How a lender thinks: Part 1, attitudes
So far in our subprime sequence, we’ve observed that all that jitters does not fold, watched New Century’s domino falls two ways, identified the dramatis personae of lending, and the right policy questions, and commented on What’s a delinquent borrower to do? In pursuit of wisdom, Dr. John H. Watson also visited Mycroft Holmes, who expounded on Securitization: the Adventure of the Top-Sliced Lender. In between Mycroft’s rarefied heights of C Pieces and collateralized debt obligations, and the financially subterranean world of the worried borrower, lies a populous species of critters whose behavior influences them both: the lenders.
Don’t you want to know how I behave?
Here, based on my three decades of stalking them in the wild, is a field guide to lenders as a species. (Important note: individual creatures may behave vastly different from this!)
Rare and flighty, these lenders
1. Lenders orient by money and paper. This is the great truth about lenders: their lodestars are the twin poles of money (financial flows) and paper (recorded information).
Everything revolves around money
Lenders are digital, not analog; things must be quantified before they can be perceived. Tell a lender a property is doing poorly and he shudders from imprecision; give him 88% financial occupancy and he is, not happy, but at least oriented.
Orientation is key. As human beings, all of us need to make sense of the world, which we do by converting continuity of impression input into recognizable forms. Babies make a cognitive breakthrough when they can identify faces — lenders want numbers and words.
Put data in the circles and a lender can recognize you
Useful principle: Give lenders information in forms they can orient. Some people think that obscuring the truth, or hedging it with qualifiers rather than quantifiers, will soften the blow. The reverse is true: what lenders cannot measure, they exaggerate.
2. Lenders receive things. A lender, I’ve said as a joke but more than a joke, is someone who sits behind a desk and receives things. They are used to receipts:
· Money, preferably in regular and timely payments.
· Evidence of collateral, in the form of mortgages, assignments, pledges and so on.
· Information, as in field reports of property inspections, management updates, and the like.
Asking a lender to provide something — an undertaking, a waiver, and heaven forbid money! — immediately propels the lender (individual or institution) into a zone of extreme discomfort.
You mean me to provide something?
Useful principle: When you need something from a lender, minimize the amount the lender must actually do. Make it so the lender can receive your proposal, receive your reports, receive your periodic (if reduced) payments, all for the low, low price of just signing once.
3. Lenders sit behind desks and answer telephones/ email. Lenders, like our friend Mycroft Holmes, like being stationary. As Sherlock Holmes comments, “that Mycroft should break out in this erratic fashion! A planet might as well leave its orbit.”
No more remarkable than a planet leaving its orbit was Mycroft calling on Sherlock
Lenders like leaving the activity to housing consultants like brother Sherlock:
“Our theory holds together,” said Holmes. “But if this is true, then the case is at an end. On the one hand, the traitor is dead. On the other, the plans of the Bruce-Partington submarine are presumably already on the Continent. What is there for us to do?”
Not for them this frenetic flying to properties, the moist handshakes with on-site staff, the clipboard-and-checklist compilation of capital needs. Lenders want to experience properties through information brought to them at their Command Post, not to glean data themselves in the field.
A lender’s favorite property visit is the ‘windshield inspection,’ where the property is surveyed without ever leaving the car. This is less superficial than it may sound, for there’s an enormous amount you can deduce about a property simply by observing its external presentations. (My old client Gene B. Glick used to claim that he could tell everything he needed to know about a property’s operations by examining its maintenance room, and knowing Mr. Glick, I wouldn’t have bet against him.)
Lenders are happiest when at their desks. Leaving their desks means something bad is probably happening, or already has happened.
The money is behind the desk, and you pay it over the desk
Useful principle: When seeking to please a lender, fetch and carry for him. It costs little and builds goodwill. Besides, it means that everything he knows, you know first because you’ve brought the info to him.
4. Surprises are bad. Lenders hate surprises; they hate crises; they hate having to make snap judgments. Lenders always want to sleep on it, to consult their colleagues, to report upwards before any action need be taken.
I acted before checking with my superiors
Useful principle: when bad news must be delivered, deliver it early and give them time to absorb it before asking a decision.
5. Risk = volatility = bad. As compared with hard equity, the quintessential feature of hard debt is its stability: the same payment, made on the same day, at the same yield rate. The absence of vibration is itself a secondary indicator of health and tranquility and calm. Conversely, variance is intrinsically bad, because some variances will be unfavorable (even if only compared with previous variable variances).
Useful principle: If you have to deliver shocking results, compress the period of volatility. It is much better to cut your payment rate 60% and keep it there, than to cut it 25%, 40%, 15%, and 35% in four successive months. Unpredictability drives lenders bananas.
“We like bananas ’cause we’re not lenders”
6. Calm is good. Lenders like serenity. An orderly desk, a squared In box, a list made and then ticked off — all these things please all of us, but especially lenders.
A lender’s adventure theme park
They like managing their work flow, knowing what happens next, scheduling things and then meeting schedules. They don’t like chaos, confusion, multi-tasking, interruptions, stress, loud noises, and uncertainty.
“Ordinary people spend their lives getting out of tense situations.
Repo man spends his life getting in to tense situations.”
Useful principle: Don’t threaten, reassure. Threats send lenders running for their lawyers, and lawyers like foreclosure much more than they like workouts. Coaxing a lender out from behind his lawyer can be done but takes time (see Surprises are bad).
7. To a lender, security trumps upside. A lender who craves risk is called either a developer or a bankrupt. Safety is their stock is trade; safety has value beyond its mere NPV.
Safety is always the trump suit
Useful principle: When proposing a restructuring, over-protect. Grandmaster Aron Nimzovitch, one of my favorites, developed the principle of overprotecting key squares as a means of freeing each overprotecting piece. In the same way, a plan that overprotects builds lender confidence, and that in turn lowers the lender’s yield requirements or collateral requirements. It’s analogous to the old saw, “if you have to break the arm, break it only once.”
8. Known pain hurts less than unknown pain. Even if the lender is facing pain, quantifiable and quantified pain is better. (By the way, this is true of human beings generally — we fear the dentist’s drill more than it actually hurts when the time comes.)
You know what being on the watch list is like?
Curiously, rescheduling a loan, or writing it down and placing it on a new amortization schedule, relieves the pain because it relieves uncertainty.
Useful principle: The sooner you quantify the downside, the happier your lender will be. But when quantifying, don’t be over-optimistic.
[Continued tomorrow in Part 2.]
