Monday, May 22, 2006
From John Dugan's Speech
Dugan gave a speech about regulating bankers including this statistic:
Between 1999 and 2005, total real estate loans on the books of national banks doubled, from $800 billion to more than $1.7 trillion, an increase slightly greater than the growth in total loans and assets. More telling, however, was the change in the composition of real estate loan portfolios in our two groups of banks. Larger banks – the “diversifiers,” as I have termed them – have come to dominate the national market for home mortgages, while smaller banks have increasingly focused their attention on the localized market for commercial real estate loans.Some of the banks, thrifts and credit unions with other charters also hold a lot of RE loans - that 1.7 trillion is just for national banks. The really bad part is that in some cases the banks are holding mostly second, last-dollar positions. The HELOC or the piggy-back is more likely to get shorted if real estate values drop.
Dugan went on to say once again that the guidances about controlling RE loan portfolios for risk will be issued. He gave an interesting, understandable speech that deals with reality in his attempt to explain why, which is something you don't encounter much these days from denizens of Washington:
It wasn’t the structure of these nontraditional products that caught our attention – after all, they’ve been around in various forms for 25 years – but, rather, changes in the way they were marketed. Lenders previously limited these products to more creditworthy borrowers for use as a cash-management tool.That's the truth. The thing about no-downpayment, option ARM or interest-only loans is that they are only good loans if the borrower can afford to pay for a traditional mortgage. Otherwise, they expose both the borrower and the LILO lender to great risk. I think the non-bank finance companies will pick up the slack and keep writing these loans. If not, what would happen to markets in which less than 20% of the prospective homeowners can qualify for a traditional mortgage? Overnight some RE markets would collapse.
During the recent spike in nontraditional mortgage lending, however, banks and other lenders began selling these new instruments as a type of “affordability product” – that is, as a product that the borrower would use as the only way to qualify for, or afford, a given mortgage.