5 Big Mistakes Banks Made In 2010

By Tim Parker | January 14, 2011 AAA
5 Big Mistakes Banks Made In 2010

2010 is in the books, but not soon enough for the banks. If there was a way to get themselves into hot water, they found a way to do it - and just like everything they do, it was done in a grand fashion that caught the eyes and ears of everyone from congress to people in small towns. Although the banks probably want to forget about 2010, let's take a look at some of their biggest missteps of 2010. (For more, see Financial Thanksgiving 2010.)

IN PICTURES: Top 7 Biggest Bank Failures

1. Robo Signers
One of the biggest scandals of 2010, robo-signing centered on the story of a small home in New England, and became the center of a bank misstep that few people actually understood. This was just one of the many homes in foreclosure that saw the foreclosure documents signed by somebody who had no knowledge of the case although by signing, he was swearing to the court that he did. This is illegal and makes the foreclosure invalid.

These robo-signers, people who sign large volumes of foreclosure documents, became the center of attention when it was revealed that many documents were prepared this way. Attorney generals from all 50 states called for swift action but the fact that it was an election year derailed the attempts to make this a story that would bring down the banks. Instead, attorneys general who were leaving office ended up settling most of the cases.

While some cases remain in litigation, what was supposed to be the next big controversy ended up being nothing more than a passing news story and a few billion dollars in expenses to the banks. (To learn more, see The Top 5 Things To Know About Robo-Signers.)

2. Mortgage Break-Ins
If you've never heard of this, you're not alone. This story barely made the news, but it was a huge news story for the people who were affected. One of those was Mimi Ash. The New York Times reported that Mimi owned a mountain getaway where she went for a ski trip. When she arrived she found that all of her assets were gone and the locks changed.

Although she first thought that she was the victim of a burglary, her mortgage lender was the true vandal. Although she was behind on payments, she was working with her bank and was in no danger of her property being seized.

Numerous reports of mistaken break-ins by banks were reported. Due to errors, some banks even disposed of assets and changed the locks of homes that were already paid off. While this didn't become front page news, it was quite embarrassing for the banks.

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3. Irish Bank Bailouts
Banks are a tight knit bunch and when something happens to one bank, it has ripple effects all over the world. Here's why. When Anglo Bank in Ireland got in to trouble, it was a systemic problem. They had to be bailed out by Ireland. A systemic problem is simply something that would have ripple effects all over the country. Somebody has to pay for this, and in this case, it's the tax payers. This could cause Ireland to have problems paying the debt which could result in the European Community having to come to the rescue of Ireland.

This story isn't unique to Ireland. One just has to look in our own backyard for an example of this. It's happening all over the world causing tensions in the European community that some say is threatening to dissolve the European Union.

Ireland, a country with only six million people, infused $570 billion in to their banks. To make it proportional to the U.S. bank bailout of a few years ago, it would be $28,500 billion, according to John Spain of IrishAbroad. (And the United States was in sticker shock over $700 Billion?)

How did the Irish banks get this bad? Subprime lending: lending to people and corporations who weren't in a position to pay it back. Sound familiar? (For more, check out Government Bailouts Around The World.)

4. "Bad Banks"
Do you have student loans? How about car loans, a home mortgage or a loan for that great new home entertainment center? Try this: When you don't want to pay for it anymore, clone yourself and put all of the "bad assets" (called toxic assets in banking terms) in that other person's name and call it a "bad" you.

It works for the banks. When they want to do business as a healthier bank, they create a "bad bank" where all of the toxic or bad assets are placed. Subprime mortgages that were a result of their bad lending decisions go to the bad bank. Wouldn't you like to do that? (To learn more, see Should You Buy Banks' "Toxic Assets?)

5. Deposit at Home
This may turn out to be one of the most convenient banking moves of the 21st century and is being hailed by many as a great move by the banks. Security experts and auditors, however, are crying foul. Such technology allows you to, among other things, take a picture of your check with your mobile device and deposit it by sending the image to your bank, as well as make credit card or debit payments from your mobile device.

This sounds like a good idea, but the security concerns as well as the lack of a paper trail could cause potential pitfalls according to some experts.

The Bottom Line
Will 2011 be a better year for the banks? As the economy improves and more people go back to work, let's hope that the banks lose their Scrooge-like image in favor of a more customer friendly persona.

For the latest financial news, check out Water Cooler Finance: Conflicting Job Reports And A Facebook IPO.

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