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Bailout may be only way up

Lender says U.S. running out of time to fix credit crisis

By John Rebchook, Rocky Mountain News (Contact)

Published January 18, 2008 at 12:05 a.m.

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A massive federal bailout may be needed to pull the country out of a U.S. credit crisis that is the worst since the Great Depression, according to a Boulder lender with a national reputation.

"We're running out of time," said Lou Barnes, principal of Boulder West Financial Services.

One possibility, he said, would be a hybrid of the government's bailout of Chrysler in 1979, or the savings and loan bailout a decade later, when Congress created the Resolution Trust Corp. to take over the assets of failed S&Ls, such as Silverado Savings and Loan in Denver.

Barnes said the nation could be facing a "credit spiral" for the first time since the 1930s.

That's when an overextended market is hammered by loan defaults, causing underwriting to tighten, he said. That leads to even more defaults and more tightening, feeding on itself.

"The problem is," Barnes said, "there is no market mechanism that creates a bottom."

He said the credit problem is "much larger than the subprime or mortgage markets and is infecting credit cards, auto loans and refinances."

All told, it is impacting $4 trillion to $5 trillion in various loan types, he said, which were packaged and sold to investors by Wall Street.

"No one knows the real market value of $4 trillion of bad ideas," Barnes said.

While no one wants a bailout, he said, at some point it is better than facing another Great Depression.

Barnes added that the easy credit and low mortgage rates benefited the country for several years, and now that the party is over, the entire country is suffering.

Greg Zadel, president of the Colorado Association of Realtors, suggested a less drastic solution.

He said one move that could boost the housing market is to allow Fannie Mae and Freddie Mac to raise their loan limits to cover what is known as jumbo loans, or those above the current conforming loan limit of $417,000.

Currently, 30-year, fixed-rate loans for conforming Fannie Mae and Freddie Mac loans are below 6 percent, while jumbo loans are above 7 percent, he said.

The savings in interest rates would flow back into the economy, he said.

At the other end of the spectrum, he applauded moves by the government that make it easier for homeowners stuck with risky subprime mortgages to refinance into safer FHA-insured loans.

rebchookj@RockyMountainNews.com or 303-954-5207

Comments

  • January 21, 2008

    11:46 a.m.

    Suggest removal

    immunizer writes:

    No bailout! Let the market suffer. All you free-market whackos come crying to the government whenever you screw yourselves over, but maintain the virtue of the Invisible Hand when it means money in your pockets. I'm tired of government sponsored capitalism. We should have let United die a well-deserved death, but instead the Pension Guaranty Corporation had to step in and help them screw the workers - while the CXOs got bonuses. Now we're going to save the corporate officers responsible for destroying the finances of more people than probably any other group? F*** that.

    The only way I'll support a bailout is if it comes with appropriate regulation. This is one industry where "creativity" must be stifled.

  • April 30, 2008

    8:09 p.m.

    Suggest removal

    denverinthesnow writes:

    All partisan politics aside there have definitely been cases where good people were duped into bad loans by bad mortgage brokers in the state of Colorado in specific. Being a CMPS Mortgage Planner in Colorado, I have heard all sorts of horror stories over the past three or four years and personally I think a government bailout through a corrected program is a valuable option for homeowners.

    The Federal housing administration or FHA is now offering programs that allow homeowners to make payments and stay in their homes where they would otherwise be foreclosed on. The bottom line is benefiting people that were lying in the first place is not a good thing to do, however helping clients make responsible decisions because they are in a rough situation is both helpful and necessary.

    I speak with clients every day that are in legitimate need for help that were duped into situations by bad mortgage brokerage firms, and they need legitimate help for homeowners in this situation I recommend going to http://www.governmentbailout.com where they can get honest help, which I might add, is a rare commodity in the mortgage industry these days…