My friend Patrick Dispensa spent many years working in the banking business, first as a loan officer at Guaranty Federal Savings & Loan Association, and later as the president and manager of a large credit union.
I think this is a fine and accurate accounting of the various financial crisis that have occurred in recent years.
|Current mortgage crisis likely will stick around
By Patrick Dispensa
Special to The Galveston County Daily News
Published February 20, 2010
The current mortgage crisis is real, and it looks to be with us for a while.
You probably remember the Savings and Loan Crisis of the late 1980s. That situation brought about the creation of the Resolution Trust Corp. It's been more than 20 years now since the RTC was in the news every day.
While today's foreclosure stampede is somewhat different from what the nation faced in the late 1980s and early 1990s, there are similar features.
Today, we have homes that are overvalued and secured by loans that in some cases shouldn't have been made. It's not uncommon for homeowners to find they can purchase a home quite similar to their existing home at a fraction of their current debt.
Others are victims of the recession, which has reduced family income to the point they can no longer meet their obligations. Houses are foreclosed, and prices continue to fall. Banks and mortgage companies must mark their real estate portfolios to the true market value and the institution's capital takes a hit.
Pre-1972, federal savings and loans were restricted to residential loans, construction loans for residential homes, limited ability to make loans for subdivisions and loans to individuals secured by savings deposits.
State-chartered savings and loans had a slightly broader lending authority. Interest rates paid on savings accounts were regulated, and most savings institutions made 30-year mortgages at about 8 percent. They had a cost of savings around 6 percent and with the 2 percent spread paid their bills, their staff and contributed annually to the capital strength of the institution.
We had a different war then - Vietnam. It drained the treasury and brought about deregulation of financial institutions to provide funds for the federal treasury. Savings and loans received checking account authority and the ability to form joint ventures, money market accounts with demand features were authorized, and savings and loans were given the authority to pay market rates for savings. They soon had very liquid deposits at high interest rates backed up with low yielding loans.
Before the crisis, Treasury bills were purchased only by financial institutions for $100,000 or more. Treasury bills were made available to individuals in amounts as low as $15,000, taking the financial institution out of the picture.
Remember the term "disintermediation?" Treasury bill rates skyrocketed, and we saw savings rates of more than 14 percent. Most joint venture loans went south, caused by high lending rates along with deteriorating markets and, in some cases, fraud. Savings and loans were required to reduce their loan portfolios to the new lower values and the capital of those institutions evaporated.
The federal government stepped in and created the Resolution Trust Corp. to liquidate the failed savings and loans and resell their assets back into the public sector.
It's hard to believe all that happened more than 20 years ago.
Patrick Dispensa is an accountant and lives in La Marque.