What The “Recession” Really Is … And What It Means For Your Real Estate Market Part 4

February 23, 2010

I’ll explain what happened with the Savings & Loan scandal.  The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 747 savings and loan associations (S&Ls aka thrifts). A Savings and Loan is a US financial institution that accepts savings deposits and makes mortgage, car and other personal loans to people.  The key development in the S&L world at that time was the US government under Ronald Reagan decided to guarantee any loans these S&L companies made.  So if a person who received an S&L loan defaulted, the US government guaranteed these S&Ls they would compensate them in full for any losses they incurred.  

That basically gave the green light to these financial institutions to loan out as much money as possible.  And they had major incentive to do so in a huge way.  It simply made business sense to do it: if the government guaranteed to pay you back for any losses you incurred on loans, why not loan as much money as possible to as many people as possible?  It’s like giving a business a license to grow and grow abundantly.  Interest rates were very high in those years, and the billion people of the baby boomer generation were becoming of age to buy their first homes.  So these S&Ls went absolutely hog wild with lending money.

The S&Ls set their sights on the real estate boom of the 1980’s.  Predictably, many S&Ls lent far more money than they should have, and put money into high risk ventures, ventures involving industries they weren’t qualified to assess, must less gauge return on investment for (especially with commercial real estate).

Large numbers of the ventures these S&Ls invested started failing.  As with any boom, demand fuels supply, demand eventually dries up, and supply eclipses demand – often greatly.  With booms, supply is often left in the cold and in huge abundance.  Consequently, home prices started dropping, in some cases dramatically.

Is this starting to sound familiar?

Yet the US government was legally bound to pay for all of this folly.  The ultimate cost of the S&L crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the US government—that is, the US taxpayer.

Filed under: Inspiration

Tags: Big City Broker, Brad J Lamb, Brad Lamb, carriage trade, depression, doom and gloom, economy, Elise Kalles, Garth Turner, Harry Stinson, Harvey Kalles, Mike Eppel, real estate market, recession, Richard Wengle, Sherry Cooper