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Lender Recalls 1990 MeltdownRick Ackerman
Below is another of the many letters I received in response to my recent commentary on the decline in mortgage-lending standards. It's impossible to know how many Americans fear that a housing bust is imminent, but judging from my mail such fears run deep. The letter is from a man in the lending business whom I quoted here earlier. In further recounting his apprenticeship in the mortgage business under Golden West Financial's Herb and Marion Sandler, he has provided us with a benchmark against which we can measure the egregious slippage in lending practices that has occurred since. I am eager to put it all on-the-record because I'm firmly convinced that a deflationary collapse in real estate lies ahead. Our correspondent writes as follows: "I [have believed since around 1990] that the real estate market could not continue in its present course without a major meltdown. I developed analytical software and spreadsheets during my time at World Mortgage, and I saw the Meltdown of 1990 happen. We had 13 people in the Atlanta office, and one day a regional manager came in to let us all know that we were all laid off. I had just walked into the office with a new loan package when I was greeted at the door by my manager. Everyone in the office had that hung dog look on their faces. "A.H. Ahmanson, one of our two portfolio competitors, had closed their office the month before, and that left only two portfolio lenders with offices in Atlanta -- Great Western and ourselves. World had an economist do a study on the Atlanta market to determine if it was wise to continue lending in that marketplace, and the conclusion was as follows: ** The second highest bad credit district in the nation. We were the second highest Federal Bankruptcy filing district in the nation, behind Orange County, CA. ** Two-year supply of new built homes, in price ranges above the mean average of purchases in the Atlanta area. ** Insufficient money on deposit in banks in the Atlanta area to conduct the type of business we demanded. World liked to have 20% down payments, and on rare occasions would accept 10% down with exceptional reasons. Atlanta's Comeuppance "These and other reasons lead to the logical conclusion that it was time to withdraw from the Atlanta market. I witnessed properties being sold off to other S&Ls via the RTC only to see them sold off to another when that S&L went bankrupt. During that time, there were several mortgage insurance companies that went bankrupt. "Recently I revisited the mortgage industry, only to discover that caution has been thrown to the wind: zero-down buying, loans to buyers with poor credit histories, interest-only loans, etc. The very things that my training at World told me amounted to unreasonable risk are now the norm. Recent revelations about the growing interest in 40-year mortgages come as a shock to me. They do not provide much benefit over 30-year mortgages, in terms of reduced monthly payments (not significant), but only burden the borrower with much longer terms of indebtedness. "I can see that under the current market conditions that the Sandlers [longtime co-chairs of World's parent company, Golden West Financial] would have a difficult time maintaining their original philosophy of 'Common Sense Lending' when the whole industry is practicing 'No-Sense Lending.' If they did, they'd be unable to make any loans. World S&L Stood Tall "I saved some articles from the WSJ and the New York Times that showcased World S&L at the peak of the S&L scandal of the 1990s. The headline on one reads, "If only all S&Ls were run like World Mortgage". During the 1980s, Wall Street laughed at the Sandlers, labeling them as a bunch of fuddy-duddies. They were not part of the enlightened and leading-edge geniuses of high finance that kept gold-plated fixtures in the executive wash rooms and yachts in their back yards in their Miami HQs. "But when the bubble burst, World was standing ten feet tall, with the best track record of any S&L in the industry. At the time, the company liked to brag that it was just a mom-and-pop business ($28 Billion in assets!). They had the lowest foreclosure ratio and the highest profitability ratio in the business, and they were poised to buy up the bleached carcasses of their high-flying competitors. Compromise or Die "Although it's been 15 years since I worked in the industry, I still look up to the Sandlers as an example of how to run a company. Take a look at their stock chart on Yahoo for the entire history. It is constantly going up, it pays a dividend, has had several splits, and during the first quarter of 2000, when most stocks fell, it went up, reflecting the fact that the smart money saw them as a haven. Way to go, Herbert and Marion! One of these days, I may be fortunate enough to meet them in person. "I suspect that the Sandlers hate having to compromise on principle in order to compete, and that Herb Sandler had to hold his nose every time he had to compromise his principles. But when the only business is garbage business, you learn to pick up your shovel and march forward." *** Taming the Mini-Futures Trading the S&P futures with a stop-loss of one point or less? Come visit our archives to see how it's done. You can get a free one-day pass to visit the site, or a two-week trial subscription with no risk, by clicking here. Rick Ackerman *** Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents ©2005, Rick Ackerman. All Rights Reserved. You can subscribe here. 321gold Inc |
