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S&L situation of the 1980's
Old 01-23-2008, 12:09 PM   #1
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S&L situation of the 1980's

Can someone older than me tell me what the S&L situation in the 1980's was? I know it was something to effect of a banking crunch or credit crunch... not sure what caused it or how government fixed it (if they fixed it at all).

I am looking to use past performance to guess how that applies to current credit crunch with sub prime situation, and devaluing of properties.

I see the current situation in a downward spiral...

consider- a person upside down on a mortgage they cannot afford at a high interest rate, property is decreasing in value, and that makes person upsidedown on it larger.

The bank holding the loan is less likely to get their money, which means the bank cannot make new loans (banks must have cash behind 20% of loan value- meaning 20% of any loan must be on deposit with bank, correct?), so even if rates fall, the person above cannot refinance their loan, and the bank cannot offer other loans (at lower rates) to other customers, because they do not have enough deposits on hand to lend out more money.

That new person which has good credit, lots of money in the bank, and stable income has few good investment options (because lower rates mean savings accounts pay low interest), so they pull money out of banks and invest it somewhere else. Might be overseas, might be to a private business, might end up taking more chances with money than they would otherwise to find a decent return (8%?). If a person takes a chance on something and loses money, GDP just dropped again, causing more problems. In most of these examples for where to invest, the money was removed from the bank, so therefore the bank has less available funds to lend to people which need credit.

A 3 way viscious circle. My fix would be to raise rates, so people and businesses would put more money into banking system, and the pressure on credit industry is then reduced. But I am no economist.

So going back to post title- what was the S&L issue of the 80's about, and is it similar to what is happening now?
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Old 01-23-2008, 12:27 PM   #2
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Here's the Wikipedia article on it:

Savings and Loan Crisis - Wikipedia, the free encyclopedia

As someone who lived through it back in Texas, it seemed like every S&L in town went out of business multiple times. Our S&L changed names I think five times in about as many years. Instead of a new sign, they would put the new name up on a cloth banner covering the old sign. Pretty nerve-wracking.
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Old 01-23-2008, 12:40 PM   #3
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Quote:
Originally Posted by Want2retire View Post
Good link, thank you. Here is an excerpt, I think past performance is repeating itself.

Quote:
Imprudent real estate lending.
Quote:
In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1950 $55bn; 1976 $700bn; 1980 $1.2tn)[citation needed]and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the FDIC and the Resolution Trust Corporation, stated, "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending." [6]
At bottom of article, there is a good summary. Two of them stick out to me "deja vu".

Quote:
Absence of an ability to vary the return on assets with increases in the rate of interest required to be paid for deposits.
and

Quote:
Increased competition on the deposit gathering and mortgage origination sides of the business, with a sudden burst of new technology making possible a whole new way of conducting financial institutions generally and the mortgage business specifically.
What I see is that the banks always look for a way to make money, but it appears these techniques are not always on the straight and narrow.
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Old 01-23-2008, 12:48 PM   #4
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Not similar at all to what's going on with the potential economic recession. The S&L fiasco primarily resulted from highly speculative transactions and extremely lax regulatory oversight by state regulators and one primary federal regulator, the former Federal Home Loan Bank Board/FSLIC. A more competitive financial environment caused S&Ls to become more speculative in a number of direct real estate investments and lots of acquisition, development and construction loans, especially in the Southwest, and there really wasn't an early, regulatory intervention system to prevent S&Ls from eroding their capital.

Over the last decade or so there are now significant regulatory improvements that essentially prevent bank capital from being eroded quickly and there's a significant prompt corrective action regulatory regime in place that permits the regulators to intervene early to cure problem banks.

Parts of New England underwent a severe credit crunch in the early 1990's after the failure of Bank of New England -- when the regional economy was essentially depressed and the regulators cracked down on credit. Credit for housing is important for our economy, and I'm not an economist either, but other than some well-known major players in the residential mortgage market, I can see how the present housing and credit woes translate into any remotely similar to the S&L mess.
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Old 01-23-2008, 12:56 PM   #5
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What you describe is roughly the situation in the Great Depression. In its aftermath, a number of institutions were set up to avoid a repeat of the banking crisis that happened back then. I am not sure where to start, but perhaps by explaining how the conforming mortgage market works:

- Bank or other lender (non-bank) makes mortgage to Joe Borrower. JB fits in the definition of conforming ($417k or less mortgage, debt to income levels, downpayment, etc.), so the bank now owns a "conforming" mortgage. Bank can either hold the mortgage (unlikely), or sell it. In normal times, bank could sell it to lts of possible counterparties. Now that the commode has hit the windmill, bank will take a pile of conforming mortgages, stick them in a bond, have Fannie Mae or Freddie Mac guarantee the bond, and sell the bond. The market will accept the bond because Fannie & Freddie are backed by the feddle gummint and have Aaa ratings that pretty much nobody will quibble with. Note that bank doesn't need much cash or capital to make and flip the loan, just the knowledge that Fannie or Freddie will be there. This is why Fannie and Freddie are so important to the system.

Aside from deposits (which do not appear to be in short supply), banks can fund themselves a number of ways:

- Borrowings on the open market are one way, but this is getting expensive and tougher to do with the credit market disruption.
- Another way is to take securities (usually Fannies, Freddies, Agencies, etc.) and do what is know as a "repurhase" or "repo." In a repo, bank sells the security to a dealer for 97% or so of the security's value and agrees to buy it back tomorrow for the sale amount plus a day's worth of interest. The dealer can get his financing from a number of places, but in times of stress this funding ultimately comes from the Federal Reserve.

- The Federal Home Loan Bank system is another source of financing for banks and (to a lesser extent) insurance companies. The FHLB system is backed by the feddle gummint and consists of a network of regional FHLBs. The member banks and insurers own the regional affiliate bank and are required to buy stock in their FHLB as a condition of membership. Members have the right to borrow from their FHLB on whatever terms the FHLB sets, subject to safety and soundness regulations. Borrowings are always collateralized, typically with loans (especially mortgages) and securities, and defaults hit the member banks first because they have put up equity capital. But members can borrow at vanishingly small spreads over treasuries and they can get funky interest rate and term structures that are hard to get in the open market (good for interest rate hedging purposes). The FHLB funds itself via bond issuances, which are eagerly sucked up by the market because the FHLB system is backed by Uncle Sam.

In the difficult funding environment of the last 6 months of 2007, banks were heavy users of FHLB advances and Fannie & Freddie's services. Deposit competition was also quite aggressive. Much of this has calmed down since Jan. 1.
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Old 01-23-2008, 01:13 PM   #6
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One of the talking heads on CNBC (believe them at your own risk) recently said that total writedown for subprimes has been .7% of the GDP the writedowns associated with S&L crisis was 2.5% of the GDP. Who knows if the numbers are right but the S&L crisis felt like a much bigger deal.
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Old 01-23-2008, 01:20 PM   #7
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There was a pretty severe real estate recession back then as well. Take a look at these foreclosure rates, with NODs peaking at 2.5% in TX back then.



Ooops, I just noticed that the CA NOD rate is already at 3.5% today .
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Old 01-23-2008, 01:22 PM   #8
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if anyone has noticed, the old TV ads from the 1990's hyping government owned homes and boats are back.

and the C level officers of New Century were doing the same thing during the S&L crisis, making bad loans.
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Old 01-23-2008, 01:58 PM   #9
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There are a couple of other things with the real estate bust of the 80s.

1. It was primarily in what came to be known as the COLT states Colorado, Oklahoma, Louisiana, and Texas.

2. It was preceded by a downturn in the economy in the 'Rust Belt' which was aided by the rapid increase in oil price in the 70's.

3. To aid the Rust Belt, Congress passed laws that would aid Real Estate investment. It was possible, do to Tax considerations, to build an office building or retail development and make money with as little as 10 to 30% occupancy.

4. Builders were not stupid. They built where the boom was i.e. COLT states. Much better return than the rust belt.

5. Oil prices stabilized. Congress changed the tax law. Developers holding the bag went broke.

6. Oil prices fell. Oil states economy recessed, while rust belt states prospered. Jobs in the COLT states dried up, people moved back home. Housing market crashed. There were Town Homes in Houston that were sold for $18K being offered for $7k. But, it had to be cash. You could not even get a $7k loan!

7. RTC and Bank Regulators had some rules that hurt the banks and S&L. Example: you had to have commercial property (I think over $1M) appraised every 6 months by two appraisers. That was $20K hit per year, just to hold the property. You could not sell the property if your offers were less than 70% of appraisal.

Now say you have a $100M building with a $68M bid. Bank can't sell. 6 months later they would bet an 80M appraisal with a 45k appraisal, still could not sell. This went on for years. Finally the bank would get an 8M offer on a 10M appraisal and they could sell. Costing the bank 60M from their first offer.

When the California market turned down, the RTC changed the rules. Banks could take early offers, appraisal rules were changed. Lessons were learned and the California down turn was not as bad.

It has been sometime since I worked with the numbers so some may not be exact. However, the crux of the post is. So it was not all bad decissions and greed. When the government changes policies there are always uninted consequences.
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Old 01-23-2008, 02:15 PM   #10
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[quote=Rustic23;6050967. RTC and Bank Regulators had some rules that hurt the banks and S&L. Example: you had to have commercial property (I think over $1M) appraised every 6 months by two appraisers. That was $20K hit per year, just to hold the property. You could not sell the property if your offers were less than 70% of appraisal.


So it was not all bad decissions and greed. When the government changes policies there are always uninted consequences.[/quote]

Rust, I think this rule came along as a result of some of the crooks developers. Recall the I30 corridor in outside of Dallas? Property was being re-appraised and sold every other week. (Mostly condos.) Some very rich, influential people went to jail ...

t.r.
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Old 01-23-2008, 02:21 PM   #11
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Here's a blow-by-blow description put together by the FDIC:

The S&L Crisis: A Chrono-Bibliography
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Old 01-23-2008, 05:56 PM   #12
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There were, as there are now, crooks. However, the S&L debacle was not caused by crooks. Unless you believe Heart Surgeon Denton Cooley, Sec. of the Navy James Connelly, and thousand of other prominent people were all crooks.
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Old 01-24-2008, 12:02 AM   #13
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Well known, highly successful people can still be too greedy.
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Old 01-24-2008, 08:43 AM   #14
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L. William Seidman: The full faith and credit of the U.S. government is behind the dollar. But you, my fellow citizens, are behind the U.S. government. (Or words to that effect.)

JMIOH, you're still paying for that debacle thanks to Ronald Regan. It will be another 20 years before the bill is paid.
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Old 01-24-2008, 03:25 PM   #15
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Did domestic housing prices across the country fall because of the S&L scandal?
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