New column: In praise of banks and thrifts
My new column is up online, and in the issue of Time with Rosie the Peace Corps Conscriptee on the cover. It begins:
The last big mortgage debacle, the savings-and-loan crisis, was made mostly in Washington. The S&Ls were required by law to borrow short (via savings deposits) and lend long (via 30-year, fixed-rate mortgages). When that led to big losses in the inflation-racked early 1980s, Congress encouraged thrifts to grow their way out of trouble, in part by financing commercial real estate, with disastrous results.
This year's mortgage crack-up comes with a different story line. It was made not in Washington but in the strip-mall offices of mortgage brokers and on the trading floors of Wall Street. The general rule this time around has been that the farther away from the prying eyes of federal bank examiners a transaction occurs, the more likely it is to cause trouble.
Does this mean we need more regulation? Maybe, maybe not. It does indicate, though, that the mortgage business might be due for a return to its roots. Read more.
By roots, I mean the bank and thrift industries. I wrote this with some trepidation, because I'm sure that in coming months we'll start hearing about some big problems in bank and thrift mortgage operations. But I think the basic point will still stand: This mortgage mess was not the making of the insured, depository financial institutions. It was the independent lenders and their Wall Street backers that drove it.
One thing that I couldn't go into much depth on in the column but that deserves more explanation is the regulatory structure for banks and thrifts and other mortgage lenders. Many people seem to have the idea that they're all regulated by the Federal Reserve. But as somebody who used to cover the OTS, OCC and FDIC for the American Banker, I know that this is not so.
Federal savings banks--a.k.a. thrifts, a.k.a. the former heart of the home lending business--are supervised by the Office of Thrift Supervision (OTS), a part of the Treasury Department. National banks are supervised by the Office of the Comptroller of the Currency (OCC), also part of Treasury. Bigger state-chartered banks are supervised by the Fed, an independent agency. Smaller state-chartered banks (the bulk of the country's banks) are supervised by the Federal Deposit Insurance Corporation (FDIC), another independent agency. This is serious regulation, with bank examiners coming in to look over the books, a lot of pressure to keep underwriting standards high, etc. The four agencies also work pretty closely together to keep their supervision consistent, although there's at least talk in the industry that the OTS might be a little more (take your pick) lax/flexible/understanding/sophisticated when it comes to real estate lending.
Next come the operations that are part of a bank or thrift holding company but not the bank or thrift proper. These are overseen by the Fed if it's a bank holding company, the OTS if it's a thrift holding company. But they're not subject to the same kind of regular prudential regulation as the actual banks and thrifts.
Then there are the independent mortgage lenders, which aren't subject to direct supervision at all by federal regulators. They are supposed to obey federal Truth in Lending Act and Home Ownership and Equity Protection Act strictures against deceptive and unfair lending, and the authority to write regulations to conform to both those laws belongs to the Fed. But this isn't the same as being regulated by the Fed. So I tend to wonder, when people say the Fed should have cracked down on all this earlier, how it could have done that, given that the most creative mortgage lenders were almost entirely outside its purview.
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1
Why do we have to do anything? Doesn't "risky" mean anything? Why should we protect those people who wish to take risks from earning the higher rates when things go right and suffering the losses when they go wrong?
As we know our economy has way too much money anyway (with only the Chinese production being the anti-inflation godsend). We need to pull a few hundred billion out of the liquidity to stop this insane housing price market. It would also slow the sales of Hummers. -
2
Now, I probably don't know what I'm talking about, but it seems that risk and its mispricing is not the whole story here. Broadening home ownership has been shown to have largely good effects on individuals, families, neighborhoods, and society at large. The risk of subprime loans, in and of itself, may not have been priced particularly poorly.
However, underlying this entire mess was the expectation that home prices would always increase at a rate well over the historic average. Most ARMs were sold with the explanation that you would have equity and be able to refinance into another loan at the end of the initial period. This only works if your house is worth more (perhaps significantly more) tomorrow than it is today. And the expectation that home prices would increase at a high rate is what brought flippers out of the woodwork, which hastened the demise of the market. This expectation, which anyone who lived through housing market of the late 1980s/early 1990s would know, is entirely incorrect.
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3
Risk and sub prime loans go hand in hand. It was anyways anticipated that someday all may not go well, basically defering the consequences.
Imagine, a person wanting to buy shares of Google, with no money in his pocket. Will the banks lend him? Similarly, with bad credit history and not much capital, if a person is wanting to buy a house, maybe to sell it later for a profit - the banks do the opposite- outrageous!!!
This puts everybody to Risk - even the people who save money, good credit score and have always been paying on time. Nobody, is thinking of rewarding these individuals.
Trying to or desiring to spend more than the earning capabilities is a bad choice. So, why should the rest suffer.
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4
Risk and sub prime loans go hand in hand. It was anyways anticipated that someday all may not go well, basically defering the consequences.
Imagine, a person wanting to buy shares of Google, with no money in his pocket. Will the banks lend him? Similarly, with bad credit history and not much capital, if a person is wanting to buy a house, maybe to sell it later for a profit - the banks do the opposite- outrageous!!!
This puts everybody to Risk - even the people who save money, good credit score and have always been paying on time. Nobody, is thinking of rewarding these individuals.
Trying to or desiring to spend more than the earning capabilities is a bad choice. So, why should the rest suffer.
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5
Risk and sub prime loans go hand in hand. It was anyways anticipated that someday all may not go well, basically defering the consequences.
Imagine, a person wanting to buy shares of Google, with no money in his pocket. Will the banks lend him? Similarly, with bad credit history and not much capital, if a person is wanting to buy a house, maybe to sell it later for a profit - the banks do the opposite- outrageous!!!
This puts everybody to Risk - even the people who save money, good credit score and have always been paying on time. Nobody, is thinking of rewarding these individuals.
Trying to or desiring to spend more than the earning capabilities is a bad choice. So, why should the rest suffer.
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6
I am so amused to see the analysis on the "housing crisis"
having worked in the mortgage/construction industry I can tell you why this happen. And it has nothing to do with government.1. Greed, appraisers inflated prices of homes then mortgage companies gave loans to people - who could not qualify.
2. When a client could not qualify, paperwork was ignored or forged (yes forged) to allow for the loan to go through. When the loan was sold there was the HUD letter warning that the loan was missing several key underwriting criteria -but nothing was done. Because after all this house of cards was keeping up the economy.
3. Loans were allowed to go through even though it was clear that the buyer did not understand the concept of the adjustable rate mortgage and could not make the payment once ARM kicked in.I can go on but you get the picture. Several builders particularly in Florida got fat and happy, made a lot of money for investors and now they want the tax payer to foot the bill for the clean up.
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7
Between August 1989 and December 1995, the Resolution Trust Corporation (RTC) resolved 747 institutions and disposed of assets with a book value in excess of $455 billion, and Justin's table indicates that the sum of the five top subprime lenders's porfolio is $211 billion. It was brutal if you purchased any real estates shortly before the early 90's.
If we survived the 90's real estate crisis and became a little wiser, may be we don't need to worry that much and let the market adjust and teaches us another round of lesson.
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8
The numbers on the chart represent the value of loans originated in 2006. (You can't really say what the portfolios are since most of the subprime lenders don't hold on to the loans.) So I think it's too early to say that this is a smaller mess than the S&L crisis, although certainly the government is on the hook for a lot less now than then.
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9
This whole housing crisis is such a joke.
If some people lose their houses, it is no big deal. These people could not really afford the house in the first place. All they have to do is go back to renting a house, a townhouse, or a condo until they can make enough money to afford a fixed rate mortgage.
These people got to live the good life for a few years by getting the subprime loans. The good times are over. People just need to stop being emotional and realize that they had a blast while it lasted. The blast is over so now these 'losers' can get back to living a normal life. The rockstar home flippers, real-estate agaents, appraisers, contractors, and buyers need to realize that the party is over and they need to go elsewhere.
Losing money or property from the housing crisis only helps to build character.
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