Eventually, you will come across a greedy banker or thoughtful banker when doing any type of business. Let's discuss a banker's sentiment, because often, the people in finance are unfairly stereotyped as bad people.
My friend is leaving his job of the past five years to work on his own start-up. When he got an e-mail solicitation from his mortgage officer about whether she could come by his office with a set of boxed lunches for him and his colleagues, he told her “no thank you” because he was leaving. He purposefully kept his plans vague and hoped she'd just leave him alone as he attends to his new life.
Greedy Banker Or Thoughtful Banker?
Instead, she came back with the following response,
“I am sorry to hear that? When you land at another organization, please let me know. Also, let me know if I can help through the transition. Since you are still on payroll, I always suggest putting a Line of Credit in place. And if you need a brokerage account to rollover your 401K, we can certainly assist.”
Pretty thoughtful right? Or is it? My friend responded,
“Thanks. It's actually voluntary. Doing my own thing. I've got enough saved up for the next 8 years, so I don't think I need a HELOC, unless the rates are super low. Even then, I don't need it because I have the cash.”
Seems like a nice way of saying he's fine and does not need the banker's help. Instead, the banker comes back and says,
“I always suggest putting a line in place even if you have cash on hand. Especially since you are still on payroll as it makes the process much easier. I recommend investing your liquid savings in higher yields within your comfort zone and instead put a home equity line in place for say $100,000 to act as your emergency line. If you need it it is there for you, if you don't great it does not cost you anything.“
At this point, my friend is starting to get annoyed. He's been polite about saying “no thank you” twice now, and yet the banker keeps on pushing. She recommends my friend use his 8 years of excess liquidity to invest in riskier assets, so he can borrow money from the bank via his home to keep liquid!?! This seems to make no sense.
“Sure, give me a risk free 4% yielding security and I'll take out as big a Line of Credit as you want!”
No response from the banker yet, and it's been a week………
I'm not sure whether this is a greedy banker or thoughtful banker.
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47 thoughts on “Greedy Banker or Thoughtful Banker?”
Looking at it purely from the perspective of your friend, I might take her up on the offer. After all, there is no cost to me unless I use it. And, she is right, in that it is much easier to get the line of credit while I still have a stable income. Who knows if in a few years my business needs some extra cash. I’d much rather use a low interest, tax-deductible product than a high interest credit card. Of course, I would have to weigh the likelihood of my business surviving since the loan is against my house.
Sounds like the banker was just doing her job. She knew your friend was a low risk to her company and she could likely make some sort of commission from the deal, so why not go for it? Not sure if that makes her greedy or just a smart business person? Personally, if I was your friend I would not take the loan… he doesn’t need it so why bother? If he goes through 8 years of savings he has bigger issues to worry about and ought to be looking for some form of employment, anyway.
Also, tell your friend to put half of his savings into a high yield dividend stock (my portfolio ranges from 1% yield to 9.5% yield and averages around 4-5% depending on the day) and he would earn enough extra to never need the loan anyway. :)
Sounds good. And what if the market corrects and the dividend stock goes down 10%? That’s what I always think about.
There are plenty of bankers out there who don’t have their current or prospective client’s best interests in mind. I know several people who actually gave up their jobs as financial advisers because they got tired of being pressured by senior management to constantly get people to sign up for products that they really didn’t need or could afford.
I can imagine. Probably a senior manager pressuring to make the sale, hit the numbers, etc. Probably similar to many types of commission related jobs, and why a lot of people quit eventually.
Please tell your friend that we have 4% bonds here in the Philippines!
Sounds good! But, also 4% inflation too!
Yeah… I’d put this in the bad idea department. It’s really as if he and the banker were speaking two different languages. I had a similar experience with a whole life salesperson who kept trying to push whole life because I could borrow from the “cash value.” I kept saying “I don’t borrow money anymore, so that’s not much of a value for me” and she kept saying “but it’s there if you need it.” She just didn’t understand that she was not going to make a sale by pushing a loan product.
It was actually pretty fun. I sat there with her for two hours in a diner with her trying to convince me that a 30-year term policy for twice the death benefit at literally 1/10 the cost of the whole policy was not wise because there was no cash value to borrow, even after I told her I had a separate investment account into which I actually invest enough of the premium difference to more than make up for the cash value.
Often, these people are so drunk on the kool-aid and married to scripts, that they can’t help themselves. I wouldn’t hold it agains the person – they were probably just cutting and pasting from a script.
Thanks for the story Nick. Sounds eerily familiar. I’m dreading this type of conversation. I see the attractiveness of whole life for those w/ extra disposable income laying around. I just wish I didn’t know about the massive commissions they make, b/c that ultimately comes out of my pocket as the consumer.
Sam, I’d suggest taking HELOC but don’t use it. I’ve been in different businesses, and I know that no matter how you plan, you may sometime need cash to expand your business. It’s good to have a line of credit at your disposal. I also think that banker is definitely doing it for her commission, but what’s wrong with that? She is an aggressive salesperson.
She’s not recommending anything that’s inappropriate for him. Keep in mind, a HELOC should be used for emergency and yes, I recommend it to my clients even the ones who have $2MM sitting in the bank. (Note: I don’t get paid or do anything with mortgages.) Right now, rates on the HELOCs that I review are 1-2.5%. That’s a pittance for the cash flow benefit. Just make sure it’s no cost, no fee.
If he’s someone without any self control and would use the HELOC to buy random things and run up debt, he shouldn’t get it at all.
The purpose of the HELOC is about cash flow during emergencies. During major health emergencies, the amount is far larger than most people can liquidate quickly without losses.
She’s also saying for him to invest within his comfort zone. If that’s a CD, he’s going to have to pay penalties to break out of a CD for any short term emergency.
For example, my sister had a health issue that required hospitalization and we had to pay the deductible upfront. That’s $10,000. I can whip out the checkbook, write a $10,000 check, and then figure out what I want to liquidate to pay it off. The cost to me for an entire month’s interest is $12.50.
If a stock’s ex dividend rate is 5 days away, it’s worth it to pay $2.08 in interest expenses until after I’ve locked in my dividend payout.
If it’s a bond, you may need to wait for the right timing to sell the bond. Bonds have different market price depending upon the time, especially municipal bonds. The loss on a bond that you sell without thinking will far exceed any interest. My $10,000 bond can fluctuate by $500-1000. I love buying those emergency liquidation bonds when I see them.
What I have a concern with would be why a mortgage broker would be selling a brokerage account for his rollover IRA.
1-2.5% HELOC rates? Sign me up! Seriously, please let me know where I can find that b/c all I see are rates in the 4%+, even though I myself am refinancing to 2.625% for a 5/1.
To 75% LTV (Prime – 1/2%) 2.75%
76% to 85% LTV (Prime + 1/2%) 3.75%
Over 85% LTV (Prime + 1 1/2%) 4.75%
Hanscom Federal Credit Union
OK, but that’s not 1-2.5%. My LTV is less than 60% for my main house. Will check it out.
That’s the best I could come up with – sorry :)
I think it is all about how far will you go to make a sale and ultimately to make a commission. She goes as far as she needs to. It is her job to sell. However, how ethical she is… that’s a totally different discussion.
Do you want to expand on your thoughts – what is she doing that is unethical?
I don’t see any problem getting a HELOC, as others have said it does provide some flexibility of you need it, and assuming that the option available doesn’t cost anything nor create any actual encumberance on the property until used, is basically free. From the bank side of things, if someone has 8 years of cash saved, they also likely have a pretty go level of equity in their house, so the walk-away problem shouldn’t be much of a worry.
Offering the option is okay, might even be considered thoughtful.
Pressing it, especially when your friend has already disclosed that he has 8 years of reserves is pushing it though.
Totally pressing it… which is really the annoying part of it.
If he already has 8 years of living expense saved up, I don’t see why he would need a line of credit. I suppose it’s a nice safety net, but I probably react the same way and skip it.
Either way, I would keep the liquidity even if he opens a HELOC.
It is a little of both! It is much easier to borrow when youare an employee. When you are self employed, you need to show income history, tax returns etc. He will be unable to do that for a 2-3 years. The banker may be a little pushy, but there is some validity to what she is saying. I think if she explained it a little more, it would be more helpful. In your description of what was said, thiere is a lot of misunderstanding.
That move may not be suitable since it’s not the best time to leverage and increase your risk in your regular investment portfolio when you’re starting a new business. On the other side maybe the business needs a little extra backup. There’s a difference between “having” a line of credit and “taking” a line of credit.
If you can work for 8 years without no pay that provides a lot of safety but businesses that also require capital could eat through amounts like that pretty quickly. Since everything takes longer and costs more than you expect, it wouldn’t be a bad idea to get credit in place when it’s easy if there’s no cost until it’s used.
Like your friend I tend to reply with something that’s barely realistic and see if anything comes from it. If they say yes I get a great deal, if they say no nothing changes because I wasn’t expecting anything. In the last week I’ve collected some mortgage refinancing offers using this technique that I didn’t think I would ever see.
And following the principle of securing credit when it’s easy I may be able to use them to get a bigger unsecured LOC and a readvancable HELOC based on the mortgage. I’m just hoping the lenders aren’t turned off by the fact that I plan to never use the credit and don’t want to pay a fee. Getting more options at no cost is a nice deal.
That’s what I was thinking. Now is not the time to be leveraging up when the income is going down tremendously!
I think it’s an interesting idea for those who know they are about to be voluntarily or involuntarily unemployed. Attempting to get a line of credit when you are not actively working would certainly be more difficult.
Your friend and samurai readers are probably smart enough to use it only as a last resort emergency line and not to borrow against it for something stupid. For the general public however. .. I would not recommend it!
This is what I’m wondering… is this morally OK to get this line of credit with steady income disappearing? Maybe it is, maybe it isn’t.
I guess one can never have too much access to capital…… but 8 years is an awful lot of money already. Is someone really going to blow through 8 years AND borrow $100,000 from their house? What on earth do they need all that money for??
“8 years is an awful lot of money already. Is someone really going to blow through 8 years AND borrow $100,000 from their house?”
And should the bank really be lending to someone who blows through that AND is soon to be unemployed? Probably not. That being said, if she is playing within the boundaries her employer has set up it is hard to blame her.
A dentist who belongs to a ritzy club in Calgary books his patients/friends at the club to come in every two or three months for a check up. These friends all have very good plans which cover 100% of the dental checkups, essentially he is pocketing their employers money with an outrageous number of checks up a year. Is it morally correct? I don’t know, but everyone is playing within the rules.
Ahhh, dentists… I have experienced some of the worst…..
Her advice is spot-on. The line of credit is much easier to establish (from a lender’s perspective) if he is employed. Also, from a financial planning perspective, establishing a line of credit is a flexible alternative to reserving your own assets for emergencies. It can free your resources to be put to more productive use. If you never need it, great. If you do need it, the money is there. Of course, you’ll have to pay the bank back instead of yourself.
Yes, but is it right if both parties know that in several months time he won’t have a job?
It’s like getting a loan to buy a property, knowing that in 3 months you are going to foreclose on your existing property no?
Take the credit and short the bank’s stock. It’s like the financial advisor who wrote a book about how he tricked the bank into giving him a free house, and the bank is encouraging it.
Leaving aside the motivations of the banker, I would be happy to sign up to a facility that has zero cost unless I actually use it. It’s a free option that gives greater flexibility to invest some of the eight year’s savings in higher returning assets – if I want to.
Also, it does not have to be all or nothing – at the end of the day its an emergency fund only, to be used if needed but to still give additional options if I don’t need it – and if secured against my house, there will be no requirement to invest through the bank.
The only reason for not taking the free facility is fear of making imprudent decisions.
One thing I just realized is that one can’t walk away from their mortgage in California if they take out a Line of Credit on their home. Removing that optionality could be a problem for some.
Nothing is ever free….
I see no problem with her advice – maybe all of us – no matter how much money we have should get a line of credit – just in case. Seriously, I might look into this – especially if there is no cost – I plan on checking with my credit union soon.
Bankers and brokers want a commission and thus they always try to sell you on what yield/return you can get based upon what has happened in the past. In the late 90’s I was talking to a broker from Dryfus and recommended I put my $ into an internet fund that he was in – it had around 100% increases in both of the last 2 years.
I told this person that I thought it was possible for the fund to go down 50% as it had climbed so high so fast – what did he do? He laughed at me and said “maybe 5% but not 50%”. Well we were both wrong it probably went down closer to 90% soon there aft
Thanks for replying – happy to see someone other than Sam is reading my posts!
Maybe they have/will give you a 40% return each year – however, some years it will be up 40% and other years it will be down 40% – straight up though – not going to happen.
Reminds me of the classic “We’ve switched to a new way of valuing stocks so it just looks like we’re overpaying for them but it really makes sense” (Japan in the 80s). Turned out the new way was to bring in a bunch of people who didn’t have the first clue about what investing is for and take all they had. And that reminds me of a time when banks said “we’ve switched to a new way of evaluating borrowers, where we don’t care if they repay the loan”. Anyone know what ended up happening?
It’s amazing how reliably and regularly people will throw out all common sense. I fear the day I lose my immunity to following along with what others say.
It’s scary how much of a herd mentality people have. It’s hard for me to escape, but I try every day.
Glad you didn’t lose 90% of your money in that fund!!!
To me it doesn’t seem like she is pushing for your friend to invest all his savings into higher yielding products. If your friend has 8 years of savings then why wouldn’t he want to take on even a little risk with say 1/4 of the money. Regarding the HELOC, it actually is in the best interest of your friend to take one out while still employed. The banker said it would be an emergency line, and that’s just what your friend should use it for. Basically, if life turns bad for your friend (health, unexpected expenses, divorce…) he would have access to that $100,000… It doesn’t cost any money to have the line available and your friend won’t be able to get near as much, if any, once unemployed. If a year down the road your friend needs some money for and can’t get any, it would be pretty sad looking back knowing you could have had access to it.
Is it OK to get a Line of Credit when the banker and the individual knows that the credit taker will no longer have a steady pay check soon?
What if my friend’s 8 years of savings is $500,000? Does that change the situation?
I don’t think it would be prudent from the banks perspective, but whether it is OK really depends on your friend… From what you have said your friend seems to be the type that wouldn’t abuse it and would actually only use it in the case of an emergency.
I think at $500,000 your friend should still take it out, but purely as precaution. The main reason is that if hard times come for your friend the bank definitely won’t be there with an offer for a $100,000 LoC. It’s never a bad thing to plan for the downside. I do agree though that your friend should consider the $100,000 relative to the savings, since at some point the $100,000 would become insignificant on a relative basis.
Sounds good. My friend does have $500,00 liquid actually, and he told the banker this and she still insisted!
The banker is most certainly trying to get a commission out of your friend, but that is how she makes her money. I’m not sure the suggestions she makes are the most ethical way of going about it, but if she can sleep at night I guess her conscience is clear. Good thing your friend is savvy enough to see through her shenanigans and walk away. Unless of course she does come back with a sure fire risk free 4% yielding security. In which case please write another post entitled “The Bankers Sure Fire Risk Free 4% Yielding Security”.
Sure. We’re waiting for the guaranteed 4% risk free return in this environment. should be great!
“I recommend investing your liquid savings in higher yields within your comfort zone and instead put a home equity line in place for say $100,000 to act as your emergency line.”
Wait. I’m trying to figure out how her advice could possibly make any sense whatsoever. Unless your friend knows of an investment that’s going to yield a greater return than the interest he’ll pay on a line of credit, I’m fresh out of ideas. And even then, he’d have to consider the risk his investment didn’t produce the results he hoped for.
Although the banker’s advice is questionable, I ain’t mad at her. She’s doing her job. And to be clear, she’s not being thoughtful.
I’m trying to make sense of it as well. Borrow more to inest more even though he’s already got enough. Aggressive sales!
This makes perfect sense. The problem is that you’re viewing it from the perspective of your friend’s finances. The banker on the other hand is operating from a standpoint of bank revenue and commission.
All roads lead to debt.
That’s all that matters. This reminds me of a quote about politicians. People get confused and irate at politicians who fail to solve our problems. They have either forgotten or don’t realize that the only problem a politician seeks to solve is his own reelection.
People need to get past the idea that bankers and politicians and salesmen in general care about any more than making a buck. It’s a business relationship, and they’re not giving something away for nothing.
Well, that’s exactly right. Imagine if this banker and other people selling things put the clients first and thought about THEIR situation first? What a better world we would live in!