appraisals is. If you use the current banking method for home appraisals in the car business, it follows that a mid-sized KIA should be priced the same as a mid-sized Mercedes. Wow! Just think about buying a fully loaded Mercedes for less than $19,000!
Why amenities and upgrades are valued in appraisals in the car industry and not in the home building industry is a complete mystery to me. I wonder: If the U.S. government had Government Builders instead of Government Motors (GM), would there be such discounting for upgrades? The banking appraisal process is fouled up, and reforms in the industry must happen now.
What is going on in the U.S. government through the Fed and America’s banks is nothing more than financial incest. You can't have former partners and friends in the Fed laundering money to America's banks with "no strings" attached, and then we are to trust the banks to make the right decisions.
For this problem to get solved, the major associations in this industry, home building and real estate, have to play their political cards in a huge way by rallying their millions of members who see the nonsense firsthand. Most of the companies are in no position politically or financially to individually stand up against the banks who hold their futures in loans and notes. Therefore, the home building and real estate associations need to stand for all. These associations should be asking their members to send them their stories, so that Congressional hearings can be organized to tell America exactly who is responsible for stalling this economy.
Don Magruder is CEO of Ro-Mac Lumber & Supply in Central Florida and former chairman of the Florida Building Material Association. This article originally appeared in FBMA's Feb. 10 newsletter.