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Private mortgage insurance should be identified as a viable option for credit enhancement as regulators contemplate post-GSE-reform models and Basel III revisions.
April 15 -
Private mortgage insurance and "senior-sub" securitization structures have advantages that could accelerate private capital's return to the mortgage market, despite the lumps they took during the crisis.
March 12 -
Regulators seem obsessed with preventing false negatives: loans that pass underwriting and then default. They should consider the costs of false positives, i.e., restricting loans that probably would perform fine.
February 6 -
Securitization is essentially a financial production factory. Consistency in the manufacturing process, which minimizes defects and hence promotes investor interest in the product, would allow the business to prosper again.
January 3
"
Charlie Fletcher wanted to talk politics. He was running for Congress in September 1946, and Howard Ahmanson, ostensibly, was his campaign manager. With two months left before the election, they had lunch together at the Stock Exchange Club in the heart of L.A.’s financial district.
As they were walking back to Howard's office, Charlie casually mentioned that he knew a savings and loan manager who wanted to get out of the business. The association was for sale. He suggested Howard should buy it.
"How much is it?"Howard asked.
"Sixty thousand.”
"Where is it?”
"Highland Park,"Charlie replied.
Howard considered the area and the opportunity. Located along the Arroyo Seco just west of Pasadena, Highland Park included some of the oldest homes in Los Angeles. "Come on up to my office,"he told Charlie.
Howard wrote out a check to Tomlinson and asked Charlie to make the deal for him. Characteristically, he was not interested in negotiating. If the price was fair, he paid it. If it wasn't, he walked away.
In telling this story years later, Ahmanson made it sound impulsive, as if nothing that came before had prepared him for that moment. In fact, he was anything but impulsive. As one of his longtime employees recalled, "Howard explored every facet of everything before he made a decision."Ahmanson had spent years studying the savings and loan industry. He had also spent months thinking about the postwar future of Los Angeles.
Ahmanson knew the demand for housing in Los Angeles was explosive. He was already positioned to take advantage of this growth by selling residential fire and hazard insurance, but he wanted to increase his bet. He bought stock in cement companies because new homes needed foundations. He continued to buy real estate because developers and builders had to have land. But he also recognized that tract builders would need financing and that savings and loans were uniquely positioned in the postwar era to provide construction loans and mortgages.
Ahmanson knew that most savings and loan managers didn't see the opportunity. For too long they had been focused on surviving. Hit hard by the Depression, nearly one in four in California had gone out of business. Those that remained carried large portfolios of delinquent loans and foreclosed properties through the 1930s. By the end of the war, only 101 state-chartered savings and loans and 73 federally chartered thrifts were still in business in California. Within the industry, the federally chartered institutions were the strongest. Statewide, they accounted for 59% of total assets. Meanwhile, most of the state-chartered, stockholder-owned thrifts had barely $1 million left on their books.
Savings and loans in California also seemed disadvantaged by public policy that favored commercial banks. Mutual savings banks, the leading source of home loans on the East Coast, had not been enabled by the California legislature, so commercial banks played a greater role in the mortgage market in California than they did on the East Coast. California was also unusually permissive with regard to branch banking, which weakened the competitive position of strictly local institutions. As a result, Bank of America, the nation's largest commercial bank, had been able to achieve enormous economies of scope and scale.
Despite all of these drawbacks, Ahmanson saw potential. States and the federal government regulated savings and loans as mutual or cooperative organizations. Given thrifts' quasi-nonprofit status, lawmakers were inclined to give them competitive advantages. For example, in 1947, savings and loans were completely exempt from federal income taxes if they made substantially all of their loans to their own depositors. Since regulators wanted to ensure that banks would remain liquid enough to meet demands for deposits—especially if there was a run—banks weren't allowed to loan more than a certain percentage of their capital long term for real estate. Commercial banks had to maintain sufficient cash reserves to meet the daily demands of their depositors. Savings and loans could invest more of their cash. State and federal laws made it difficult for depositors to withdraw money from savings and loan accounts. They did this to minimize the risk of a run on the association's deposits.
Savings and loans also enjoyed other significant competitive opportunities. They could attract savings by advertising the dividend rates (interest) paid on deposits; banks were not allowed to do this. This privilege was especially important because, under Regulation Q, the Federal Reserve controlled interest rates paid by banks on savings deposits. Savings and loans had greater freedom to set their own rates.
All of these advantages would have meant little to Ahmanson if all savings and loans in California operated as mutual or cooperative organizations, as they did in most states. But in California, entrepreneurs had a unique opportunity to own a savings and loan and profit from its success. In 1909, the California legislature had passed an unusual law that essentially transformed state-chartered thrifts into stockholder, rather than mutual, corporations. Some California entrepreneurs had taken advantage of this structure, but the Depression and World War II stifled the industry's growth. Very few entrepreneurs paid attention to the ways in which New Deal legislation had diminished the risks and enhanced the potential profits of the business. Passage of the GI Bill, with mortgage guarantees for veterans, made mortgage lending even more attractive.
All of these government incentives to lenders and particularly to savings and loans, coupled with the latent demand for homeownership in Los Angeles, suggested enormous opportunity to an entrepreneur in California, particularly to a government entrepreneur who saw the potential for profit in aligning his business to achieve public policy objectives. In Washington, Ahmanson had seen men like Donald Douglas and Henry J. Kaiser get rich by focusing on the government's priorities. With the war over, the government no longer needed as many bombers and battleships. Now it wanted homes and mortgages. Ahmanson would build a business to meet this demand.
Eric John Abrahamson is an economic historian who has researched and written about various regulated industries, as well as business and philanthropy in California, the U.S. and Canada.
