HSBC Head Sees Western Banks Returning to Asian Lending Model "Turning Japanese"

The Bloomberg report quotes HSBC Holdings Plc Chief Executive Officer Michael Geoghegan believing that more countries will adopt the mortgage lending caps that protected Asia during the collapse in the U.S. and U.K. housing markets.

“The fact that Asia does guide you to the sort of loan-to-value ratio you should have has certainly helped Asia through this crisis,” Geoghegan said in an interview with Bloomberg Television today. “Making sure people have their own skin in the game as well as the bank’s skill in the game is important."

Bravo! Bravo! I am sure Mr. Michael "Notradamas of my time" Geoghegan was shouting this from the mountain tops in 2005. Oh, he wasn't and was "confident that we have the management skills to manage any deterioration in the overall market"?!? Poser.

Truth of the matter is that the U. S. had the 20% down 80% mortgage long before the current hangover. Hell, we even had a 50% down payment requirement before 1934.

So why did the U. S. change these tried and true underwriting standards?

Banks are racist! Stan Liebowitz, the Ashbel Smith professor of Economics in the Business School at the University of Texas at Dallas, opines in the NY Post (beware of racy side pics).

His argument essentially states that banks did not lend to areas typically populated by minorities because their socio economic status generally had weaker finances. Discrimination was obvious and forced passage of the Community Reinvestment Act, Fair Housing Act, Fair Equal Credit Opportunity Act, Home Mortgage Disclosure Act, CRA ratings of the Financial Institutions Reform Recovery and Enforcement Act, Federal Housing Enterprises Financial Safety and Soundess Act, and the Riegle-Neal Interstate Banking and Branching Efficiency Act to make sure any future public policy was escalated to a national level.

Note: a 1996 paper by Raphael W. Bostic, Division of Research and Statistics Federal Reserve Board of Governors states that default rates between races were equal in previous years (p.6) and that discrimination occurred with minority applicants in regards to debt-to-income ratio in marginal applications(p. 20). However, minority applicants actually fared better in loan-to-value requirements (p.20)

But back to Liebowitz's angle: Community activists (ACORN and others) called out banks in the 80's, and later shook them down to get their way in the 90's and 00's. So there you go.

What ever good happened from initial efforts led banks to find ways to profit. George W. Bush, Bill Clinton and a Democratic Congress are to blame for "opening the doors to home ownership". I see you Barney Frank!

Banks started lending, creating creative mortgages (NO/LOW Doc, Alt -A, 100% LTV, 110% LTV, etc...) to accommodate this movement and quickly shifted risk on others. This was done by syndication/packaging loans and selling them to investors. Burn and churn baby!

And yet, as banks are flailing from the fallout of their follies, the federal government, via FHA loans, is perpetuating the cycle.*

So this "Asian" financial model we are returning to was initially American. We just wanted to open the doors of home ownership at all costs. Unfortunately, these earlier attempts to empower minorities have caused unemployment in minorities to hit 25 year highs; double the white unemployment rates.




*Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.