By Arthur Foulkes, Tribune Star
arthur.foulkes@tribstar.com
Housing prices may not hit bottom until next year, according to a financial analyst and risk management specialist speaking at Indiana State University on Wednesday night.
Chris Whalen, managing director of Institutional Risk Analytics, said the current subprime mortgage crisis could lead to "significant bank failures this year," and he expects mortgage foreclosures to continue to rise.
"I think the U.S. economy is really going to take a hit," Whalen said.
Speaking to a gathering of bankers, ISU faculty, financial services professionals and others, Whalen said the subprime crisis has three primary causes.
First, Whalen said, the subprime crisis has roots in government efforts to expand home ownership in the U.S. Although home ownership rates in the U.S. were already around 65 percent - greater than anywhere else in the world - this was not high enough for Washington, he said.
Legal and regulatory mandates, influenced by lobbyists from the home building and mortgage industries, pushed affordable housing to the point where banks were routinely offering innovative financing in the 1990s, Whalen said.
Second, Whalen blames "errors and omissions" committed by government regulators regarding banking policy. Regulators and economists at the Federal Reserve Bank followed a faulty model of the subprime market based on the market for government-sponsored entities, such as Fannie Mae and Freddie Mac. This opened the door for Wall Street to capitalize on "regulatory arbitrage," Whalen said.
Third, Whalen blames the Securities and Exchange Commission for requiring the use of "fair value accounting," something Whalen calls hearsay.
Fair value accounting requires companies to record greater losses than they are actually suffering, harming investor confidence, he said. The recent failure of Bear Stearns & Co. would not have happened without fair value accounting, Whalen added.
The financial fallout from the subprime crisis could make it more difficult for people to receive fixed-rate home loans, said John W. Perry, senior vice president and trust officer at Terre Haute Savings Bank. "It has a fundamental impact on the economy," Perry said.
Whalen, who said he believes Fannie Mae and Freddie Mac have forced private lenders to "go up the risk curve" in the loans they make, also believes the entire mortgage industry could be quickly privatized and made more transparent with proper legislation.
However, Whalen was not optimistic Washington will find any solutions soon.
"Unfortunately, most members of Congress don't have a clue about this," Whalen said. "Remember, when [politicians] offer you a solution, they caused the problem in the first place," he said.