“We’re still making loans,” Bajat said. “We haven’t seen a slow-down in the market. In fact, we have actually closed more loans this year than we closed last year, so there’s been an increase. Locally, I don’t see that this (crisis) is gonna affect us.”
Bajat said what led to the collapse of financial institutions like Lehman Brothers Holdings and AIG is the issuance of subprime loans to people who should not have qualified for a loan.
“What happened was they made loans to people that they should not have made loans to ‑ and they securitized those loans: either the financial institutions securitized them or Fannie Mae did,” Bajat explained. “The problem you have is when the security loses value, or you can’t even determine the value because no one wants to buy it, the banks are forced to mark that security to market.
So if they have $100 million in these securities, and they have minimal value, they’ve got to ‘write down’ that $100 million to whatever the value currently is.”
Bajat said that the write down that banks have to accommodate is taken out of their net worth, but that as long as they possess ownership they have the potential to reap the benefits.
“The only time you have the loss is when you sell it -- and you actually take the loss,” he said. “The good thing, though, is of the securities that they’re buying, because of the way they set these mortgages up, none of these securities are going to be 100 percent bad. Some of them will actually increase in value. So, over the next few years the government can actually sell the securities that they hold and actually make money, which will bring money back into the treasury.”
Government bailouts are not going to fix the problem we’re having right now, Bajat said. “I don’t think $750 billion is going to be enough,” he elaborated. “I think it’s not gonna stop the crisis. I think there’s more coming,” noting that this current problem has taken many years in the making.
“What happened is in the desire that Congress wanted to get as many people into homes as possible (that) they didn’t regulate,” Bajat said. “This is not a 2000 problem, this goes back into the ‘90s when they started that, because the economy was so good ‑ everybody had jobs and they wanted these people to get homes ‑ people were buying, and they started relaxing the rules. (Banks gave out) what I call a ‘liar loan’: An individual walks in, wants to borrow $300,000. They ask him how much money he makes and he says ‘well how much would I have to make in order to qualify for the loan?’ They tell him and he says ‘oh, I make that much’.
“(Banks didn’t) verify that,” Bajat continued. “The same thing (goes) for down payments. He says ‘I make good money but I don’t have a down payment’. The bank says ‘no problem; we’ll make you a 100 percent loan.”
Bajat said consumers are now paying for things that we’ve done over the last 20 years. “Brokers got in there and increased the problems that we had by securitizing loans that should’ve never been made in the first place - that’s where the problem started - it was excesses in the market,” he added.
So what does this mean to Louisiana or to Vermilion Parish? Bajat said there are no reasons for concern.
“None of this should affect Acadiana,” he said. “I know there are no banks - and I know we don’t have them - that made any subprime loans in Vermilion Parish. There are a few in Lafayette that did, but we didn’t get involved with that. So, the economy’s good here. What’s happening on Wall Street will affect 401Ks and retirement, but only if you sell it! It’s not a loss until you take the loss, so you just sit on it and wait to see what happens with it.”
Bajat said that in addition to monitoring and avoiding subprime loans, banks are tightening their underwriting requirements for credit loans.
“For the last 30 years or better, people have been living beyond their means and using credit cards to live on,” he said. “We still have plenty of money to make out loans. We take care of our own customers. Locally, we don’t have a problem. The underwriting requirements are being tightened; you might have had a credit score of 620 and you could’ve bought just about any house you wanted, now you might need a credit score of 680-700,” he added.
Tighter requirements, Bajat said, will force individuals to be more aware of the payments they are making because if they have any delinquencies, it will work against them.
“They’re tightening the underwriting requirements, but that’s not tightening the credit,” he said. “The credit is still available, it’s just available to people that have the ability to re-pay. Whereas, the subprime was available to people that did not have the ability to re-pay.”
Bajat said Acadiana is not in a crisis and if you have the ability to re-pay a loan, you should be able to find one, and with a relatively low interest rate.
“Acadiana is not in a crisis. We have billions of dollars that are coming in from Katrina and Rita and Gustav and Ike, that will allow people to work. All of this is helping Louisiana. It’s not helping other states but it’s definitely helping (us), he stated. However, “if you’re overextended, the thing you need to do is start working to bring yourself back in line,” he concluded.