“A lot of depositories in Montana are in good shape because they didn't engage,” in subprime loans, said Richard Riccobono, president and chief executive officer of the Seattle bank. But “my gut feeling is we haven't seen all of the losses that are pent up in the industry.”
Riccobono was at the University of Montana School of Business Administration on Thursday to discuss the subprime mortgage crisis. His talk was part of an executive lecture series sponsored by Harold and Priscilla Gilkey.
He said many people are confused on how issuing loans to people with impaired credit could have caused this “absolute mess.”
Riccobono attributes some of the problem to shifting home lending from financial companies, with higher capital requirements, to the highly leveraged banking industry.
“It was a perfect storm of low interest rates, rising real estate (values) and the goal to have everyone attain homeownership,” he said. “I think many people, myself included, misjudged the spillover from the subprime to prime and then to the liquidity in the secondary market.”
He said there was a lapse in conventional underwriting standards for loans, including 20 percent down payments, verifiable income and other standards. Instead, an array of low-document and no-document loans emerged.
Lenders, who extended those loans to people with marginal credit histories, promised buyers they would refinance them when the low, teaser rates on their adjustable mortgages reset in several years.
Bank regulators didn't apply the brakes to these subprime loans, he said, because of the goal of helping Americans achieve homeownership.
Then, however, as the amount of credit constricted and Wall Street couldn't find buyers for mortgage-backed securities, many lenders couldn't refinance those consumers. Foreclosures rose as those borrowers couldn't afford the higher loan payments.
Despite the cautionary voices, he said, “the reality is we don't recognize (it) when we're in these frenzies.”
Harold Gilkey, chairman of Sterling Financial Corp. based in Spokane and a 1962 UM business school graduate, summed up the dynamic among borrowers, lenders and Wall Street investors.
“Greed overcame fear,” Gilkey said.
While Montana lenders for the most part were spared the ills of the subprime mortgage crises, some local impacts are likely, Riccobono said.
“We really haven't hit bottom,” he said. “The concern will be we'll see mortgage markets get tighter and tighter in Montana.”
He said the national housing picture must turn around, hopefully with some congressional action, an infusion of cash from the economic stimulus checks in May and systemic changes.
“We can't help individual borrowers unless we get the secondary market back on track,” Riccobono said.
He described the 12 regional banks for FHLB as a “banker's bank,” providing billions of dollars of primary liquidity to about 80 percent of the nation's financial institutions. His Seattle-based bank serves Montana and seven other states, plus Guam and the Northern Mariana Islands.
The FHLB's mission is adding liquidity to member banks, thrifts, credit bureaus and other affiliates. He said about $103 million in loans and grants have been issued by the FHLB's roughly 40 members in Montana since 1990.
About 10 percent of the FHLB's funds are steered toward affordable housing, he said. In early April, a proposed regulation change would give temporary authority for FHLB members to help low- or moderate-income households refinance or restructure subprime or unconventional loans. If approved by federal regulators, the authority would expire on June 30, 2011.
Reach reporter Pamela J. Podger at 523-5241 or at Pamela.podger@missoulian.com
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