Innovation!

Friday was D Day. The escrow company called me up to let me know that the loan documents had arrived and were awaiting my signature. I gave escrow my work address and they sent a notary to my office for final execution of the loan documents. The signing took no longer than 10 minutes, upon final execution I drove to my local Bank Branch and ordered a wire to be paid to escrow to close this transaction. Once the Deed records on Wednesday, the loft is mine, the transaction is complete.

It was all very painless and easy, but it did leave a sour taste in my mouth. As a professional in the mortgage banking business I'm accustomed to viewing settlement statements (also called a HUD-1, it's a federally mandated receipt of charges for a real estate transaction that involves a loan) nearly every day. But, in work, I'm viewing random people's HUD-1s, never my own. It's different to think about HUD-1s in the theoretical sense of it existing for some one else, when the point is driven home and you sign your own HUD-1 it takes on a different meaning.

When you think of Innovation, what do you think of? I tend to think of innovation in terms of technological achievements, when the original Apple IIe hit stores in 1984 the base model cost $1,300 in 1984 dollars. When the Ipad hit stores in 2010 the base model cost $499. Between the two lie a light year of innovation. In Banking, the idea of innovation isn't how to make something cheaper, better, or faster. The idea is how best to pass on fees to your customers and borrowers.

My HUD-1 is filled with fees, here's a small sampling: loan origination fee, appraisal fee, credit report, tax service, audit, notary fees, recording fees, move in deposit, and my personal favorite, a Move-in Fee from the HOA. These fees are making the lender money and the borrower poor. A co worker was telling me that the average America will refinance their 30 year mortgage once every 7 years, if you add in the fees associated with every refinance transaction they complete, then the effective interest rate on a mortgage loan becomes something like 15% to 20%. Think of how many people pay annual fees for credit cards? No one, at any time, should pay an annual fee to use credit (however, this is a topic for a separate blog post).

Charging fees is not innovation, although the Banking Industry seems to think so. To my knowledge, there has been only one major innovation to Bank in history (a history that expands the entire time man needed to finance construction projects that could not be done by a band of people), that is the double entry book keeping system in the renaissance. After that, there is no further innovation. It is my personal belief that Banks should quit looking for ways to 'innovate' and focus on their historic job in human society, shepherding the risk that economies need to take in order to grow. If Banks had focused on being a shepherd instead of an innovator then maybe we could have avoided the subprime melt down.