Jan 27 2009

Fed Adopts Policy to Modify Mortgages, Stem Home Foreclosures

By Alison Vekshin

Jan. 27 (Bloomberg) — The Federal Reserve will ease terms on residential mortgages acquired in the rescues of Bear Stearns Cos. and American International Group Inc., seeking to stem foreclosures.

The Fed policy is targeting borrowers who are 60 days or more overdue on loan payments and covers modifications of interest rates and payment plans. The program uses the Fed’s authority in the $700 billion Troubled Asset Relief Program and was released today by the House Financial Services Committee.

“It reflects the understandable desire of the Federal Reserve to have some cooperation” with the Obama administration, House Financial Services Committee Chairman Barney Frank told reporters today in Washington. “This is a very big deal.”

Frank, a Massachusetts Democrat, and other leaders in Congress have criticized theTreasury for failing to act on the foreclosure-relief provisions in the TARP law Congress approved in October. This month, Congress released the remaining $350 billion in rescue funds to the Obama administration.

“The goal of this policy is to avoid preventable foreclosures on such assets through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers,” according to the document.

The Fed’s “Homeownership Preservation Policy” lets the central bank or its agents “promptly” review applicable mortgages to determine whether the borrowers should be offered a loan modification, the document said. Qualified borrowers must be at least 60 days late on their payments.

Modifications

Modifications will include cutting the interest rates, extending the loan terms, and deferring or reducing the outstanding principal balance, the Fed said.

The policy applies to the residential-mortgage assets the Fed acquired in its rescues of Bear Stearns in March and AIG in September.

The Fed will distinguish between loans in which the central bank may hold only a fractional interest along with other investors, the Fed said. It will encourage the servicers of those residential mortgage-backed securities “to implement a loan-modification program that is consistent with this policy,” according to the document.

“Treasury and Federal Reserve know that they are going to need more” than $350 billion, Frank said. “They also understand that they will not get any further authority for any kind of intervention if they don’t build up some political support.”

Fed Chairman Ben S. Bernanke will appear at a committee hearing on Feb. 10, Frank said, adding he plans to meet with Bernanke on Feb. 2.

“I’m very pleased that the Fed is stepping up,” Senate Banking Committee ChairmanChristopher Dodd, a Connecticut Democrat, told reporters today about the Fed’s policy.

To contact the reporter on this story: Alison Vekshin in Washington atavekshin@bloomberg.net;

Last Updated: January 27, 2009 15:52 EST


Jan 27 2009

California mortgage default filings drop

(01-27) 12:29 PST SAN DIEGO, (AP) –

Lenders filed 75,230 mortgage default notices against California homeowners during the fourth quarter of 2008, the lowest quarterly number in more than a year, a real estate reporting firm said Tuesday.

The decline was likely due to delays caused by new state regulations requiring lenders to take added steps to try to keep troubled borrowers in their homes, La Jolla-based MDA DataQuick said.

The figures for the period ending Dec. 31 marked a 20.2 percent plunge from 94,240 the previous quarter and a 7.7 percent decrease from the 81,550 recorded in the fourth quarter of 2007.

The new rules went into effect in September. But by December, default filings had returned to the monthly average of about 40,000 posted between March and August of 2008.

DataQuick president John Walsh said no one expected defaults to stay at lower levels.

“The bigger question is whether or not the housing market has hit a low and is dragging along bottom, or if the markets that so far have remained unaffected by the foreclosure problem are due for a fall,” he said.

Most foreclosure activity remained concentrated in the state’s more affordable inland areas, where so-called subprime financing was most prevalent, DataQuick said.

Notices of default mark the first step of the formal foreclosure process.

Recorded default notices peaked in the second quarter of 2008 at 121,673.


Jan 27 2009

Breaking News: Bad Bank By Next Week?

Breaking News: Bad Bank By Next Week?
Posted By: Lee Brodie | Web Editor
CNBC staff and wire reports
| 27 Jan 2009 | 06:11 PM ET

 

In late breaking news Steve Liesman reveals that the Treasury is a step closer to creating a bad bank

As we’ve told you the general plan involves the government buying so-called bad assets and then hold them to maturity.

Liesman suggests the big change here is that the government taking preferred shares in banks is “going out the window.” He explains that the Obama administration does not want to be involved in the nationalization of banks.

According to Liesman this new bad bank could hit as early as next week.

Click here to read Liesman’s entire report

 

For further insights Fast Money turns to Bill Seidman, the former Chairman of the FDIC who dealt with similar troubles during the S&L Crisis. 

Seidman tells the traders that it’s tough to create a bad bank – because “no one can agree on price. And what do you do with the assets after you get it. If the government gets the assets do they just take the loss right there.”

You might remember on January 16th, Seidman explained to the Fast Money audience that instead of creating bad banks he advocatesbridge banks, something he did during his tenure. During that time the government seized banks that were insolvent and then, “as soon as possible we sold it back to the private sector.”

However, if the government follows a similar strategy it won’t go well for anyone holding common stock. “If you create a bridge bank shareholders lose everything.”

 

Strategy Session with the Fast Money Traders

Karen Finerman thinks the devil will be in the details. She’s very curious to learn how they will price bad assets.

Pete Najarian likes that there’s time for the market to digest the plans. He thinks it could provide some tailwinds for the banks.

Joe Terranova thinks it’s a good thing for the banks. And he reminds that when they did something similar in Sweden there was a pop in bank stocks – however then they rolled back.

Tim Seymour reminds the panel that Citigroup has already done this already. 

The Citigroup Plan

On January 16th Citigroup, told the market that it is, in fact, splitting into two operating units — in what is known as a “good bank/bad bank” strategy.

Good Bank

Citigroup’s core commercial, retail and investment banking worldwide — the good bank — will be reorganized as Citicorp and led by Citigroup Chief Executive Vikram Pandit.

Bad Bank

The other unit — to be called Citi Holdings — will include brokerage, retail asset management, consumer finance and a pool of risky assets. The bank is considering selling off Citi Holdings assets, or letting them mature.

The retail brokerage assets include its remaining stake in Smith Barney, and Nikko Cordial Securities, as well as Primerica Financial Services.

The bank said it was searching for someone to run Citi Holdings. 

Critics of the bank, who argue it had become too big and complex to manage, have demanded a break-up for some time, although most envisioned Citigroup splitting into separately capitalized companies, instead of separate operating units consolidated onto the same balance sheet.


Jan 23 2009

Former Merrill Chief Is Out at Bank of America

By Heather Landy
Special to The Washington Post
Friday, January 23, 2009; D01

 

NEW YORK, Jan. 22 — Former Merrill Lynch chief executive John A. Thain, who negotiated the brokerage’s hastily arranged sale last year to Bank of America, has resigned from the combined company in the wake of fresh losses that unsettled Wall Street and the firm’s new owner.

Meanwhile, New York Attorney General Andrew M. Cuomo is investigating whether Merrill awarded “large, secret, last-minute bonuses” to employees days before the acquisition by Bank of America was finalized, according to a source familiar with the matter.

Bank of America spokesman Scott Silvestri declined to comment on Cuomo’s inquiry. The source familiar with the investigation declined to be named because of the sensitivity of the matter.

Thain’s resignation followed Merrill’s report this week that it lost $15.3 billion in the fourth quarter. The magnitude of the loss surprised investors who thought that the worst of the firm’s toxic assets had been sold off or written down. But citing what it called a “severe capital markets dislocation,” Merrill took additional write-downs including $1.9 billion for leveraged loans and $1.1 billion for commercial real estate.

On Thursday, Bank of America chief executive Kenneth D. Lewis flew to New York to meet with Thain.

“It was mutually agreed that his situation was not working out and that he would resign,” Silvestri said.

Merrill paid out $15 billion in compensation last year, down 6 percent from 2007. Cuts ran much deeper at rival firms such as Goldman Sachs, where compensation expenses were nearly halved during the worst financial crisis since the Great Depression.

No bonuses were earmarked for Merrill’s top five executives, but that decision was announced only after reports surfaced that Thain had lobbied Merrill’s board for a $10 million bonus to recognize his work in selling the beleaguered firm to Bank of America.

It wasn’t the first time Thain attracted negative attention since taking the helm at Merrill in late 2007. He was roundly accused of underestimating the firm’s financial woes in mid-2008. He also had been criticized for offering rich employment contracts to former colleagues from Goldman Sachs, where Thain had been president before becoming chief executive of the New York Stock Exchange.

When the deal with Bank of America was announced in September, Thain said he had given little thought to his potential role at the combined company. Eventually, Lewis tapped him to head the bank’s global wealth and investment management business, a role that will be filled by Brian Moynihan.

Moynihan ran Bank of America’s global corporate and investment banking division before the merger with Merrill, and has been serving as the bank’s general counsel. The Bank of America-Merrill merger was finalized Jan. 1.


Jan 20 2009

Dow Drops Below 8,000 on Fresh Fears About Banks

By Heather Landy

Special to The Washington Post 
Tuesday, January 20, 2009; 5:47 PM 

NEW YORK, Jan. 20 — New doubts about the health of major banks triggered sharp losses on Wall Street Tuesday, with the Dow Jones industrial averageshedding 4 percent and the Nasdaq and Standard & Poor’s 500 stock index plunging more than 5 percent.

Bank of AmericaJ.P. Morgan Chase and Citigroup fell to fresh lows, leading the Dow down 332 points to 7949 points, its worst closing level since Nov. 20.

The S&P 500 lost 45 points to close at 805 points, while the technology-heavy Nasdaq ended 88 points lower at 1441 points.

“The problem is first and foremost in the financial sector and it’s spreading out in all other manners,” said Richard Cripps, chief investment officer at Stifel Nicolaus in Baltimore. “It’s just hard to think about trying to own stocks if we can’t get the banking system on some kind of solid footing, and it seems to be on anything but that at the moment.”

The Royal Bank of Scotland moved a step closer toward full government control in Britain over the weekend, renewing worries about the stability of banks around the globe. Meanwhile, State Street, the largest money manager for institutional investors such as pensions and mutual funds, jolted the market when it said paper losses on bond investments had climbed from $3.3 billion on Sept. 30 to $6.3 billion at the end of December.

State Street shares plummeted 59 percent to $14.89, making it the day’s worst performer in the S&P 500.

Shares of Bank of America extended their slide from last week, when the company accepted a new round of federal aid, dropping another 29 percent, or $2.08, to $5.10. J.P. Morgan finished 21 percent lower at $18.09, while Citigroup closed at $2.80, marking a 20 percent decline for the session.

The action in the markets underscored the need for newly inaugurated President Barack Obama to set his sights on repairing the banking system before turning his attention to a broader economic stimulus package, said Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods.

“What gets at the core economic issues of the day is fixing the financial system,” Gardner said. “This all started from a crisis in the financial system, and it’s going to be solved by fixing the financial system.”

Financials represented nine of the 10 biggest decliners Tuesday in the S&P 500. The other was Developers Diversified Realty, a real estate investment trust, which fell 23 percent to $4.83.

All 30 of the Dow average’s blue-chip stocks closed down for the session.

“If the financial stocks aren’t doing well, it’s a commentary on the credit process getting restored and the likelihood of it getting restored quickly, and that has implications for everything,” said Binky Chadha, chief U.S. equity strategist at Deutsche Bank.


Jan 20 2009

Obama sets fresh course for ‘remaking America’

The new president addresses the nation and speaks of work and sacrifice and makes clear that Bush policies will change.
By Cathleen Decker 
2:20 PM PST, January 20, 2009
Reporting from Los Angeles — Barack Hussein Obama took the oath of office today as the nation’s 44th president — and the nation’s first black chief executive — and told Americans shaken by economic despair and war that shared sacrifice would be required to draw the nation back to prosperity and peace.

“Our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed,” Obama declared in a ringing inaugural address. “Starting today, we must pick ourselves up, dust ourselves off and begin again the work of remaking America.

“For everywhere we look, there is work to be done,” he said, ticking off needs in the areas of the economy, energy, education and myriad other fronts. “All this we can do, and all this we will do.”

Obama’s day was replete with the emotion of the past — the son of a white Kansas mother and a Kenyan father took his oath from Chief Justice John G. Roberts Jr. on the Bible used by Abraham Lincoln more than a century ago.

But his inaugural address, though filled with eloquent references to American will and its historic successes, was also a sharp attempt to wrest the country from the path set by outgoing President Bush.

 
Several times, he appeared to repudiate decisions by the Bush administration, including its curbing of some scientific efforts and, most dramatically, decisions that lessened constitutional freedoms in pursuit of the Iraq war and the larger fight against terrorism.

“We reject as false the choice between our safety and our ideals,” he said. “Our Founding Fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expediency’s sake. And so to all other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: Know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and that we are ready to lead once more.”

He took special pains to speak to Muslims, who have bridled at what they saw as Bush’s cavalier treatment and go-it-alone demeanor.

“To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society’s ills on the West — know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history but that we will extend a hand if you are willing to unclench your fist.”

Obama repeated his 35-word oath before a rapturous and massive crowd, supplemented across the country with separate, if just as boisterous, celebrations. In the carefully scripted inaugural pageant, the swearing-in itself provided one brief bit of spontaneity: Chief Justice Roberts misplaced one word of the oath, then restated it correctly before Obama repeated the line.

Minutes before Obama took office, former Delaware Sen. Joseph Biden became the nation’s new vice president with the assistance of Associate Justice John Paul Stevens.

The day unfolded with the nation invoking the familiar rituals of a peaceful change in power, although history hung in the air.

The day ushered out the eight-year presidency of George W. Bush, who came into office vowing to unite the country and led the nation through the tumult of the Sept. 11 terrorist attacks, only to founder over an ill-managed war in Iraq, lengthening battles in Afghanistan and a downward-spiraling economy.

But the bracing turnover was cultural as much as political, as the nation grasped the import of November’s election again: After 220 years, for the first time it was not a white man taking the oath of office. The fact of Obama’s parentage rippled across the inauguration platform and the assembled crowd, both more diverse than at past inaugurations.

From black Americans who had lived through the civil-rights era and who had never presumed they would see such a day as this, to Americans whose experience of discrimination is limited to history books, Obama’s journey evoked both emotions and echoes. He took the oath of office looking westward toward the Lincoln Memorial and its great marble likeness of the president who freed America’s slaves. The steps of the very same memorial welcomed, in 1939, black contralto Marian Anderson after she was refused entrance to Constitution Hall, and in 1963, Martin Luther King Jr. for his “I Have a Dream” speech. On Sunday, at the first of the inaugural festivities, a concert at the Lincoln Memorial, Obama sat there as president-elect, his dream realized.

Before the swearing-in, Nelson and Tina Daniel stood in the shoulder-to-shoulder crowd at the foot of the Washington Monument, halfway between the Lincoln Memorial and the Capitol. The Los Angeles residents had staked out their position at 5 a.m.

“This is big history,” said Nelson Daniel, a 63-year-old African American. “Once-in-a-lifetime experience. My mother and grandparents dreamed of it. I have a chance to witness it for them.”

Also in the crowd was Gloria Washington-Lewis Randall, an African American from Alabama who spent 2 1/2 weeks in jail for participating in a civil-rights demonstration in 1963. Now, at 62, she watched the ceremonies via one of the giant viewing screens set up on the Mall.

“I’m totally ecstatic,” she said. “You don’t really notice the cold out here. It’s a warmness that’s coming up. Because no more will we be called black or white. We’ll be called Americans.”

A counterpoint to the enthusiasm greeting Obama was the grim reality facing the new administration. Obama inherits the wars in Iraq and Afghanistan, anti-American sentiment around the globe and, at home, the harshest economic crisis since the Great Depression. Much of his transition was spent trying to infuse optimism that his proposals will work, while simultaneously warning Americans that recovery will take years, not months.

He returned to that sentiment in his address, as he repeated vows he made during his long and arduous campaign for the presidency. He pledged anew to rebuild the country’s decaying roads and bridges and utility systems, reform healthcare and improve education. He brushed aside past partisan disputes.

“What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply,” he said, reprising a campaign theme. “The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end.”

Turning to foreign policy, he reiterated his view — much criticized during the campaign — that the nation ought to rely more on nimble diplomacy than a muscular display of strength.

“Our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint,” he said.

He promised to “begin to responsibly leave Iraq to its people,” with no mention of a timetable for doing so. He also said he would “forge a hard-earned peace” in Afghanistan, where opponents have proved intractable. But he gave no quarter to those who have fought Americans, whether in skyscrapers in New York or the streets overseas.

“We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you,” he said.

Obama’s improbable journey began less than two years ago when, with what even he acknowledged was “a certain presumptuousness,” he announced his candidacy for president in a speech in Springfield, Ill., Lincoln’s adopted hometown. At the time, Obama had served only two years in the United States Senate.

Few gave him strong odds at the beginning of his quest. Hillary Rodham Clinton was the front-runner and all-but-certain nominee, but as the pre-primary polling gave way to the sentiments of actual voters, her veneer of inevitability cracked. Obama’s campaign was built on soaring rhetoric and substance — his early opposition to the Iraq war contrasted sharply with Clinton’s vote for it.

Less measurable early on — but ultimately more potent — was his emotional reach among voters who wanted to turn a page on the divisive politics that many felt Clinton personified. On their backs, and on the backs of young voters whose eventual turnout was suspect until election day, Obama built a stunning, tech-savvy organization. His campaign appearances in the general election regularly drew numbers unseen in past campaigns — 100,000 in St. Louis, 90,000 in Manassas, Va., 75,000 in Kansas City, Mo.

Obama upended the race with a smashing victory in the first contest, the Iowa caucuses, but Clinton came back days later to win in New Hampshire, setting up a grinding primary contest that would last until she relented in June. Like Biden, himself a candidate in 2008, Clinton would find a place in the Obama Administration hierarchy, as the designated secretary of State.

The general election saw Obama trounce Arizona Sen. John McCain, who fought against a sweeping Democratic voter registration effort but ultimately fell under the weight of the economic downturn. McCain also suffered from the election’s anti-Republican cast; the party lost seats in the House and Senate, and Bush leaves office for his Texas retirement with a positive approval rating at less than three in 10 Americans.

Obama, by contrast, has strengthened his hand since election day. Several polls have placed the percentage of Americans who say they feel optimistic about his tenure at more than seven in 10, well above his 53%-46% margin over McCain.

Obama and his wife, Michelle, and Biden and his wife, Jill, began their day by attending services at St. John’s Episcopal Church, the traditional destination for an incoming president, located across Lafayette Park from the White House.

Then they traveled to the president’s residence for coffee with outgoing President Bush and Vice President Cheney, along with House and Senate leaders. Bush and his wife, Laura, met the Obamas at the north portico, where they embraced and exchanged greetings. The group later caravaned to the Capitol for the swearing-in ceremony, charting a reversal of the path that Obama’s inaugural parade took this afternoon. In between, he was honored at a lunch in the Capitol, where a key Obama supporter, U.S. Sen. Ted Kennedy, was taken ill. Kennedy, who has been battling brain cancer, was rushed to a hospital.

The Bushes, meanwhile, departed the city they have called home for the last eight years and had visited often during his father’s earlier presidency. After the inaugural ceremony, the Obamas escorted Bush and his wife, Laura, to a Marine helicopter on the east side of the Capitol; they flew to Andrews Air Force Base, where a jet from the presidential fleet took them home to Texas.

The new president woke this morning to a city overwhelmed with revelers. Suburban parking lots for the city’s subway system were filled before dawn, and masses of people thronged on foot toward entrances to the National Mall. With hours to go before the ceremony, the Mall was packed from the Capitol west to the Washington Monument, and overflow crowds spilled onto the grounds of the Lincoln Memorial as well.

Yet concerns that the crush of people would prompt security crises and cellphone network implosions were largely unrealized. The crowds were docile, if cold, and temperatures topped out in the low 30s. Although there were no massive traffic tie-ups, there was pedestrian gridlock. As the crowd dispersed after Obama’s speech, the sea of visitors moved en masse toward whatever direction appeared to allow movement, butting up against the security barriers that blocked free access to the Mall and parade route.

Those who captured a front-row perch along Pennsylvania Avenue for the parade were rewarded twice — midway down the route and near the White House — when both the Obamas and the Bidens hopped out of their armored limousines to wave at the crowds. The president and first lady walked hand in hand at times, beaming with broad smiles, seemingly oblivious to the cold.

The district swarmed not only with security forces — seen and unseen — but also those who seized on the inauguration as their personal ticket out of economic malaise. T-shirts, knit caps, key chains, pencils, coffee mugs, American flags, all decorated with Obama’s face, were being vigorously hawked across the district. The chaotic display competed with the formal red-white-and-blue bunting that draped the graceful old Capitol, the stately backdrop for the drama.

But most were not in it for the money. Elizabeth Austin, 86, walked alone from her house in the cold, but found herself blocked from the parade route by iron gates, blocks from any of the action. She had worked for years at the Capitol, as a cook. She looked frail and vulnerable against the mass of surging visitors, but no matter, she was there.

“It’s history,” she said.


Jan 16 2009

Fed Says Some Home Loans in Bear Portfolio Became Delinquent

Jan. 15 (Bloomberg) — The Federal Reserve said some home loans in the $30 billion asset portfolio acquired in the rescue of Bear Stearns Cos. became delinquent and were modified to avert foreclosure, according to a central bank official.

The Fed will soon adopt a policy on modifying home loans owned by the central bank in response to a provision in legislation creating a $700 billion financial-rescue program, Fed Governor Elizabeth Duke told Senate Banking Committee Chairman Christopher Dodd on Jan. 12. An excerpt of the letter, responding to an inquiry from an Oct. 23 hearing, was obtained by Bloomberg News.

The letter suggests that the central bank’s markdown of the portfolio value to $27.1 billion from $30 billion in March was partly due to losses from delinquent loans. Since the Bear Stearns rescue, the Fed has taken on more credit risk with the bailout of American International Group Inc. and direct purchases of mortgage-backed securities.

As of Nov. 30, about 11 percent of the “whole loans” in Maiden Lane that were “both nonperforming and more than 60 days past due had been permanently modified through a reduction in interest rate, an extension of term, a deferral or reduction in the principal balance, or a combination of such actions,” Duke said.

All residential whole loans in the former Bear Stearns portfolio, now held in a Fed-created company called Maiden Lane LLC, were performing as of March 14, 2008, the Fed said.

Wells Fargo & Co. and EMC Mortgage Corp., a former Bear Stearns unit now part of JPMorgan Chase & Co., are servicing the whole loans in the former Bear Stearns portfolio, Duke said. The companies are using “industry standard protocols for loan modifications” consistent with the industry’s voluntary Hope Now Alliance, Duke said.

Verification Period

“The number of permanent loan modifications is expected to increase in the coming months” because the verification period for modified loans takes three months and more delinquent borrowers will be contacted and finish the negotiation process, Duke said.

Most home-loan assets in the former Bear Stearns portfolio are in the form of mortgage-backed securities, and the Fed “does not have direct control” over servicing those loans, Duke said.

The Fed extended a $28.8 billion loan to purchase the assets, and JPMorgan is absorbing the first $1.15 billion of any losses realized on the holdings. The central bank in March agreed to the transaction to ease JPMorgan’s purchase of Bear Stearns and avert a bankruptcy of the investment bank.

Dodd, a Democrat from Connecticut, said earlier today that Duke took three months to “half-heartedly” reply to his inquiry on how the Fed could prevent foreclosures on mortgages it “effectively owns” as a result of the Bear Stearns rescue.

‘That’s Unacceptable’

“That’s unacceptable,” Dodd said at a confirmation hearing for Fed board nominee Daniel Tarullo. Duke wasn’t present. Fed spokeswoman Michelle Smith had no immediate comment on Dodd’s remarks.

Section 110 of the financial bailout bill calls for the Fed and other agencies to “implement a plan that seeks to maximize assistance for homeowners and use its authority” to encourage companies servicing mortgages owned by the government to use certain programs to reduce foreclosures.

“The Board is in the final stages of developing a foreclosure mitigation policy for use by the Federal Reserve Banks,” Duke said. “In addition to applying this policy in situations required by section 110, the Board will consider whether there are situations in which it is appropriate and feasible for the Board to apply the policy voluntarily.”


Jan 16 2009

Mortgage Mayhem Misses Main Street Lenders — How Come?

Over the past eighteen months it’s been nearly impossible to make it through a week of news that does not include something about the terrible state the housing and mortgage markets are in. We have heard a lot about the troubles that Fannie, Freddie and many of the big banks are having, often involving their failure or collapse into receivership. As a banker this news cycle has been depressing to witness. However, as depressing as it is for me, I can only wonder how dismaying it must be for the average, hard working taxpayer who does not work in the sector! 

The questions that must be lingering are, “How could this have happened? Should these companies have known better? How did it go on for so long to turn into such a mess before being detected?”

In this spirit, I would like to take a stab at answering these questions, from my vantage point. I began my career in the banking industry as a mortgage loan officer at a small community bank sixteen years ago. I learned about the fundamentals of making a mortgage loan. It is pretty straightforward, there are three elements: income/debt ratios, property/collateral and previous credit history. The mortgage loan officer’ job is to determine if an applicant can afford a house payment based on their salary and existing debts. There were generally accepted industry ratios that existed for maximum housing debt to income and total debt to income. Decades ago borrowers were required a long time ago to put twenty per cent down in cash. Over time that number changed to a minimum of ten percent then five percent then three percent with FHA. Finally, lenders believed that a borrower’s past credit history was likely a good predictor of future credit behavior when it came to willingness to payback creditors. Part of the application process involved verifying all of the information that the borrower submitted. Fannie Mae and Freddie Mac bought loans and subsequently sold them as mortgage backed securities to investors that conformed to their standards.

Community banks often made the decision to hold loans in their own portfolios rather than sell them into the secondary market to Fannie or Freddie. They made this choice because they believed in the quality of the loans that they were originating, as they knew their borrowers, knew their markets and the properties that were being purchased and had a cushion for error by requiring a down payment of ten to twenty percent. Accordingly, if something went wrong for the lender and the borrower defaulted, the bank could foreclose and not take a large loss, in most cases.

The good news is that community banks still operate that way today! Consequently, community banks have not seen the massive write-downs, losses and failures that we have witnessed in the big bank and GSE (Government Sponsored Enterprise) sector. This news begs the question, what did community banks know that the big banks either did not know or somehow miss in a really big way?

The big players started playing a different game in which they created all new rules for making a mortgage loan. They were ambitious and they wanted to make lots more loans and consequently a lot more money as well. They created a new type of loan called the sub-prime loan aptly named as this loan was considered to be of materially worse quality to a conforming or prime loan. These loans later came to be known as liars loans as the borrower could lie about their income because the lender was not going to check, in some cases the lender lied about their income for them so that they would qualify. The borrower was often allowed to move in without any down payment. If their credit history was poor, they were asked to pay a higher interest rate, making a long-term payment trajectory less likely.

How could this happen? That part is pretty easy! Everyone in the channel had something to gain by originating a sub prime loan. The borrowers were able to purchase a home that they otherwise would never have qualified for and with no money down. The mortgage broker working for either a small or large brokerage was able to load up the loan with large fees and points that were built into the loan. The broker on this type of loan could make approximately ten times more money than the community banker that was originating an old fashioned, conforming loan. There are cases around the country where these brokers where making tens of millions of dollars per year originating these loans. Fannie and Freddie played a pivotal role as they facilitated packaging and passing on billions of these types of loans. In addition, they chose to hold hundreds of millions of these loans in their respective portfolios, as well, with disastrous consequences.

Others in the mortgage channel also made a lot of money on these loans as the volume grew over the years. Big banks liked the fact that they could earn a much higher yield on these loans than conforming loans. The result: higher earnings for shareholders and subsequently higher bonuses to follow for the CEO’s. Since the rating agencies rated pools of these mortgages as triple A credit, investors, including foreign countries felt comfortable buying them.

Investment bankers joined into the party by selling these sub prime investments to their clients. It became easier to do when investment bankers successfully lobbied for the overturn of the law that caused the collapse of the stock market in 1907. In 2000, permission was granted for investment bankers to sell credit default swaps. In many cases, these products were sold to investors that were worried about the inherent credit risk contained in these pools of subprime mortgages. Presto-,the answer–the investment bankers could sell a credit default swap to mitigate the risk. Investment bankers were essentially selling an insurance product except they were not subject to insurance regulation or bank regulation. Ultimately, they granted way more insurance than their balance sheets could handle, (I believe the number of credit default swaps sold was over $60 trillion of all types) even though they were big balance sheets.

What was the motivation? I suppose you could point to greed. It is a fundamental principal of capitalism, that businessmen will conduct themselves with a basic morality and ethical responsibility.

How did it happen tactically? Everyone was willing to “stretch” to ramp up sales and make more money or get bigger bonuses. This stretching involved a very dangerous process: the layering of risks. Bankers are risk managers and you cannot avoid risk if you want to lend money to someone as there is always the risk that you will not get paid back or you could lose money on a loan if the collateral is damaged and the borrower defaults as well. Bankers learn early on that is not wise to layer or combine risks in a deal. For instance, if a borrower has a poor credit history then it is not a good idea to also allow them to obtain a loan with no down payment. If something happens, there is very little the banker can hang his proverbial hat on to recover. This is precisely where the system broke down, as under the new rules that were invented, a borrower could get a loan with poor credit, put nothing down, pay lots of fees that were rolled into the loan, pay a higher rate making the payment higher and the affordability tougher. All of these layered combined risks made for a loan that had a substantially greater risk of default.

Community banks did not make these types of loans as it seemed like a terrible business decision to take on all these layers of risks with a single borrower. Worse, community banks did not want millions of dollars of these types of loans on their books because they knew they could one day have the big losses to accompany the big risks that were taken. Even the substantially better yields, sometimes up to 50% better were still not adequate justification for all the additional risk. You only collect the higher rate as long as the borrower is paying it!

How are community banks faring after the billions in announced losses? I wish this was the unqualified happy ending. However, since so many of these subprime loans were made throughout the country, real estate values were driven higher over the years. Therefore, when a community bank or big bank proceeds with a foreclosure, it is likely that all of the home values in the area are inflated and the bank is more likely to suffer a bigger loss than before. This means that most banks are experiencing higher losses, but community banks are still in a much better place since they did not engage in making the substantially riskier sub prime loans. The bad news has been so consistent that it has driven all investors to question the merit of buying any bank stocks. However, the bargain hunters and value players have entered the market and hopefully the darkest days are behind us.

Note: William A. Donius was elected CEO of Pulaski Bank in 1997. He took the bank public in 1998 with Pulaski Financial Corp. NASDAQ listed PULB as the holding company. Under his leadership the bank grew from $168 million to $1.3 billion. Pulaski Bank is the largest purchase market, mortgage originator in St. Louis and one of the top three in Kansas City. Pulaski Bank was voted the Best Place to Work in St. Louis in 2007, received a Torch Award from the Better Business Bureau in 2008 and is ranked as one of the best performing smaller banks/thrifts by industry publication SNL. Donius retired from the CEO position in April of 2008 and remains Chairman of the bank. This essay represents his personal view and may represent the view of the bank.

Donius was appointed to a two-year term on the U.S. Federal Reserve Board TIAC Council in 2008. Donius served a four-year term on the Board of Directors of America’s Community Bankers ending in 2007. In addition, he served as Chairman of for profit subsidiary, America’s Community Bankers-Partners for two years.


Jan 16 2009

Citigroup In Pieces

In the case of Citigroup, the parts hold greater value than the whole.

It took a financial crisis, but Citigroup finally announced Friday it was moving on from its financial supermarket model and splitting the company, as investors were hoping it would do for some time now. One business, Citicorp, will focus on traditional banking, while Citi Holdings will be covering the company’s riskier assets.

Citi is trying to rid iteself of its toxic assets, and the move puts it in the position to sell or spin off Citi Holdings’ assets to raise cash. In the meantime, the separation enables it to focus on what is sound, like gathering deposits and lending.

Citi Holdings will account for $850.0 billion, of Citigroup’s $1.95 trillion in assets, and will include Citi’s asset management and consumer finance segments, CitiMortgage and CitiFinancial.

It will also be in charge of Citi’s 49.0% stake in the joint brokerage with Morgan Stanley, and the pool of about $300.0 billion in mortgages and other risky assets that the U.S. government agreed to backstop late last year.

Friday’s announcement came as the New York-based financial company reported a fourth-quarter loss of $1.72 per share, well ahead the $1.31 per share loss predicted by Wall Street. Shares of Citigroup fell 2.6%, or 10 cents, to $3.73, in late-afternoon trading, while the Financial Select Sector SPDR, an exchange-traded fund, slipped 1.7%, or 17 cents, to $9.81.

At the same time, Bank of America slashed its quarterly dividend to a penny, announced $2.4 billion fourth-quarter loss and got $20 billion from Uncle Sam as a guarantee on assets against losses to help it absorb Merrill Lynch. (See “U.S. Rescues Bank Of America.”)

For years Citigroup’s critics have called for breaking up the company, calling it too unwieldy to manage, with its global scope and diversified businesses, and the likelihood of a breakup drew much closer over the past week. (See “Citigroup Comes Undone.”)

One week ago, Robert Rubin, one of the company’s most familiar faces, said he was leaving in the spring after a decade as a key adviser within the bank’s echelons of power. (See “Citigroup: Bye Bye, Bob.”)

The legacy of Sandy Weill at Citigroup has been hard to break. (See “Bury The Legacy Of Sandy Weill…”) Ten years ago, Citi’s former chief set out to prove that the supermarket concept to banking was the best approach. He drove a 1998 merger of Travelers Group and Citicorp, which combined retail and corporate banking, a major brokerage house and a substantial insurance underwriting business. When it was conceived, the deal was illegal. It took heavy lobbying and the overturning of 70-year-old laws to make it happen. But even back then, there were signs this financial supermarket model would not work.


Jan 16 2009

BofA Gets $20 Billion, Merrill Loses $15 Billion

Bank of America posted its first quarterly loss in 17 years Friday and slashed its dividend, hours after winning a multibillion-dollar lifeline from the U.S. government to help absorb Merrill Lynch, which lost a record $15.31 billion in the quarter.

Bank of America [BAC  7.18    -1.14  (-13.7%)   ], the largest U.S. bank, lost $1.79 billion, or 48 cents per share, in the fourth quarter, compared with a year-earlier profit of $268 million, or 5 cents. Net revenue increased 22 percent to $15.68 billion.

 

 

At Merrill, the loss was $9.62 per share, driven by significant writedowns of troubled assets.

Bank of America announced the results hours after it won $20 billion in new capital from the government’s $700 billion Troubled Asset Relief Program (TARP).

“They were probably one of the best banks out there, balance sheet-wise, until they did the Merrill deal,” said Cassandra Toroian, chief investment officer at Bell Rock Capital in Paoli, Pennsylvania, which owns the bank’s shares.

Speaking of the results, she added: “None of it’s a surprise at this point.

I think it’s really unfortunate that they had to cut the dividend.” The bank slashed its quarterly dividend to a penny from 32 cents.

With the latest capital infusion, Bank of America has taken $45 billion in TARP money, the same amount as Citigroup Inc , which won its own rescue package in November.

Citigroup [C  3.50    -0.33  (-8.62%)   ] also reported fourth-quarter results on Friday, posting an $8.29 billion loss, and said it plans to separate into two units after its own massive credit losses.

Shares of Bank of America rose 5.8 percent to $8.80 in premarket trading, though well off their highs for the morning. Citi gained 5.7 percent to $4.05.

 

 

Through Thursday, BofA shares had fallen more than 81 percent from their 52-week high last February.

Government Shares in Losses 

Bank of America Chief Executive Kenneth Lewis sought government help to combat losses at Merrill, which the company agreed to buy on Sept. 15 after less than 48 hours of talks. The original $19.4 billion transaction did not get government assistance, and closed on Jan 1.

John Thain, Merrill’s CEO, became Bank of America’s head of global banking, securities and wealth management.

The Bank of America rescue calls for the government to share in losses on $118 billion in residential and commercial mortgages, derivatives and corporate debt.

Bank of America will absorb the first $10 billion of any losses, the government takes the next $10 billion, and the government 90 percent of any remainder. Bank of America said the rescue package will help it operate as normally as possible.

The bank said it had extended more than $115 billion in new loans in the quarter and was adding mortgage staff to accommodate an increase in refinancings.

Bad Loans Skyrocket  

Nevertheless, Bank of America already has its hands full with soaring credit losses.

 

 

It set aside $8.54 billion for bad loans in the quarter, up from the third quarter’s $6.45 billion and $3.31 billion a year earlier.

Video: Debating the odds of a nationalization of the financial services industry.

Net charge-offs nearly tripled from a year earlier to $5.54 billion, or 2.36 percent of average loans and leases.

Lewis is also struggling with defections of top Merrill talent, including brokerage chief Robert McCann and Greg Fleming, who was expect to run the combined investment bank.

Lewis is also still absorbing Countrywide Financial, which had been the largest U.S. mortgage lender, and LaSalle Bank, which has significant loan exposure in the Midwest, hard hit by the housing and the auto industry crises.

Bank of America has said it expects to cut 30,000 to 35,000 jobs over three years following the Merrill merger, on top of 7,500 job losses following the Countrywide acquisition.