| Commercial Finance - The Mortgage Meltdown |
| By Features Editor |
Published
03/24/2008
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Economy
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Commercial Finance - The Mortgage Meltdown
In the quest to do more and more business, the standards to get a loan were lowered to a point where, at least in some cases, if a person wanted to buy a house and could assert they could pay for it they received the loan. Borrowers with weak or poor credit histories were able to get loans. There was little risk to the lender because unlike the earlier days when home loans were held in their portfolios, these loans were sold and if the loans defaulted the investors or purchasers of these loans would take the losses i.e. not the bank making the loan. The result today is tumult in our economy from the mortgage meltdown which has disrupted the overall financial system and affects all lending in a negative way.
Who is responsible for this situation? All loan originators, including banks, are responsible for turning a blind eye to loans that were based on poor credit criteria. Under the label of “subprime” loans there were low documentation loans, no documentation loans and very high loan to value loans- many of which are the foreclosures we read about on a daily basis. Wall Street is responsible for pumping this system into a financial disaster that may grow from the current $400 billion dollar estimate to over a trillion dollars. Realtors, mortgage brokers, home buyers and speculators are responsible for their willingness to pay higher and higher prices for homes on the belief that prices would only go higher and higher. This basically fueled the system for the mortgage meltdown.
Are there any similarities to the saving and loan crisis of the 1980’s? Between 1986 and 1995 Savings and Loans (S&L’s) lost about $153 billion. The institutions were regulated by the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation. These entities passed laws that required the S&L’s to make fixed rate loans only for their portfolios. The rates that could be charged for these loans were determined by the marketplace. Imagine an institution with $100 million in loans at 6% to 8%. For years the interest rates on deposits were also regulated by the government. The interest rate spread between the two allowed institutions to make a small profit.
In 1980 the U.S. Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). A committee was established in Congress. Over a period of years the committee deregulated the rates S&L’s could pay on savings. Nothing was changed with respect to what could be charged for home loans. Many institutions started to loose huge amounts of money because they had to pay market rates of 10% to 12% for their savings, yet they were stuck with their old 6% to 8% loans. Some executives in the savings and loan business referred to this committee as the damned idiots in Washington.
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