Bankers Are Morons

For the uninitiated, here's a quick recap of how a builder gets that house built.

First, a construction loan is applied for and received. Those funds are specifically for the cost of building the house; in other words, they are supposed to pay the sub contractors for their work.

The actual process of getting the funds from the construction loan can vary depending on the bank. Some banks will wire money to the builder's bank account according to the percentage of completion of the house. Some banks require that the builder fax in a disbursement request with the sub contractor bills attached, and then they wire the money to the builder.

The only smart one of the bunch will require copies of the bills, and then write the checks themselves.

When banks write the checks themselves, they are assured that the sub-contractors are paid. However, during the heady times of the housing boom, many banks were very lax with their construction loans. Simply wiring money to the builder is in essence an honor system, leaving the banker to trust that the builder will use the money appropriately. The problem is that many builders did not. There's payroll to meet, new projects to acquire, and countless other expenses that need paying for. Money for one project is used for a project somewhere else, always with the intention that it will be paid back with funds from yet other projects. As long as the houses get built, nobody cares.

That is, until the market slows. Then the money from closings dries up and can't be used to keep the cash flowing. Building projects in turn slow down as subs aren't paid. Lien notices are filed on multiple properties, making it harder to close, and alerting the now nervous bankers to what they should have known all along. Builders are left with what could be millions of dollars of property, but little to no cash to finish building.

The bankers are angry that the builder would divert money from their project to use somewhere else. They threaten to call the loan due and take over the property; which of course they really don't want to do. Bankers are in the business of loaning money, not building condos. So instead they tighten up controls and make it harder for builders to get access to more money. But the bank might as well take the property, because by withholding cash they make it next to impossible for the builder to finish the job.

Moral of the story- bankers are morons.