Brilliant Way Out of the S&L; Mess? : Federal financing for prospective buyers
Real estate dealers called the financial packages they cobbled together during the housing boom of the 1980s “creative financing.” It wasn’t always pretty, but it sold property and got a lot of mostly young couples of modest means into homes they couldn’t otherwise buy.
Now Washington is talking about creative financing of its own as a way to get out of houses, office buildings and other assets that it gets stuck with when it closes a bankrupt savings and loan.
Specifically, what L. William Seidman, chairman of the Resolution Trust Corp. and chief of the nation’s S&L; salvage crew, wants to do is loan federal funds to people who could use the money to take $50-billion worth of S&L; assets off his hands.
Hundreds of S&Ls; have gone under in recent years, some because of bad judgment--paying higher interest on deposits than they could get on loans. Incompetent regulation from Washington contributed to the mess. And one study found that 40% of the problems were caused by simple fraud, with thrift officers making high-yield investments in the shakiest of deals because depositor insurance made their gambles risk-free.
By the end of last year, the number of thrifts had tumbled to around 2,800, with another 700 to 1,000 considered too weak to survive.
Taxpayers may not find Seidman’s approach to creative thrift financing very pretty, but nobody has a better idea. The five-member board that sets policy for the S&L; salvage crew seemed intrigued by his idea last Thursday. The board should encourage Seidman to see if his idea can work.
Seidman has been pushed toward an approach that his board has resisted because real estate prices are headed in the opposite direction from the 1980s boom. The real estate market may be even softer in six months than it is now. Credit may be no easier to come by next year.
In those circumstances, waiting for buyers to put together their own mortgage deals might well mean getting less for property than it would bring today if the government helped with financing.
One potential stumbling block: money. If he is to loan money, Seidman will need more of it. But with the next election only weeks away, neither the White House nor Congress will be eager to be the first to mention yet another large contribution to the thrift calamity.
That seemed clear on Thursday when Seidman told a stormy session of the Senate Banking Committee that he will need $100 billion during the next budget year, $40 billion more than earlier estimates, to keep salvaging failed savings banks.
If the Administration wants the money, Democrats said, it will just have to ask.
It will cost American taxpayers at least $500 million to protect insured depositors and absorb other losses in one of the most serious failures in U.S. financial history. The chances are the price tag will be even higher than we now realize. Letting politics dictate that the losses will just get higher--if there is a possible way to keep them down--would border on the criminal.
