Archive for March, 2010
In light of the recent passage of health care reform, a hard-fought battle that kept President Obama out of lame duck status, the financial stability and regulatory reform bill looks set for a similar battle. But that's where the similarities end.
The comparatively short 1,336-page bill on sweeping reforms to the financial markets, originally introduced by Senator Chris Dodd (D-Conn.), narrowly moved forward this week with the approval of the Senate Banking Committee. The vote to shift it to the floor went as expected, with all 10 Senate Banking Committee Republicans opposing the measure. The 13 Democrats who make the rest of the committee all voted in favor.
However, concerns are emerging in the mortgage finance industry over the scope of the financial regulation that, while necessary, may be moving forward simply for the sake of moving forward. Indeed, there are so many points to argue on this bill, that this column could easily compete in page count.
Let's put the regulation into perspective: mortgage finance cannot regulate itself as the past few years showed, correct?
Dodd's legislation is meant to fix all this in one fell swoop, establishing a Consumer Financial Protection Agency, and offering changes to the regulation of credit ratings agencies, short-selling, derivative trading, and would require supervision of non-bank financial institutions, to name a few.
Considering that distressed asset trading in the United States is now earning yields in some markets at 30% to 35% per annum, this country is quickly becoming the next EMERGING MARKET. Forget the housing bubbles in Shanghai or Mumbai. Or excessively yielding Greek sovereigns.
This country is attracting investors from all over the world, and they are hungry for deals, both in real estate and in related securities. Dodd's bill sits at the perfect nexus to draw a line, and to well-regulate the potential abuse these new players to the market conceptually may bring.
The thing is, opportunistic or not, the bill simply won't do this.
One criticism is that the bill, in its form, will eventually become watered-down legislation. I was taken by today's comments from Deputy Secretary of the Treasury Department Neal Wolin, speaking before the US Chamber of Commerce: "As the President has made clear, we will oppose efforts to weaken it," and that "there should be no debate about one thing: a central cause of the financial crisis was a financial regulatory system decades out of date and riddled with gaps and loopholes."
But, even in its current form, the Dodd bill contains more waivers and exceptions than an insurance policy.
In the case of supervision of non-bank agencies, the governing council can waive this mandated oversight. In the case of consumer protection, licensed real estate brokers appear to enjoy special waivers. As do accountants, lawyers, and many, many others. Even the date of such an agency becoming actualized is not yet settled.
Lending practices considered abusive, by definition in the bill, are opaque and perhaps difficult to determine. For instance, the new regulator must prove that a certain lending practice actively seeks to capitalize on the borrower's inability to make sense of what is being offered. A tall order.
However, the so-called Volcker Rule remains largely intact. Named for a former Federal Reserve chairman, the rule forbids trading at banks across its own subsidiaries. Another section, numbered 164, prohibits managers from overseeing multiple bank operations. Good steps, both.
Yet, from a secondary market perspective, the American Securitization Forum is continuing its call to further examine risk retention requirements, before passing a new law.
In a statement of explanation, executive director Tom Deutsch said, "we are committed to restoring credit to Main Street and are particularly concerned that the 5% risk-retention provision in the current legislation will have the effect of severely limiting balance sheet and lending capacity over time."
He adds: "We are also concerned that any reform, including new accounting regulations, be coordinated so that it manages risk without materially restricting credit availability."
The Dodd bill seeks to coordinate all of these efforts, to be sure, but at the end of the day it will only draw a line in the sand too close to the tide water.
Jacob Gaffney is the managing editor for HousingWire and HousingWire.com
Charles Schwab filed arguments in federal court in San Francisco on March 19 to try to preclude the Securities and Exchange Commission (SEC) from suing it over its YieldPlus fund, which had nearly 50% of its assets in mortgage-backed securities.
Once one of the biggest short-term bond funds in the world, with $13.5bn at its peak in 2007, YieldPlus lost 35%, before dividends, in 2008. Today, a mere shell of its former self, it stands at a mere $184m.
In a Wells notice, the SEC accused of Schwab of marketing the fund as being as safe as a money market fund and of withholding information about the fund’s risk from retail investors ahead of a rush of redemptions by Schwab proprietary mutual funds.
The two sides are now essentially arguing over the meaning of the word “industry," under Section 13(a) of the ’40 Act, in determining the fund’s investment mandate and whether the SEC will proceed with a suit. Schwab argues that the SEC’s semantics over adhering to a cap of 25% on “industry” investments refers to industry, as in manufacturing, automobiles or steel, not the mortgage-backed securities industry. SEC rules preclude a fund from investing more than 25% in any one industry without a shareholder vote.
Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc agreed with the UK Treasury to make £105bn (US$156bn) of new loans available to businesses and homebuyers over the next 12 months.
RBS, Britain’s biggest government-controlled bank, will provide as much as £50bn in gross business lending, and Lloyds, 41% state-owned, will provide £44bn, the companies said today in separate statements. That compares with £79.7bn of gross lending to businesses last year, the banks said.
“We have the capital to make this lending available,” said Philip Hampton, chairman of RBS in a statement. “The right amount of debt for businesses will be greatly influenced by the pace of economic recovery.”
The Four Seasons Maui has gone delinquent on its $425m of mortgages just as the Four Seasons New York and others have reached compromises with their lenders.
MSD Capital LP, the private investment firm of Dell Inc. founder Michael Dell and his family, skipped the February payment on the debt as it seeks to restructure the loan, according to credit-rating company Realpoint LLC. The 380-room hotel's debt is split between two securitized mortgages, one of $250m and one of $175m.
The Four Seasons Maui has struggled in the past year along with most luxury hotels in Hawaii. Its occupancy fell to 60% in last year's third quarter from 79% a year earlier, according to Realpoint. Its net cash flow declined from $32.9m in 2007 to $10.9m in the first three quarters of 2009.
JP Morgan Chase is nearing a deal with the Federal Deposit Insurance Corp. (FDIC) that could end up providing the firm with $1.4bn in tax refunds.
A media report, which cited unnamed sources, also indicated that as part of a larger settle with Washington Mutual's bondholder's, JP Morgan could claim $1.4bn of funds in the FDIC receivership to shield itself from exposure to mortgages that WaMu serviced.
WaMu was seized by the FDIC in March in 2008 and later sold to JP Morgan for $1.9bn, putting it among the largest US bank failures in history.
Federal prosecutors have indicted two San Diego men for their role in allegedly defrauding desperate homeowners trying to modify their mortgages.
Glenn Rosofsky and Michael Trap, who ran a business called Nations Housing Modification Center, are charged with duping homeowners who were falling behind on their mortgages into paying $2,500 to $3,000 for loan modification services.
The defendants allegedly tried to create the false impression that they were operating from an address near the White House, and sent letters marked with the seal of the US Capitol to prospective customers. They also allegedly told customers that they had forensic accountants and lawyers on staff to provide assistance. The firm actually operated out of Southern California and had no accountants or lawyers on staff, according to Rosofsky's indictment.
Assuming they can laugh about such things, pension fund accountants might consider telling a joke that goes like this:
What’s the difference between General Motors and California?
California hasn’t gone bankrupt. At least, not yet.
General Motors Corp. did go bankrupt, of course, in a historic Chapter 11 filing orchestrated by the federal government last June. A similar fate for California isn’t out of the question, though it is unlikely. No US state has ever gone bankrupt, although California’s Orange County back in 1994 and, more recently, the City of Vallejo did take the plunge.
California’s $20bn financial crisis — just the latest in a series, like a Hollywood horror movie with endless sequels — makes it Exhibit A of the pension funding predicaments looming over many state and local governments in the US. And as it happens, these crises have a lot in common with the pension overhang that helped sink General Motors last year.
We're at one of those historic moments in the credit market, when US government bond yields are clearly no longer considered one of the safest investments in town.
Key corporate debt now trades for lower yields than US bonds of similar maturity. Note these are both dollar-based types of obligations, thus the difference in yield isn't simply due to dollar-weakness fears. It's due to default concerns.
Berkshire Hathaway recently sold debt at 3.5 basis points less than Treasuries of similar maturity, and that Procter & Gamble and Lowe's have seen their debt trade at lower yields than Treasuries as well. For a country with a rock-solid credit rating, this is pretty staggering (even if we are looking at temporary anomalies).
The UK stamp duty for first-time buyers of homes up to £250,000 (US$372,310) was scrapped in the last budget before the election in a direct appeal to younger voters struggling to step on to the housing ladder.
The government will from Thursday double the stamp duty limit for first-time buyers from £125,000 to £250,000 for this year and next. This is set to help about 90% of such house buyers and provide a welcome boost to still stagnant activity in the UK housing market.
The move, which will be funded through a stamp duty increase to 5% for homes of more than £1m, was welcomed by the housing market, sending share prices of big builders higher in early afternoon trading.
Alistair Darling, chancellor, added that the housing market had now stabilized and has begun a slow recovery, although recent data, showing two months of house price falls, has suggested that this rebound has started to falter.
