Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1575.3 | 1.7 | 0.11% |
| Eurostoxx Index | 2679.6 | 16.7 | 0.63% |
| Oil (WTI) | 89.52 | 0.3 | 0.38% |
| LIBOR | 0.276 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 82.97 | -0.077 | -0.09% |
| 10 Year Govt Bond Yield | 1.71% | 0.01% | |
| Current Coupon Ginnie Mae TBA | 105.9 | -0.2 | |
| Current Coupon Fannie Mae TBA | 104.2 | 0.0 | |
| RPX Composite Real Estate Index | 191 | 0.5 | |
| BankRate 30 Year Fixed Rate Mortgage | 3.47 |
Markets are flat this morning after a slew of earnings releases. Apple reported a mixed bag last night, with better than expected earnings, but a disappointing Q2 forecast. They are increasing their buyback, which is raising concerns about future growth. Ford reported better than expected earnings as well. We will hear from Ryland and Meritage Homes today. MBA mortgage applications rose .2% last week, while durable goods orders fell. It appears most of the drop in durable goods was defense-related, so you probably shouldn’t read too much into it. Bonds and MBS are down small.
New Home Sales rose to 417,000 units in March, which was up 1.5% from February. We are seeing a pickup in activity in the Northeast and the South. The inventory of new homes for sale was 4.4 months, while the median price was 247,000, and the average price was 279,000. Average prices actually dropped on a year-over-year basis, which means luxury building must be decreasing.
Lender Processing Services released their February Mortgage Monitor yesterday, showing delinquencies and foreclosures continue to fall. DQ + FC fell to 10.18% from a peak of 14.82% in Jan 2010. This is still well above normalcy, which is a DQ+FC percent in the 5% range. Mods are starting to pick up havter having declined for 6 consecutive quarters.
PennyMac reported earnings yesterday. Seem to be growing in all 3 business lines: origination, servicing, and distressed MBS. Some of the highlights:
- PMT reported earnings of .90, better than expectations of .76
- Correspondent loan purchase volume $8.5B, down 15% from Q4
- Lock volume $8.1B, down 22% from Q4
- MSR portfolio up 36% to $17B UPB
- Strong demand for reperforming loans
- Correspondent margins decreasing but still above historical norms
- Correspondent will increase as a share of origination market
- Anticipating increase in refi activity as LTVs decrease
- Re-launched prime jumbo program, did over $100M in locks in Q1
- Targeting Q313 for first jumbo private label securitization transaction
Filed under: Morning Report |
All Things in Moderation 
Worth a read:
“Make Wall Street Choose: Go Small or Go Home
By SHERROD BROWN and DAVID VITTER
Published: April 24, 2013”
Key point:
“Under our proposal, megabanks (those with at least $400 billion in assets, of which there are currently seven) would face a 15 percent capital requirement — instead of the 8 percent to 9.5 percent requirement being discussed by international regulators.”
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jnc:
From your link:
Meanwhile, smaller banks in communities across the country, including Cleveland and Covington, La., in the states we represent, were allowed to fail. They were, evidently, too small to save.
Is it really true that such banks were denied access to TARP funds? Or is it the case that, even with such access to government bailout money, they were still unable to survive?
This would ensure that the government safety net protects only the commercial bank, not the risky investment-banking arms of the megabanks.
The question (naturally, never addressed) is why should it protect only the commercial banking activities and not the investment banking activities? Their plan doesn’t fix the problem they identify, it simply shifts the government-provided benefits to a different set of beneficiaries.
If the megabanks want to remain large and complex, that’s their choice — but Americans should not have to subsidize their risk-taking.
But under their plan Americans will still be subsidizing their risk-taking. It will just be limited to that risk-taking which has been deemed, for strictly political reasons, “acceptable”.
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Scott –
I consider commercial banking activities:
lending to business for cash flow fluctuations
lending to business for expansion
lending to individuals for cars, homes, boats, etc.
borrowing from depositors to create a pool of funds to lend
to be relatively low risk activities. Borrowing from depositors can thus be made risk free to the depositor by spreading the risk cost to the institutions through the FDIC.
I consider the risks of investment banking to be potentially catastrophic to the point where the investors cannot be insured against loss in any feasible way.
Beyond that, lenders’ risks are considered more protected in Anglo-American law than investor’s risks. Lenders get paid before investors.
Are my observations incorrect?
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Mark:
Are my observations incorrect?
I think the notion that lending to people to buy homes is relatively low risk ought to have been dispelled by the events of 2008. The banks that collapsed in 2008, or came close to doing so, did so precisely because they thought that lending to people to buy homes was a lot lower risk than it actually is.
Ultimately the real problem is not the types of risks that are taken on, but rather the way those risks are managed. A derivatives trade is not by its nature more risky than lending to Joe Blow to buy a house or start a business. What makes one more risky than the other is the care with which those risks are taken on and managed.
BTW…the risk to depositors can never be made zero absent a government guarantee, no matter what activities the deposits are funding. And the government guarantee necessarily puts taxpayers at risk.
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Mark:
I still sense a reluctance on your part to accept that the 2008 financial crisis, and the recession that came with it, was primarily caused by the burst housing bubble. Is that correct?
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Scott, I think the burst housing bubble precipitated it, but the burst housing bubble in 1988-1991 was actually worse, in isolation, and the RTC was able to close S&Ls and deal with the properties over five years, without a national and international panic. I think that what changed was how the mortgages were repackaged for worldwide trade.
As for other unrelated issues, this is a beauty:
http://tinyurl.com/aud3dhp
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mark:
I think the burst housing bubble precipitated it, but the burst housing bubble in 1988-1991 was actually worse, in isolation…
You’ve said this before. Why do you think so? A look at this inflation adjusted graph of housing prices suggests that the ’80’s bubble and burst doesn’t even come close to being as big and bad as the ’08 one.
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By any metric, you are correct that 2009 was worse. VA foreclosures were at the same rate, FHA were double in the recent bust, and subprime foreclosures were infinitely more because there were none in the earlier period.
Still, the damage did not go beyond the actual lenders and the FHA, VA, FanFred – it wasn’t packaged worldwide. The RTC finally got good at selling the properties.
It was so much easier unwinding those transactions then. The bypassing of the real estate filing requirements by lenders alone created unworkable issues. This crisis had so many more moving parts.
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Mark:
it wasn’t packaged worldwide.
True. Undoubtedly the proliferation of RMBS/CDOs helped fuel the bubble, as did Fed interest rate policy as well as government housing policies, all of which were different from what they were in the late ’80s and contributed to making the ’08 situation much worse than the previous bubble. But none of this would have been any different had there been a separation of commercial and investment banking activities, or if FDIC insured only against commercial banking losses and not trading losses, so I continue to wonder why there is such a focus on the distinction between the two as a preventative measure against possible future crises. It certainly wouldn’t have prevented the latest crisis.
There is nothing inherently safer about lending to some guy to buy a house than, say, making markets in interest rate swaps. They both can be done conservatively and with relatively low risk, and they both can be done aggressively with relatively high risk. I don’t see why anyone who wants the government to guarantee deposits should prefer one to the other as a matter of risk aversion. If you don’t want the taxpayer to be at risk to the banking system’s risk-taking activities, then you should simply oppose FDIC as a matter or principle.
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Listening to the House Financial Services committee discuss how to get private capital back in the market
Maxine Waters is worried about the effects of principal mods are on investors. CALPERS must have gotten to her. I had heard that the pension funds have been quietly talking to lawmakers asking them not to do it. One of the witnesses noted that if you are in the TSP plan, you are an investor.
If Maxine Waters is lukewarm on principal mods, they aren’t happening…
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Brent – Wow.
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principal mods = principal modification on mortgages, right?
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yes. principal modifications…
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Makes you wonder what banks would do to dance around capitalization requirements. I would suspect a bunch of similarly named spin-offs with interlocking directorates. This could be as big as the break-up of Standard Oil or Ma Bell.
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“Makes you wonder what banks would do to dance around capitalization requirements”
The key, as always, is what you get to count as Tier 1 capital.
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I think the big guys will recognize that they trade with a holding company discount and will break up on their own. I could see Bank of America spinning ML and Countrywide, I could see Citi spinning out Smith Barney (or even Salomon).
B of A (which is capped out as a % of deposits) could even break up into regional banks again by spinning off NationsBank.
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Did anyone see Frontline last night?
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
What’s your opinion of John Bogle’s argument about preferring index funds with a 1% or less fee vs actively managed funds with higher fees?
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“ScottC, on April 24, 2013 at 10:22 am said:
Is it really true that such banks were denied access to TARP funds? Or is it the case that, even with such access to government bailout money, they were still unable to survive?”
My impression is that the FDIC process was enforced for the smaller banks if they were shown to be insolvent. That wasn’t the case for the larger ones, i.e. Citi. Geithner also tried to do a special deal for Wachovia, but Shelia Blair actually blocked him.
“But under their plan Americans will still be subsidizing their risk-taking. It will just be limited to that risk-taking which has been deemed, for strictly political reasons, “acceptable”.”
Well yes. The existence of the FDIC itself is a political decision, so it follows that the limits on what it will subsidize are political as well.
What I like about the proposal is fixed capital requirements with minimal regulator discretion and this provision:
“Under our legislation, financial institutions would be prohibited from transferring nonbank liabilities — like derivatives, repurchase agreements and securities lending — into federally supported banks that benefit from deposit insurance.”
which bans a practice I thought was already illegal.
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jnc:
Under our legislation, financial institutions would be prohibited from transferring nonbank liabilities — like derivatives, repurchase agreements and securities lending — into federally supported banks that benefit from deposit insurance.
This seems to suggest that an FDIC insured bank would be prevented by law from doing an interest rate swap. If so, this would be insane. Interest rate swaps are a fundamental tool of risk management for any corporation, whether in the finance industry or not.
It also seems to suggest that executing a repurchase agreement would also be illegal for an FDIC insured bank. A repurchase agreement is nothing other than borrowing or lending on a secured basis. Why it would be preferable for a bank to borrow and lend on an unsecured basis, but not on a secured basis, is utterly mystifying to me.
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jnc — was frontline worth watching? i’ve got it on my to watch list this week.
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Did anyone see Frontline last night?
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
What’s your opinion of John Bogle’s argument about preferring index funds with a 1% or less fee vs actively managed funds with higher fees?
How about ETFs? The SPY has a management fee of 9.5 basis points and you are not locked into trading only at the end of the day…
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“novahockey, on April 24, 2013 at 11:02 am said:
jnc — was frontline worth watching? i’ve got it on my to watch list this week.”
In my opinion, yes.
Read this interview for a preview:
http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/john-bogle-the-train-wreck-awaiting-american-retirement/
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Scott, my impression is that it would prevent something that Brent reported on a while back namely the uninsured investment bank side transferring liabilities to the FDIC insured side.
Brent, do you remember which bank was it that was under investigation?
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jnc:
Brent, do you remember which bank was it that was under investigation?
I vaguely remember hearing something about this with regard to BoA.
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jnc:
BTW, the fact that derivatives and repo agreements were defined as “nonbank liabilities” suggested to me that banks would not be allowed to engage in such activities. Perhaps that was not an accurate reading on my part.
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Scott, my impression is that it would prevent something that Brent reported on a while back namely the uninsured investment bank side transferring liabilities to the FDIC insured side.
I think you are referring to something that the Dallas Fed proposed, which was that deposits had to be ring-fenced from the investment bank and couldn’t be used to lever any investment bank activity. This would essentially re-institute Glass Steagall by taking away the rationale for merging them in the first place.
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I believe it was this:
” Oct 18, 2011, 2:34pm CDT
Flap: Should Merrill Lynch liabilities shift to FDIC-backed BofA?”
http://www.bizjournals.com/kansascity/blog/2011/10/flap-should-merrill-lynch-liabilities.html
See also:
http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
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Interesting tidbit from the House Financial Services Committee meeting:
The US Government bears 50% of the credit risk of the entire US mortgage market.
I did not know that.
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Lawmakers try to figure out a way to exempt themselves and their staffs from the perils of Obamacare.
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