Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on bigger issues.
Is the Federal Reserve failing at its own stress tests? According to its own watchdog, the answer is yes.
Over the weekend, the Wall Street Journal published an article that cited a recent report from the Fed’s Inspector General, which wasn't too kind to the Fed's handling of the stress tests required by the Dodd-Frank Wall Street Reform Act,
According to the WSJ report, the Fed IG found that the Fed was not properly administering the stress tests, which are performed on the nation’s largest banks to test their financial footing in the case of another massive recession.
According to the WSJ, the Fed IG identified a number of issues with the Fed’s internal procedures, which the Fed has already begun “revamping” as the result of the IG’s report.
From the WSJ:
The changes affect implementation and administration of procedures—such as how the Fed staffs the tests—not core policy questions like how strict or how accurate the tests are.
But the problems exposed do involve a central and controversial part of the testing program: The computer models the Fed uses to simulate how banks would perform during a hypothetical recession. The output of the models effectively sets capital requirements for the largest banks in the U.S., benchmarks that in turn affect banks’ profitability and flexibility to conduct their business.
Specifically, the internal reviews found deficiencies in the Fed’s system for double checking, or “validating,” the models. They found the Fed didn’t always have enough staff on hand, relied too heavily on certain key personnel, and lacked clear procedures and policies about certain aspects of the validation process.
According to the WSJ report, the Fed IG report concluded that the Fed would have “reprimanded” a bank if the same issues were found.
The Fed for its part, told the WSJ (via a spokesperson) that the IG’s report “did not find any mistakes in the validation process and did not identify any problems with our models.”
Michael Gibson, director of the Fed’s division of banking supervision and regulation, also told the WSJ that the IG’s recommendations “align with improvements to support our work that we had independently identified and are putting into action.”
It’s a fairly safe bet that the subject of the Fed’s stress test shortcomings would have come up on Capitol Hill this week during a meeting of the House Financial Services Committee where the members of the Financial Stability Oversight Council are due to testify, but Fed Chair Janet Yellen “declined the Committee’s invitation to appear.”
Despite Yellen’s absence, eight of the remaining member of the FSOC will be in the Hill to testify before the House Financial Services Committee at its annual hearing entitled “Oversight of the Financial Stability Oversight Council.”
The FSOC members that are scheduled to be there are: Richard Cordray, Director, Consumer Financial Protection Bureau; Thomas Curry, Comptroller of the Currency; Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation; Timothy Massad, Chairman, Commodity Futures Trading Commission; Debbie Matz, Chairwoman, National Credit Union Administration; Melvin Watt, Director, Federal Housing Finance Agency; Mary Jo White, Chair, Securities and Exchange Commission; and Roy Woodall, Independent Member with Insurance Expertise, Financial Stability Oversight Council.
The hearing begins Tuesday, Dec. 8 at 10:00 a.m. Eastern. On the agenda is a discussion of the “FSOC’s efforts, activities, objectives, and plans,” as well as the FSOC members answering questions about the FSOC’s annual report.
“This hearing is intended to supplement the statutorily required annual hearing and allow the Committee to hear directly from the FSOC’s voting members other than (Treasury) Secretary Lew on matters relating to the FSOC’s agenda, operations, and structure,” the House Financial Services Committee said on its website.
One provocative view on the future of Fannie Mae and Freddie Mac involves the FSOC and its ability to designate a financial intuition as a “Systemically Important Financial Institution,” sometimes referred to as “too-big-to-fail.”
Writing at TheHill.com, Douglas Holtz-Eakin, former director of the Congressional Budget Office and current president of the American Action Forum, argues that the FSOC needs to designate Fannie Mae and Freddie Mac as Systemically Important Financial Institutions, which would subject the government-sponsored enterprises to stricter regulatory oversight and force them to rebuild their capital reserves.
The issue of recapitalizing Fannie and Freddie has become a much louder discussion of late, with major civil rights groups, community lenders and other industry insiders pushing to allow the government-sponsored enterprises to rebuild their capital reserves.
But the Obama administration has pushed back against those efforts, with Michael Stegman, senior policy advisor for housing for the White House, saying repeatedly that the administration is not in favor of returning Fannie and Freddie to their pre-bailout status.
Holtz-Eakin writes that the pushback against “recap and release” is predicated on a belief that “things can just go back to the way they were before the crisis,” which is in his mind, is not possible due to the Dodd-Frank Act.
Here’s Holtz-Eakin’s plan, in part:
Fannie Mae and Freddie Mac are SIFIs no matter how the FSOC looks at them. As institutions, they are very large, highly leveraged financial institutions with monoline risk exposures to the mortgage market. Size was apparently the initial criteria for designation that inappropriately swept insurance companies into the SIFI net. It should apply to the housing GSEs as well. Alternatively, history has shown clearly that their activities and products are a financial time bomb that would and should merit designation.
Fannie Mae and Freddie Mac were SIFIs in 2007. They are SIFIs right now. They would be SIFIs the moment they exited from conservatorship. Accordingly, there is simply no way that housing finance can go back to its pre-crisis form, and proponents of this dream should stop blocking progress on building a new platform for housing finance in the United States.
While the government and other interested parties wrestle over the future of Fannie and Freddie, the cost of buying or selling a home just outside of New York City is about to get a whole lot more expensive.
According to a report from Newsday.com, real estate fees in Nassau County, which includes Long Island, are about to skyrocket, due to a budgetary shortage.
To avoid a 1.2% property tax increase, the Nassau Legislature last month voted to hike the county tax map verification fee, first collected in April, to $225 from $75, and the county clerk block recording fee, only $10 in 2009, to $300 from $150.
The new fees take effect on Monday and are expected to bring in $35.6 million in revenue to the county.
The concern for buyers and sellers is the increased cost of a real estate deal.
Again from Newsday:
Every document in a deal requires a separate fee. For example, refinancing a $50,000 mortgage to $100,000 could involve three separate documents, each requiring payment of the $225 tax map verification fee and the $300 recording fee, for total county fees of $1,575 — a $1,125 increase over a year ago for the same transaction. The cost does not include state-imposed charges.
This next one is from Canada, but it’s too good not to share.
According to the U.K’s Daily Mail, a Toronto man paid off the mortgage on his $425,000 house in just three years. Good for him, right? Probably not exactly what his lender was expecting, but still, good for him.
But not everyone was happy for him. In fact, the man, 30-year-old Sean Cooper drew the ire of “the Internet” when his story went viral in Canada recently.
From the Daily Mail:
Sean Cooper, a financial writer and pension analyst, worked three jobs and lived the life of a cheapskate for years while paying down the $255,000 mortgage on his $425,000 bungalow in Toronto, Canada.
Cooper was emotionally scarred after seeing his single mom almost lose their childhood home after she became unemployed in the aftermath of the dotcom crash in the early 2000s.
'I didn't want to be in that situation. I saw how tough it was on her,' he told CBC News.
According to the Daily Mail, Cooper saved up $170,000 while in college, using that money as his down payment.
Then he worked full-time as a pension analyst, “burned the midnight oil writing for financial outlets,” and took a third job working the meat counter at his local supermarket.
Again from the Daily Mail:
To pay off the debt he said he worked 100 hours a week.
He also ditched his car and rode his bike everywhere, claiming he saved $10,000 a year that way.
And that wasn't the end of his frugal ways - Cooper lived in his basement apartment and rented out the rest of the house.
Between work and rental income, Cooper says he brought home $100,000 a year - and put much of that towards his $255,000 mortgage - taking three years and two months to pay it off.
When CBC posted Cooper’s story on its Facebook page, the story went viral, eliciting lots of comments. According to the Daily Mail, many of the 500 commenters were none too pleased with Cooper’s story.
The Daily Mail capture two comments that are true peaches:
Upstanding citizen works his life away, lives in miserable squalor and forgoes human relationships for years. How is this an inspirational story?' asked a commenter named Parker Johnston, according to the Globe and Mail.
'Well there. Guess the corporations are right. Work multiple jobs, don't have a family, and eat rice and pasta and you too can achieve the dream,' snarked a man named Nathan Hanscom.
Guess that just goes to show that anyone on the Internet can turn anything into a negative.
And finally, no banks were reported closed by the Federal Deposit Insurance Corporation for the week ending Dec. 4.