real estate finance - full book (500 pgs)

At the same time they would pay higher than normal

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Unformatted text preview: s to the excesses of greed and fraud. By 1989 there were so many insolvent and financially shaky thrift institutions that one Congressman described the situation as the “greatest financial scandal” in our nation's history. Insanity Factor – S&Ls on the brink of failure would offer home loans at unrealistically low rates to attract business. At the same time they would pay higher than normal interest rates to depositors to attract cash at a time when many depositors were withdrawing cash because of the fear of financial unsoundness. Meanwhile, financially healthy institutions were having to compete with the lower mortgage rates and higher deposit rates, cutting deeply into profits. One economist described such unsound business practices as the “insanity factor.” Federal Losses – The sick thrifts had little to lose if they failed; the federal government would take over and pay each depositor up to the $100,000 insured limit. By the time the federal S&L bailout bill was passed in 1989, it was estimated that the losses suffered by the government on federally insured deposits were $20 million to $30 million each day. Dynasty School (www.dynastySchool.com) 1-5 REAL ESTATE FINANCE The Rescue – In 1989, Congress enacted, and the President signed, the $159 billion financial rescue, the largest in the nation's history. The total costs are projected to be as high as $335 billion over the following 30 years. Close Insolvent Thrifts – Regulators are empowered to close an estimated 500 insolvent thrifts and pay off depositors. Many thrifts will be liquidated; many others will be sold to healthy institutions. Financing the Bailout – The financing of the bailout over the next 30 years involves: • • • • • • Higher annual FSLIC insurance premiums charged S&Ls and banks Moratorium on healthy S&Ls leaving FSLIC for FDIC to avoid higher rates Sale of U.S. Treasury bonds Creation of the Resolution Trust Corporation to take over and sell assets of failed thrifts Allocation of earnings of the FHLB Requiring...
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