Archive for April, 2009
The Federal Reserve today detailed the process and methodologies used in the bank stress tests under the Supervisory Capital Assessment Program. For all the hype the anticipated announcement created, the actual methodologies reported came as no substantial surprise, as actual stress test results have yet to circulate but are expected for public release May 4.
The Fed did announce, however, that most US banking organizations currently have capital levels well in excess of the amounts required to be well capitalized. "However, losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks," the Fed warned in its statement on the process.
Regulators required all US bank holding companies with year-end '08 assets exceeding $100bn to participate in the assessment, which began February 25. These 19 institutions collectively hold two-thirds of the assets and more than half the loans in the US banking system, according to the Fed.
More than 150 examiners, supervisors and economists from the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation studied banks' potential performance under projected economic expectations and a more adverse outlook with a longer, more severe recession. The point: to determine the capital buffer needed to ensure the firms would remain appropriately capitalized at the end of 2010 if the economy proves weaker than expected.
The "extensive" process, as described by the Fed:
1. Banks first submitted projected losses on a variety of loan categories to the government.
2. Federally appointed supervisors then evaluated the "substance and quality" of banks' projections and requested additional data, if necessary.
3. Supervisors developed independent benchmarks for each firm based on its portfolio characteristics.
4. Supervisors used banks' benchmarks to determine bank performance under more adverse conditions.
5. Senior supervisory officials finally determined the banks' necessary capital buffer to "continue to play their critical roles as intermediaries" under either scenario.
The Fed said supervisors conducted calculations under regulatory and accounting frameworks present as of year-end '08, which require bank holding companies to generally hold a dominant share of their regulatory capital in the form of common equity. If banks cannot raise enough capital, of course, the Treasury Department has committed to either supply more federal funds or exchange existing preferred stock purchased through the Capital Purchase Program for common shares. The latter option would create some degree of government ownership, however, that may likely affect consumer and investor confidence in the banks.
Read the Fed's white paper on the process.
Write to Diana Golobay at diana.golobay@housingwire.com.
Americans believe their financial security is based more on their own actions than government programs, according to a new report from Allstate Corporation released today.
"While many Americans are looking to government to provide a more comprehensive safety net…an even larger number places the most emphasis on personal initiative," says Ronald Brownstein, political director of Atlantic Media Company and presenter of Allstate's data.
Allstate's Heartland Monitor Poll found respondents believe personal actions will best ensure the ability of Americans to afford health care and save for retirement. Respondents were equally split on whether corporate leaders and businesses or political leaders and government will offer the best ideas and solutions, with both options garnering support from 40% of respondents.
The poll also reported 64% of Americans feel today’s economy presents more risks than their parents faced at the same age. This attitude prevailed across all socioeconomic levels, Allstate said.
The poll found most Americans view their own situations better than that of their peers – 56% said they were doing a good or excellent job of managing economic risks and opportunities, while 54% rated the abilities of most Americans to manage economic and financial risks and opportunities as merely fair.
Brownstein said the survey shows "striking variations" in attitudes based on the extent to which Americans have actually experienced economic reversal, with those that have been the most exposed being most supportive of an enhanced government role.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Former Freddie Mac (FRE: 0.00 N/A) CEO David Moffett is temporarily returning to the mortgage giant as a consultant to the company's interim CEO, John Koskinen. As consultant, Moffett will assist and advise Koskinen on Freddie's finance division.
"I am grateful to David for offering to assist us during this challenging time," Koskinen says in a press statement released today. "David is well positioned to advise me in my oversight of the finance function. He knows the company well from his time as chief executive, and has built an impressive career in finance and accounting leadership as an executive with other leading public companies."
Freddie Mac will continue its search for a permanent chief financial officer to lead the finance division.
Moffett resigned the chief executive position in early March, just six months after the government placed Freddie into conservatorship. He returns days after authorities found David Kellerman, Freddie's acting CFO since September 2008, dead from an apparent suicide in his home early Wednesday, police said.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
PNC Financial Services disclosed Friday a $530m, or $1.03 per share, first-quarter income, marking a significant 38% year-over-year increase driven largely by its recent acquisition of National City Bank.
"In a very challenging environment we further strengthened our capital and liquidity positions and loan loss reserves," says James Rohr, chairman and CEO. "We are on pace to exceed the strategic objectives of our acquisition…"
PNC's total revenue sits at $3.9bn for the first quarter. Non-interest income is $1.6bn, compared with $967m for the first quarter of 2008 and $684m for the fourth quarter of 2008. PNC says first-quarter 2009 noninterest income benefited from strong fee income from residential mortgage banking activity related to refinancing volumes, amounting to $175m, and $202m in gains on hedging mortgage servicing rights.
A decline in home equity installment loans, however, offset increases in residential mortgage and education loans. Total loan originations and new commitments and renewals were approximately $26bn in the first quarter of 2009, including $6.9bn of originations for increased demand for first mortgages.
Credit quality deterioration continued during the first quarter as expected, PNC said, reflecting further economic weakening and resulting in additions to loan loss reserves beyond net charge-offs. Nonperforming assets increased during the quarter and were 2.02% of total loans and foreclosed assets at March 31, 2009 compared with 1.23% at year-end.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
The Federal Reserve Bank of New York purchased another $41.45bn in gross agency mortgage-backed securities (MBS) this week from government-sponsored entities Freddie Mac (FRE: 0.00 N/A), Fannie Mae (FNM: 0.00 N/A) and Ginnie Mae after last week's $30.4bn gross purchases, according to a late-Thursday announcement. The Fed purchased, net of $15.25bn in coupon sales, $26.2bn in agency MBS in the week ending April 22, a pick-up from last week’s $21.75bn in net purchases.
The Fed bought a gross $9.5bn from Freddie’s books, $30.2bn from Fannie and $1.7bn off Ginnie’s books this week. The Fed’s purchases continued to favor MBS with 30-year maturities and 4.5% coupons, at a $17.55bn price tag from all agencies. The Fed also purchased $4.25bn in 30-year 4.5% coupons. Meanwhile, the Fed sold $8.84bn of 30-year 5.5% coupons.
See a detailed table of the current week’s purchases and sales.
Since the Fed began listing the settlement months of the transactions — when the purchases and sales should affect the Fed's balance sheet — weeks ago, a noticeable discrepancy arose on a weekly basis in terms of the settlement months of coupons bought and sold. For example, of the Fed's hot ticket purchase item, 30-year 4.5s, a whopping $16.45bn is set to hit the Fed's balance sheet in June, while the Fed's only weekly sales of the same coupon listed Thursday — a relatively small $500m — affects the Fed's balance sheet in April. The Fed plans to buy $8.75bn of the 30-year 5.5% in May, although it won't sell $8.61bn of the same coupon until June.
The Fed began listing sales weeks into the program and settlement months only recently, however, indicating a long history of MBS purchases that outweigh sales. The effect shows on the Fed's balance sheet, which sits about 150% above its value at the same time last year, according to a balance sheet summary released Thursday. The Fed’s assets rose by $70.36bn the week ending April 22. The data show the Fed’s consolidated balance sheet rose to a value of $2.17trn for the week, from $2.09trn the week before, and is up $1.3trn from the year-ago week ended April 23, 2008.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Hours ahead of the anticipated release of preliminary stress test results, the US banking industry, public and media are keeping an eye on the skies and an ear tuned for a telltale peal of thunder to signal a downfall of negative results for banks deemed under-capitalized by regulators.
The technicians and examiners behind the stress tests have conducted a range of litmus tests, microscopic scrutinies and x-ray studies to determine the health of banking entities, and depending on whom controls the intercom at the moment, today's announcements may or may not prove devastating.
Federal Reserve officials are slated to deliver preliminary results to financial firm representatives in a series of meetings today, unnamed sources told Bloomberg News. Details are widely expected for public dissemination on May 4, after banks have a chance to discuss — and possibly dispute — the results with regulators. The Fed also plans to release stress test methods to the public today, although no announcement had been made before this story went to press.
A new set of "tougher" standards on capital reserves following the stress tests may potentially force under-capitalized firms to sell ownership stakes to the government if private investors are unwilling to provide capital, unnamed sources told the Washington Post. The government may either swap preferred shares already owned for common shares, or infuse banks with additional federal money if outside capital cannot be raised, the Post's sources said.
A draft report from the Financial Stability Oversight Board obtained by the Wall Street Journal indicates the Fed and Treasury Department officials see a substantial government ownership stake in some troubled banks, although such an arrangement would be temporary, as complete ownership "is not an objective." Any kind of ownership, however, would undermine the position often reinforced by regulators that total government control of the banking industry is unnecessary, and likely reinforce public view of U.S. banks as sickly. It remains unclear just how long such an ownership situation may last at capital-impaired firms.
Write to Diana Golobay at diana.golobay@housingwire.com.
Four more institutions joined the list of servicers set to receive Troubled Asset Relief Program (TARP) funds through the U.S. Treasury Department.
Bank of America, Countrywide Home Loans Servicing, Home Loan Services and Wilshire Credit became the eighth, ninth, tenth and eleventh firm to be pre-approved for TARP funds, under the Making Home Affordable loan modification system.
Simi Valley, Calif.-based Bank of America, will be allowed to draw up to $798.9m of government funds. Countrywide Home Loans has been promised a maximum of $1.86bn. Home Loan Services and Wilshire Credit can draw up to $319m and $366m, respectively.
The other seven servicers on tap to receive funds include Chase Home Finance (which was allotted the largest share thus far — up to $3.55bn), Wells Fargo Bank ($2.87bn), CitiMortgage ($2.07bn), GMAC Mortgage ($633m), Saxon Mortgage Services ($407m), Select Portfolio Servicing ($376m) and Ocwen Financial ($659m).
It's unclear at this time how much of those allotted funds the institutions have actually received. The rate at which they're stepping up to the deposit window — if at all — is unknown.
The Treasury bases investment figures on the size of each company’s servicing portfolios, however the government lender may adjust the actual dollar amount based on servicer usage. So far, program funds allocate a total of $13.92bn to the 11 servicers, just a fraction of the Treasury’s $75bn program to prevent foreclosures and help borrowers refinance into new loans.
The government plans to pay servicers a $1,000 one-time fee for modifying a mortgage down to a 38% payment-to-income ratio for five years. Modified loans must survive a 90-day trial in order to be eligible for the incentive payment. Government funds will also match the cost of further interest-rate reductions or other modifications to bring payments down to 31% of a borrower’s income. If borrowers perform in their newly-modified mortgages, servicers would be eligible to receive $1,000 per annum for three years under the government incentive program.
A Treasury spokesperson told HW that servicers are being added to the program on a rolling basis — suggesting this list is just the beginning, and other servicers are likely in the pipeline.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments
Segments of the U.S. banking industry show signs of recovery, although they may yet face some loss before the economy ultimately bottoms out, Federal Deposit Insurance Corp. (FDIC) chair Sheila Bair said in a speech Thursday, Bloomberg News reported. However, the future is no less certain.
Rising unemployment and continued economic weakness could take the wheel from the hands of so-called "exotic" mortgage products, which are typically blamed for borrower non-affordability and rising delinquencies, Bair said, according to the news bulletin.
Bair sees the industry no longer in a crisis stage, but entering the cleanup stage, with regulators implementing procedures to provide stability and liquidity. She praised the Federal Reserve and Treasury Department, in particular, for unpopular but necessary roles in the process, Bloomberg reported.
The speech also served as an update on several key programs. A trial phase of the new Public-Private Investment Program (PPIP) is slated for June, with regulators intending to be "very careful…very transparent" in making sure the program gets off the ground without conflict, Bair said. She also says the FDIC does not expect losses from the Temporary Liquidity Guarantee Program, through which the institution backs debt issued by banks, according to Bloomberg.
In reality, so far, the FDIC collected $7bn in premiums from the program, she says.
Bair used the speech to again call for the creation of an institution to exercise regulatory power over non-bank firms to ensure no institution grows "too big to fail." Bair said the FDIC has the capacity to serve as such a regulatory power to break up and shut down non-banking entities. "I think we would be a logical place for that," she said, according to Bloomberg. "We aren’t asking for it, but we know how to close an institution. And we’re equipped for it."
Write to Diana Golobay at diana.golobay@housingwire.com.
Capital injections through the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP) picked up slightly last week.
The Treasury Department funded $40.95m in stock purchases from six financial institutions in the week ending April 17 after its $22.8m in injections funded the previous week ending April 10. Weekly transactions in recent months illustrate a steady cooling off of CPP activity, with the Treasury funding $54.83m the week ending April 3, down from $192.96m in late March.
The Treasury made its largest daily injection for the most recent week ending April 17 — $13.18m — in Mocksville, N.C.-based Bank of the Carolinas Corp. (BCAR: 0.28 +12.00%). The other five transactions, made in five privately-held firms, ranged from $9.96m for Wayne, Pa.-based Penn Liberty Financial Corp. to $2.82m for Lakewood, Colo.-based Omega Capital Corp. Treasury also invested $3.8m in a Tifton, Ga.-based firm, $3.69m in a Patterson, La.-based firm and $7.5m in New York City-based BNB Financial Services Corp.
Treasury invested $198.89bn total so far through the CPP, but that figure slips to $198.42bn after the Treasury's receipt of $467.31m from stock repurchased by seven financial institutions. The purchases aim to shore up financial institutions by supplying fresh capital, bolstering investor confidence and encouraging lending. But large and small banks alike voice hesitance over keeping government funds. Morgan Stanley (MS: 18.56 +2.26%) most recently joined the ranks of financial institutions saying they may consider TARP repayment, according to a Bloomberg News article.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
The House Financial Services Committee plans to meet Tuesday to consider legislation that may bring sweeping changes to the way the mortgage industry conducts business.
The bill in question, called HR1728 or the Mortgage Reform and Anti-Predatory Lending Act, aims to curb forms of lending that have been a major factor in the highest home foreclosure rate in the nation in 25 years the committee said in a statement.
The sponsor of the bill, Brad Miller (D-NC), and the committee called it a tougher version of the bill approved by the House in 2007 but never passed by the Senate. The goal, however, remains the same: to impose strict regulations on originators to cut down on unaffordable mortgages, refinanced mortgages that have no positive effect on monthly payments, and instances of borrower fraud where borrowers present erroneous documentation to obtain a mortgage. The previous version aimed to prevent another subprime mortgage meltdown, the committee said.
The political climate has changed since the failure of the previous version to face a Senate vote, Miller says in a statement on his Web site. "The foreclosure crisis has wreaked havoc on middle-class families and our economy as a whole," he says. "The industry’s arguments for watering the bill down are not at all convincing."
In testimony Thursday before the committee, the Mortgage Bankers Association (MBA) chairman David Kittle said the risk retention provision currently drafted in legislation would make it impossible for many lenders to compete, among other faults.
"First and foremost, HR1728 does not establish a national standard for mortgage lending to replace the uneven patchwork of state and local mortgage lending laws," Kittle told the committee. "We are just as concerned about the requirement that lenders retain at least 5% of the credit risk presented by non-qualified mortgages."
Media reports began circling late Thursday that committee chairman Barney Frank, (D-MA), and co-sponsor of the controversial bill, may consider taking a red pen to the legislation in acknowledgment of concerns like Kittle's that the bill may kill competition among smaller mortgage lenders and severely reduce the industry's origination capacity.
Frank said he might consider two hotly contested provisions of the bill — the 5% risk retention banks would be required to carry, likely in the form of ready-to-use capital, after selling a loan on the secondary market and a provision that would provide legal protections to lenders on 30-year traditional mortgages only, American Banker reported.
"How you require the 5% is very much an open question, and I do think there is some room for some broadening of the safe harbor," Frank said during a break in the hearing, according to the article. "It's a new idea. How you do it, we are very open about."
Write to Diana Golobay at diana.golobay@housingwire.com.
