Banks lend money to individuals and businesses. The money is used for consumer purchases and investment purposes such as food, cars, and houses. When these investments are productive, the money eventually returns to the bank and the overall liquidity of a well-functioning economy is created. Money goes round and round when the economy works efficiently.

When the market turns upside down, financial markets tend to go up sixteen. The liquidity cycle can slow down, freeze up to a point, or stop altogether. This is true because banks are highly leveraged. A well-capitalized bank should only have 6% of its assets in core capital. The collapse of residential mortgages is estimated to cause credit losses of about $ 400 billion. This credit loss is approximately 2% of all US stocks. This hurts the bank’s balance sheets because it affects its 6% core capital. To compensate, banks have to charge more for loans, pay less for deposits, and create higher standards for borrowers, leading to fewer loans.

Why did this happened? Once upon a time, after the great depression of the 1930s, a new national banking system was created. Banks were required to come together to meet high standards of safety and soundness. The purpose was to prevent future bank failures and to prevent another disastrous depression. Savings and Loans (which still exist but today call themselves Banks) were created primarily to lend people money to buy houses. They took money from their depositors, delayed it from people to buy houses, and kept these loans in their portfolio. If an owner did not pay and there was a loss, the institution assumed the loss. The system was simple and the institutions were responsible for the construction of millions of houses for more than 50 years. This changed dramatically with the invention of the secondary market, secured debt obligations which are also known as secured mortgage obligations.

Our government created the Government National Mortgage Association (commonly known as Ginnie Mae) and the Federal National Mortgage Association (commonly known as Fannie Mae) to purchase mortgages from banks to expand the amount of money available in the banking system to buy homes. Then Wall Street firms created a way to expand the market exponentially by bundling home loans in clever ways that enabled originators and Wall Street to make big profits. The large equity market firms were mortgage-backed securities securitizers and resecuritizers that split different parts of the mortgage loan pools to be bought and sold in the equity market based on prices set by the market and market analysts. . Home loans, packaged as securities, are bought and sold as stocks and bonds.

In the quest to do more and more business, the standards for obtaining a loan were lowered to a point where, in at least some cases, if a person wanted to buy a house and could claim to be able to pay for it, they received the loan. Borrowers with weak or poor credit histories were able to obtain loans. There was little risk to the lender because, unlike the days before when mortgage loans were held in their portfolios, these loans were sold and if the loans defaulted, the investors or buyers of these loans would bear the losses, that is, not the bank that made the loan. The result of today is a tumult in our economy due to the collapse of mortgages that has disrupted the financial system in general and affects all loans 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 were low-documentation loans, undocumented loans, and very high-value loans, many of which are foreclosures that we read about on a daily basis. Wall Street is responsible for driving this system into financial disaster that can grow from the current estimate of $ 400 billion to more than a trillion dollars. Real estate agents, mortgage brokers, home buyers, and speculators are held accountable for their willingness to pay higher and higher prices for homes in the belief that prices would only go higher and higher. This basically fueled the system for the mortgage collapse.

Are there any similarities to the savings and credit crisis of the 1980s? Between 1986 and 1995, savings and loans (S&L) 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 S&L to make fixed-rate loans only for their portfolios. The market determined the rates that could be charged for these loans. Imagine an institution with $ 100 million in loans at 6% to 8%. For years, interest rates on deposits were also regulated by the government. The interest rate differential between the two institutions allowed for a small profit.

In 1980, the United States Congress passed the Depositary Monetary Control and Deregulation Act of 1980 (DIDMCA). A committee was established in Congress. Over a period of years, the committee deregulated the fees that S&L could pay for savings. Nothing was changed regarding what could be charged for home loans. Many institutions began to lose large amounts of money because they had to pay market rates of 10% to 12% for their savings, but they were stuck with their old loans of 6% to 8%. Some executives in the savings and loan business referred to this committee as the fucking idiots of Washington.

Many books have been written about these events. There is documented evidence of substantial wrongdoing by S&L executives attempting to invest funds to save their institutions, sometimes for personal gain. Some were sophisticated criminals. Congress recognized its mistake in 1982 when the Garn-St. Depositary Institutions Act was passed. Germain to allow the S&L to diversify their activities to increase their profits. It also allowed S&L to make variable rate loans. He was too small, too late. After the government liquidated the bankrupt institutions, the Federal Deposit Insurance Corporation evaluated billions of dollars from the surviving S&L to replenish the fund that insures the depositors of all American banking institutions.

The mortgage collapse and savings and loan crises are similar in the presence of greed and criminal activity. They are very different from the fact that the S&L crises originated from a government-mandated bankrupt regulatory system, and the mortgage collapse has been primarily caused by a system gone mad with greed.

This has affected non-bank lenders, such as private commercial finance companies that offer hard money real estate loans, purchase order financing, and accounts receivable financing. Most of these companies have raised their prices and standards of origin for the safety and soundness of their operations.

The bottom line: bank loans can be replaced by other sources, such as commercial finance companies, to some extent. Hard money, purchase order financing, and accounts receivable financing will help some businesses grow during these tough times. But for the average borrower, entrepreneur, or business owner, these are tough economic times, caused by the collapse of mortgages, which are here to stay for several years.

Copyright © 2008 Gregg Financial Services