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What JPMorgan Chase Really Means When It Complains about Regulation

Bankers would have you believe they're not lending enough because of government constraints. In reality, they're not lending enough because they've grown dependent on government largesse.
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Jamie Dimon, the chief executive of JPMorgan Chase, would have you believe that government regulation is threatening the economy. Earlier this month, as his company reported record profits but a scant appetite to write new home loans which would spur the still-lackluster economy, he blamed regulations for having, according to the New York Times, "clogged the lending spigot," and excluded qualified borrowers from getting loans.

I was one of those qualified borrowers. And the harrowing year I wasted trying to refinance my Chase home loan with a hapless bunch of Chase loan reps shows that Dimon's claim is highly misleading. Banks like Chase complain about government intervention while wholly depending on it to absorb their risk while walking away with large profits (this is one reason Dimon was forced to apologize before the Senate Banking Committee for a $6 billion trading loss last year). Contrary to Dimon's ongoing complaints, these days it's government intervention that opens the lending spigot while the free market runs it dry.

Complaints by banks about excess regulation harming the economy are part of a larger conservative counter-narrative that emerged after the 2008 financial crisis. That story says that it wasn't unconstrained risk and complexity among financial institutions that caused the crisis but efforts by government to help unworthy people get loans. In particular, according to this view, government-sponsored enterprises like the mortgage companies Fannie Mae and Freddie Mac, along with laws like the Community Reinvestment Act, nudged or even forced banks to make loans they should never have made. These days, say the complainers, banks are required to keep more capital on hand than they need to, constraining their ability to loan.

But do banks really make bad choices when government intervenes and good ones when left to their own devices? My experience suggests not.

A little background: I have an adjustable-rate mortgage on my two-family Brooklyn rowhouse. Unlike many people trying to refinance their home loan to lower their monthly payment, I'm willing to raise mine in order to lock in a historically low rate for the next 30 years -- otherwise my payments are likely to go even higher as the economy improves and interest rates rise. I thought Chase would have an incentive to refinance my loan since what I was trying to do was to both pay them more and reduce their risk -- by replacing a loan that might screw us both (if I couldn't handle the rising interest payments) with one safer for both me and the bank.

But while Chase services the loan they wrote for me, they no longer own it. Like so many mortgages today, Chase bundled it and sold it to investors. And guess what? When their money isn't involved, they don't really care about it. There's an obvious logic to this -- no one should expect a company to care much about other people's money. But that's exactly the point: banks are far more risk-averse when dealing with their own money than when writing loans they plan to sell of -- which consist largely of loans that are attractive to investors because of government guarantees and government-sponsored loan investors like Fannie and Freddie.

So when Chase thought they could make off with a quick, risk-free profit by writing me a new loan and selling it off, they were ready to offer me a refinance. After luring me in with a low rate that undersold what other banks were offering, the Manhattan offices I was dealing with displayed an appalling level of incompetence in understanding basic personal finance. The sloppiness caused weeks of needless delay. Their appraiser compared my recently-restored corner house with a much smaller, dilapidated house around the corner that needed half a million dollars in work. That faulty comparison sank my appraisal value below what was required for the loan. When I complained that the appraisal had obviously used inappropriate comparables, I was told that, due to new regulations, there was nothing Chase could do, as they weren't allowed to contest the appraisal. That was false. New regulations do restrict lender contact with appraisers, but they also set up an independent entity responsible for handling appraiser misconduct, which could have been contacted to deal with my faulty appraisal, had Chase really wanted to close the loan.

Instead, months went by. By the time I prevailed on the bank to order a new appraisal, my credit score had temporarily dipped below the qualifying standard due to a common error by the credit report bureaus -- double-counting certain credit card debts. Months went by again before my credit score could be corrected, but by then Chase had decided they weren't satisfied with the income they initially said would be sufficient.

So I got a co-signor. After weeks of providing them with detailed paperwork, they concluded that, even if the income was sufficient, they just couldn't be sure they could sell this loan on the open market, so the only hope would be to qualify my application by a new set of stricter criteria required by their portfolio division -- the office that makes loans it plans to keep on its own books.

A full year had passed. I had walked away from other banks -- and from the lowest interest rates available, as they inched back up in the first quarter of this year. I also was concerned that my 2012 tax returns would show less income than previous years, since I'm currently taking less paid work while I finish writing a book. Chase, which had locked in my rate at 3.75 percent, was my only hope.

But Chase no longer wanted to make the loan. What had happened? Chase told me that the bank simply "didn't have an appetite" for my loan. I tried in vain to get an explanation for why -- having jumped through all the hoops they said were required to qualify -- they were ultimately saying no. Keep in mind that the monthly payment I would be making under the new loan was lower than the payment I've made for the last eight years. In that time, I've never missed or been late with a payment -- making over 90 consecutive payments to Chase. That, really, is all that should matter. In other words, this isn't sour grapes for losing a loan for which I didn't qualify -- I met every requirement they set before me, and repeatedly asked why they still said no. But now Chase wasn't returning my calls.

The fact that they gave no explanation besides "appetite" for what they had said was a qualifying and appealing loan is telling. When Chase thought they could make a quick profit by selling the loan to someone else, it was appealing. When they realized they could only write the loan if they held onto it themselves, they balked. That's because they'll take bigger risks with other people's money than their own. Which is why what Jamie Dimon really means when complaining about regulation is that the government hasn't been offering up enough guarantees that the taxpayers will absorb any bank losses that come from risky investments while granting them any benefits that may accrue.

Bankers would have you believe they're not lending enough because of government constraints. In reality, they're not lending enough because they've grown dependent on government largesse. This may or may not be a good use of government intervention, but bank leaders like Dimon should make clear just what their beef is with government action, and why they seem so willing to disparage it and depend on it at the same time.