Subprime Devastation Retraces Path of S&L Crisis in U.S. States

By Jonathan Keehner and Bob Ivry

Oct. 8 (Bloomberg) -- The $700 billion bailout of Wall Street's subprime-tainted securities harkens back to the real- estate bets that sparked the savings and loan crisis in the 1980s. The geography's the same, too.

Then, as now, the government created a taxpayer-funded enterprise to absorb the fallout from bad real-estate investments. A Bloomberg map of the hardest-hit areas shows that, with the exception of Nevada, regions with the highest foreclosure rates also had the most savings-and-loan failures, according to the Federal Deposit Insurance Corp.

The overlap shows that the aggressive lending and speculation that ignited the savings-and-loan meltdown persisted, at least in those areas, according to Paul E. Johnson, who was mayor of Phoenix from 1990 to 1994.

``From where I sit, the areas that were hit by the S&L crisis and those struggling with subprime look pretty much the same,'' said Johnson, now president of Southwest Next Capital Management, a real estate investment fund based in Arizona.

Texas, where failed thrifts in the Dallas and Houston areas had assets of more than $45 billion in the 1980s and 1990s, has largely sidestepped the subprime crisis by learning a lesson from the S&L scandal and ratcheting up regulation.

``We had no regulation of mortgage brokers before 1990 and now we have some of the most robust requirements in the country,'' said Doug Foster, commissioner of the Texas Department of Savings and Mortgage Lending in Austin.

Criminal Background

Texas is one of 32 states that require criminal background checks for mortgage brokers and one of 12 states that administer tests that prospective brokers must pass, Foster said. The state has a 42 percent failure rate on that test, he said. Texas also requires 90 hours of training for new brokers and 15 hours of continuing education every two years. Only Wisconsin mandates more, he said.

Granted, home prices in Texas didn't rise as high as those in California, Arizona and Florida, according to the S&P/Case- Shiller Home Price Index.

Los Angeles, Phoenix and Miami home prices doubled from 2002 to 2006 and have slipped by about one-third since, according to the S&P Case-Shiller Home Price Index. Home prices in Dallas rose 12 percent from 2003 to 2007 and have dropped 3.2 percent since then, according to the Case-Shiller index.

``Deterioration of property values in other states is the result of the run-up,'' Foster said. ``We didn't have the run- up.''

California, by contrast, was hit hard by both financial meltdowns. Failed thrifts based in the regions of Santa Barbara, Ventura, Los Angeles, Orange County, San Diego and Stockton had combined assets of more than $95 billion in the 1980s and 1990s.

Failed Thrifts

Now, the state is home to all five of the top metropolitan areas for foreclosures, according to RealtyTrac Inc., a real estate database in Irvine, California.

California, Arizona and Florida rank second, third and fourth by percentage of households in the foreclosure process, behind Nevada, RealtyTrac said.

Borrowers with subprime mortgages fell behind on their monthly payments at a rate more than four times that of prime borrowers, according to the Washington-based Mortgage Bankers Association. Subprime home loans went to people with bad or incomplete credit histories.

Some of the names from the era of Resolution Trust are familiar as well. Goldman Sachs Group Inc. and Morgan Stanley were among the underwriters of products created by the RTC, which recovered almost $400 billion in assets from about 750 failed savings and loans. They may be among the biggest beneficiaries of the new bailout plan as sellers of devalued assets, according to a Sept. 21 report by Bank of America Corp.

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.