Housing Lenders Forgot the Basics: PNC Chairman Rohr

The current credit crunch occurred as lenders ignored a long-held rule of lending and certain economic misconceptions took hold, James E. Rohr, chairman and CEO of The PNC Financial Services Group, said Thursday at the Federal Reserve Bank of Chicago’s Annual Conference on Bank Structure and Competition.

Many lenders ignored the basic regulatory rule to know your customer, said Rohr, while also believing that liquidity and increasing home prices “would be there forever.” All was good for lenders in 2001-2002 when fixed rate mortgages were at 7.5 to 8 percent and the federal funds rate was at 1 percent. But that spread quickly shrunk as the federal funds rate rose to more than 5 percent and mortgage rates dropped. Lenders tried to make up for the difference by increasing volume, but that led to bypassing the rules about credit and risk, said Rohr.

That’s when subprime loans increased from 2 percent of the market to more than 20 percent. When the liquidity for those loans started drying up and the teaser rates started adjusting to market rates, the defaults started.

That began in earnest last summer and but there’s still much more on the horizon, according to Rohr. He said that the monthly repricing of adjustable rate mortgages will continue through this July and the subprime market won’t escape its current problems until at least 2009.

The adjustable rate mortgage repricing increases monthly payments by as much as 30 percent – increases that homeowners can’t handle. Therefore, Rohr expects the real estate and mortgage markets to continue to be slow for the next several years.