S&L Deja Vu: Sub-Prime Loan Market Set To Implode? genre: Econ-Recon & Six Degrees of Speculation

Implosion

If you were around during the late 80’s you have an appreciation for the magnitude of the Savings & Loan Scandal. If you weren’t around, you may get an opportunity to see it firsthand as a result of the sub-prime lending debacle that is just beginning to unfold.

Federal Reserve Chairman Ben Bernanke warned legislators that the problem is significant…and if I may be so bold…he is doing his best to tamp down the alarm for an issue that is about to become a front and center economic crisis.

Federal Reserve chairman Ben Bernanke has warned that the crisis in the US sub-prime lending market could cost up to $100bn.

In a second day of testimony to Congress, Mr. Bernanke said credit losses associated with sub-prime mortgage failures were "significant".

"The credit losses associated with sub-prime have come to light and they are fairly significant," Mr. Bernanke told a Senate Committee.

The Fed's handling of the sub-prime market, which it regulates, came under fire from Senators who argued it should have done more to protect vulnerable consumers from inappropriate and improper mortgage practices.

Mr. Bernanke said the Fed was reviewing current regulations on lending practices in a "responsible" manner.

The Fed remained "alert" for any signs that housing weakness may destabilize the economy as a whole, Mr. Bernanke added.

The problem is not dissimilar to the S&L debacle as it stems primarily from a lack of oversight of the lending industry. In the case of the sub-prime market, it has been a virtual free for all for mortgage brokers and lenders. Some 1.3 trillion dollars is now tied up in loans that are considered to be suspect. Those loans were issued to borrowers with inadequate credit and an insufficient historical demonstration of an ability to make the payments required by the loans.

Unfortunately, brokers aren’t often motivated to monitor the fiscal worthiness of the business they transact and they are also frequently compensated based upon the dollar value of the loans they initiate…which often means that their objectives are likely to be in conflict with sound lending practices.

Moving up the chain of command, managers of mortgage brokers often receive some of their compensation from the dollar value of the loans written by their subordinates which will further compromise the veracity of the process. As with many businesses, prosperity often leads to drift…drift from sound practices…drift from adequate oversight…and drift towards a disregard for the consequences of mismanagement.

As it becomes evident that a problem exists, human nature kicks in and people from top to bottom look for loopholes to repair the damage. During the S&L Scandal, lenders frequently rewrote bad loans under different ownership entities and flipped bad loans back and forth with other lenders in order to minimize their defaulted portfolio and avoid the scrutiny of auditors and regulators.

At its worst, virtually everyone benefiting from the industry becomes complicit in avoiding the inevitable collapse and the fine line of criminality becomes blurred and before long it is no longer a deterrent as people scramble to survive the approaching implosion.

If the sub-prime crisis unravels in a manner similar to the S&L Scandal, the magnitude of the mess will become visible at a point when the damage has reached a level that turning back is impossible. While I can’t predict the future, I do recall the past…and everything I’m witnessing…such as the slow release of ever more ominous projections, the attempts to minimize the pending impact, and the suggestions that the situation is being closely monitored…all lead me to believe that the dice have been rolled and all that remains is for someone to utter the word no one wants to hear once things come to a halt…craps!

Daniel DiRito | July 19, 2007 | 5:43 PM
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Comments

1 On February 6, 2009 at 8:28 PM, nancy wrote —

I wanna thank for your service.Some of my friends just want to start a small business.I think they should need money regarding this.Shall i know what are the things should be needed while buying loan.
=========
nancy

Home Loans

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