I remember it must have been about late 2005, maybe early 2006. The bank I was working for was advancing loans at a "loan to value" of 80% and in some cases 85%. So if the property or asset was worth $100,000, we'd loan out $80,000 or maybe up to $85,000. I was looking at property prices and I said, "I think we should lower our loan to value to 75 maybe 70%."
The statement was summarily ignored.
Of course, like many things, now I watch various predictions (which weren't terribly hard to make) come true and see the same people with their pants caught down during Dotcom Mania sit there and scratch their heads today.
But the issue of what loan to value banks lent out at had larger effects than just for the local neighborhood bank down the street. It's having an effect throughout the country's banking and mortgage system as there are billions and billions of dollar's worth of CDO's, securities that were essentially mortgages packed together and sold on the second market.
The whole selling point or gimmick of the CDO was that, yes, part of the portfolio of mortgages were sub prime or worse, but the majority of the mortgages were high quality, triple A rated mortgages. The idea was to provide a slightly higher rate of return, but mix in different qualities of mortgages in the mix to lower the risk.
What's sad though, is that say you have a great borrower, low risk and so forth and so on. That may get you a triple A rating, but that doesn't mean you lent out $100,000 on a property that was worth $120,000. Matter of fact, given the over valuation and my now aging recommendation that banks lower their loan to values, it seems these AAA mortgages loan out $100,000, on properties that were only worth $80,000.
What I love though, is the now 20 cents on the dollar people are getting for loaning to a BBB- risk.
Alas, I'll say it again for the cheap seats, there was no lack of economists, analysts and just plain ol' smart people that warned about this. And all of it could have EASILY been avoided if you just had an economist in the house...or rather should I say LISTENED to the economist in the house.
Sadly, it seems in America it's more important not to rock the boat than prevent it from sinking.