How the S&L crisis is similar to what’s happening now

[contentrenter]

In a different thread someone posted that Countrywide plans to “loot the FDIC insured bank” to continue with business as usual, and another poster commented that this is what happened with the S&L crisis.

Forgive my ignorance, but I was too young then to know what was going on. How are the situations similar?

[waterboy]

this link will sum up thr S&L and hopefully others can touch on similarity.

http://www.fdic.gov/bank/historical/s&l/

[waterboy]

this link will sum up thr S&L and hopefully others can touch on similarity.

http://www.fdic.gov/bank/historical/s&l/

[waterboy]

this link will sum up thr S&L and hopefully others can touch on similarity.

http://www.fdic.gov/bank/historical/s&l/

[Diego Mamani]

The guaranteed FDIC bailout makes bankers less careful than they otherwise would be when lending money.

The S&Ls relaxed lending standards and lent generously to people who wanted to buy houses in the late 1980s housing boom. Buyers were afraid that they may be “priced out forever,” so they were willing to pay any price for a house and the S&Ls were happy to lend them money.

When subprime borrowers started to default en masse, S&Ls hiked the interest rates they pay on CDs, etc., in an effort to improve their liquidity. Savers, lulled by the (FDIC-like) NCUA guaranteed bailout, happily deposited their money. Eventually the party stopped, countless of S&Ls went belly up, and the taxpayer had to foot the bill for billions of dollars.

[Diego Mamani]

The guaranteed FDIC bailout makes bankers less careful than they otherwise would be when lending money.

The S&Ls relaxed lending standards and lent generously to people who wanted to buy houses in the late 1980s housing boom. Buyers were afraid that they may be “priced out forever,” so they were willing to pay any price for a house and the S&Ls were happy to lend them money.

When subprime borrowers started to default en masse, S&Ls hiked the interest rates they pay on CDs, etc., in an effort to improve their liquidity. Savers, lulled by the (FDIC-like) NCUA guaranteed bailout, happily deposited their money. Eventually the party stopped, countless of S&Ls went belly up, and the taxpayer had to foot the bill for billions of dollars.

[Diego Mamani]

The guaranteed FDIC bailout makes bankers less careful than they otherwise would be when lending money.

The S&Ls relaxed lending standards and lent generously to people who wanted to buy houses in the late 1980s housing boom. Buyers were afraid that they may be “priced out forever,” so they were willing to pay any price for a house and the S&Ls were happy to lend them money.

When subprime borrowers started to default en masse, S&Ls hiked the interest rates they pay on CDs, etc., in an effort to improve their liquidity. Savers, lulled by the (FDIC-like) NCUA guaranteed bailout, happily deposited their money. Eventually the party stopped, countless of S&Ls went belly up, and the taxpayer had to foot the bill for billions of dollars.

[bsrsharma]

Another useful link:

http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

What I remember is, one aspect of S & L Crisis was its origin in liberalization of S & Ls charter to diversify outside of traditional home loans. This made them jump into commercial real estate and construction loan business which they did not understand well. Commercial RE is more cyclical and the cycles are deeper than traditional home mortgages due to absence of psychological and emotional ownership and the lack of sense of failure. This made S & Ls sitting ducks to phony developers who took out large loans with speculative intent (If I win, I will pay back; If I lose, I will walk attitude). Of course, many unscrupulous developers were hand in glove with corrupt S & L owners and conspired to loot the S & Ls right away.

[bsrsharma]

Another useful link:

http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

What I remember is, one aspect of S & L Crisis was its origin in liberalization of S & Ls charter to diversify outside of traditional home loans. This made them jump into commercial real estate and construction loan business which they did not understand well. Commercial RE is more cyclical and the cycles are deeper than traditional home mortgages due to absence of psychological and emotional ownership and the lack of sense of failure. This made S & Ls sitting ducks to phony developers who took out large loans with speculative intent (If I win, I will pay back; If I lose, I will walk attitude). Of course, many unscrupulous developers were hand in glove with corrupt S & L owners and conspired to loot the S & Ls right away.

[bsrsharma]

Another useful link:

http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

What I remember is, one aspect of S & L Crisis was its origin in liberalization of S & Ls charter to diversify outside of traditional home loans. This made them jump into commercial real estate and construction loan business which they did not understand well. Commercial RE is more cyclical and the cycles are deeper than traditional home mortgages due to absence of psychological and emotional ownership and the lack of sense of failure. This made S & Ls sitting ducks to phony developers who took out large loans with speculative intent (If I win, I will pay back; If I lose, I will walk attitude). Of course, many unscrupulous developers were hand in glove with corrupt S & L owners and conspired to loot the S & Ls right away.

[waterboy]

Bsrsharma- You basically explained the scenario of my neighbor from Colorado Springs back in the 80s. Here is part of an article from 1990 on him.

Colorado developer Frank Aries had no intention of carving out another piece of ho-hum suburbia when, in 1985, he went calling on the Driggs boys, the freewheeling moneylenders at Phoenix’s Western Savings and Loan. Aries, who drove a Rolls-Royce, lived in a $1.6 million home in the ritzy Broadmoor district of Colorado Springs and liked to brag about the multimillion-dollar sailboat he had his eye on, was not a man who thought small. He envisioned 25,000 acres of homes, schools, industry, shops and golf courses surrounding the old Banning-Lewis Ranch east of Colorado Springs.

All Aries needed to pull off the deal was $240 million of somebody else’s money. The remarkable loan agreement he worked out with Western saw to it that he wasn’t personally responsible for a dime of the money.

In a segment on the national television news magazine “60 Minutes,” Frank Aries dispensed some important financial information: When borrowing money, never sign your name to the loan document. Aries used $235 million borrowed from Western Savings to buy the massive Banning-Lewis Ranch, got the city to annex it, then handed the land over to federal regulators in 1989 when his company missed a loan payment. Aries himself was not liable for the debt when his company could not make the payments. CBS promoted the segment with the teaser, “Do you know that you, the American taxpayer, own one-third of all the real estate in Colorado Springs? …” (April 20, 1991)

Not sure if I should be more pissed at him or the ones who loan the money. Same with todays scenario….Not happy about some of the brokers & lenders that “looked the other way” and the buyers who inflated their income/assets or knew they were way in over their head but took the approach that they can just hand the keys over if it didn’t work.

[waterboy]

Bsrsharma- You basically explained the scenario of my neighbor from Colorado Springs back in the 80s. Here is part of an article from 1990 on him.

Colorado developer Frank Aries had no intention of carving out another piece of ho-hum suburbia when, in 1985, he went calling on the Driggs boys, the freewheeling moneylenders at Phoenix’s Western Savings and Loan. Aries, who drove a Rolls-Royce, lived in a $1.6 million home in the ritzy Broadmoor district of Colorado Springs and liked to brag about the multimillion-dollar sailboat he had his eye on, was not a man who thought small. He envisioned 25,000 acres of homes, schools, industry, shops and golf courses surrounding the old Banning-Lewis Ranch east of Colorado Springs.

All Aries needed to pull off the deal was $240 million of somebody else’s money. The remarkable loan agreement he worked out with Western saw to it that he wasn’t personally responsible for a dime of the money.

In a segment on the national television news magazine “60 Minutes,” Frank Aries dispensed some important financial information: When borrowing money, never sign your name to the loan document. Aries used $235 million borrowed from Western Savings to buy the massive Banning-Lewis Ranch, got the city to annex it, then handed the land over to federal regulators in 1989 when his company missed a loan payment. Aries himself was not liable for the debt when his company could not make the payments. CBS promoted the segment with the teaser, “Do you know that you, the American taxpayer, own one-third of all the real estate in Colorado Springs? …” (April 20, 1991)

Not sure if I should be more pissed at him or the ones who loan the money. Same with todays scenario….Not happy about some of the brokers & lenders that “looked the other way” and the buyers who inflated their income/assets or knew they were way in over their head but took the approach that they can just hand the keys over if it didn’t work.

[waterboy]

Bsrsharma- You basically explained the scenario of my neighbor from Colorado Springs back in the 80s. Here is part of an article from 1990 on him.

Colorado developer Frank Aries had no intention of carving out another piece of ho-hum suburbia when, in 1985, he went calling on the Driggs boys, the freewheeling moneylenders at Phoenix’s Western Savings and Loan. Aries, who drove a Rolls-Royce, lived in a $1.6 million home in the ritzy Broadmoor district of Colorado Springs and liked to brag about the multimillion-dollar sailboat he had his eye on, was not a man who thought small. He envisioned 25,000 acres of homes, schools, industry, shops and golf courses surrounding the old Banning-Lewis Ranch east of Colorado Springs.

All Aries needed to pull off the deal was $240 million of somebody else’s money. The remarkable loan agreement he worked out with Western saw to it that he wasn’t personally responsible for a dime of the money.

In a segment on the national television news magazine “60 Minutes,” Frank Aries dispensed some important financial information: When borrowing money, never sign your name to the loan document. Aries used $235 million borrowed from Western Savings to buy the massive Banning-Lewis Ranch, got the city to annex it, then handed the land over to federal regulators in 1989 when his company missed a loan payment. Aries himself was not liable for the debt when his company could not make the payments. CBS promoted the segment with the teaser, “Do you know that you, the American taxpayer, own one-third of all the real estate in Colorado Springs? …” (April 20, 1991)

Not sure if I should be more pissed at him or the ones who loan the money. Same with todays scenario….Not happy about some of the brokers & lenders that “looked the other way” and the buyers who inflated their income/assets or knew they were way in over their head but took the approach that they can just hand the keys over if it didn’t work.

[michigoose]

I’ve often thought about the similarities between the “subprime default” issue and the what the S&Ls went through in the 1980s.

Back then, a key component of the failures were the inflated appraisals that loan officers solicited and accepted to justify their loans. Today, the appraisal industry has vastly higher standards although I’m sure we’ve all heard of appraisers who’ve felt pressured into delivering specific valuations, or lose future business.

Today, credit reporting and rating agencies take the place of appraisers. A FICO score really doesn’t tell much about anyone’s ability to pay back money, rather it tells more about *how valuable* a credit customer has been in the past.

I hate to admit that I have only a slightly better than mediocre credit rating because five years ago I paid off my 30 year mortgage in under seven years, and now no longer have that line of credit. In addition, I only have two credit cards, with small limits that I often bump up against, even though I usually pay my bill in full every month. The fact that I’ve had these cards for over 25 years works in my favor, but somehow not enough to give me an interest rate of under 20%. Hence, I rarely carry a balance.

Until credit ratings take into account an individual’s other assets, income, and employability, they’re pretty useless in determining who is truly credit worthy.

[michigoose]

I’ve often thought about the similarities between the “subprime default” issue and the what the S&Ls went through in the 1980s.

Back then, a key component of the failures were the inflated appraisals that loan officers solicited and accepted to justify their loans. Today, the appraisal industry has vastly higher standards although I’m sure we’ve all heard of appraisers who’ve felt pressured into delivering specific valuations, or lose future business.

Today, credit reporting and rating agencies take the place of appraisers. A FICO score really doesn’t tell much about anyone’s ability to pay back money, rather it tells more about *how valuable* a credit customer has been in the past.

I hate to admit that I have only a slightly better than mediocre credit rating because five years ago I paid off my 30 year mortgage in under seven years, and now no longer have that line of credit. In addition, I only have two credit cards, with small limits that I often bump up against, even though I usually pay my bill in full every month. The fact that I’ve had these cards for over 25 years works in my favor, but somehow not enough to give me an interest rate of under 20%. Hence, I rarely carry a balance.

Until credit ratings take into account an individual’s other assets, income, and employability, they’re pretty useless in determining who is truly credit worthy.

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