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Archive for the ‘lending’ Category

Bond action in the Eurozone has modestly picked up (yields steady or falling) since the ECB’s 3-Year LTRO program – Long Term Refinance Operation. However, European banks still do not trust each other, not even for overnight lending.

Instead, banks park all available funds with the ECB, as noted by the Wall Street Journal in Deposits at ECB Hit Record High.

Use of the European Central Bank’s overnight deposit facility hit the second all-time high in a row Tuesday as euro area banks increased the amount of cash they park at the central bank’s safe haven, ECB data showed Wednesday.

Banks parked €452.034 billion ($589.72 billion) at the ECB, up from €411.813 billion the previous day. The high level reflects prevailing distrust among banks which prefer using the ECB’s facility rather than lending to each other.

The increase in deposits follows the ECB’s first-ever three-year liquidity tender last week in which it allocated nearly half a trillion euros to more than 500 banks.

The ECB also said banks borrowed €6.225 billion via its overnight lending facility, up from €6.131 billion the previous day. When markets are functioning properly, banks use the facility to the tune of a few hundred million euros overnight.

The “first-ever three-year liquidity tender” offer cited by the Wall Street Journal is the 3-year LTRO that I mentioned at the top.

ECB’s LTRO Won’t Stop Collateral Contagion

Gordon Long put out an outstanding report on his website on why the ECB’s LTRO Won’t Stop Collateral Contagion. I picked up the link from Zero Hedge. Following are a few snips:

Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU “kick at the can”.

1. COLLATERAL CONTAGION: There is a cascading Collateral Contagion crisis in which secured lending, based on sound assets, has replaced unsecured lending based on future expected cash flows.

2. WHOLESALE LENDING: Wholesale bank lending, which is a unique cornerstone of European banking, has completely frozen since the failure of Dexia and US Money Market Funds will no longer risk short term capital having learned their lesson in 2008.

3. BANK RUNS: Bank Runs are quietly and insidiously occurring throughout the peripheral EU countries as corporate and private depositors seek safe havens for their cash holdings. … WHOLESALE LENDING

There are approximately $55T of banking assets in the EU. This compares to only $13T in the US. Bank Assets in the EU are 4 times as large as the US.

In the US, debt held by the bank is smaller because retail deposits are a primary source of funds. EU banks use wholesale lending and, as a consequence, the debt held by banks is closer to 80% versus less than 20% by US banks.

Wholesale bank lending in the EU approximates $30T versus only $3T in the US, a 10 X differential.

Wholesale lending is fundamentally borrowing from money market funds and other very short term, unsecured instruments. The banks borrow short and lend long. It all works until short term money gets scarce or expensive. Both have occurred in the EU and this recently placed DEXIA into bankruptcy, forcing them to be taken over by the Belgium and French governments. The unsecured bond market fundamentally closed in the EU in Q3 2011, as fears mounted that an EU solution was not forthcoming.

Assuming $30T of loans is spread over three years, EU banks have a requirement for $800B / Month of rollover financing for wholesale lending outstanding.

Where is this money going to come from? No one is waiting around to find out as there will be cascading counterparty failures soon surfacing. Banking money in Europe is fleeing to custodial and official accounts of the ECB, the US Federal Reserve and any other central Bank willing to accept their cash.

Excerpts do not do the article full justice. It’s well worth a read in entirety.
Mike  “Mish”  Shedlock – Global Economic Analysis

As I write this the DOW is down 178, the S&P is down 19, and the Nasdaq 100 is down 32, all well more than 1%.  In addition volume is more than 10:1 down on the NYSE and about 8:1 on the Nasdaq.

It’s a bloody day in the markets.

But one problem is apparent – the TNX, or 10 year Treasury bond interest rate, is actually up about 0.2% on the day, and the 30 year is up 1% in yield.

They shouldn’t be.

When investors get nervous about stocks, they usually flow to bonds.  Today, they’re not.  They’re buying Gold instead which is up just under 1%, or silver, which is up 3.2%, both on the day.

These correlations have been solid for a long time.  Now they’re failing.  This failure is telling you something – that our Congress and President had better get their heads out in the daylight instead of up their respective asses, and they better do it soon.

Oh sure, we’re not seeing the sort of out-of-control ramp in government bond rates that Italy has seen the last few weeks.

Yet.

But remember the 1930s.  A bank called Creditanstalt turned what was a nasty stock market crash and credit contraction into a global Depression.

Regulators then, as now, ignored the crash’s warnings and refused to force those who were not properly capitalized to close.  They allowed people to double into bad bets.  Those bad bets compounded, and when the economy started to slip for real, instead of just on paper, the leverage they were carrying, both that which everyone knew about and that which people did not, ultimately blew them up.

Now we have a “little bank” in Italy that is teetering on the same edge – Unicredit.  It is too big to bail out – it holds hundreds of billions in liabilities.  There’s no money available to bail them out and the time to resolve them, as with our banks, was two and three years ago.

The risks are extremely high here folks.  I know many have laughed at my warnings for the last three years and have hooted and hollered as the stock market “recovered”, buoyed by yet more cheap money.  But during this the coverage of government debt with employment has not recovered at all – in fact, it’s worse now by far than it was in 2008.

So now what’s available in terms of policy tools?  There’s no funds available to bail people out, and a bank of that size isn’t able to be bailed out anyway in reality – all you can do is lie and hope people believe it.  But the market is calling all the bluffs now, one after another.

Remember 2008?  Buffet was going to buy the world.  Then it was Korea’s Development Bank.  Both, and many more yarns that were spun, were lies.  Those who believed got skinned alive in the collapse that followed.

If you think it can’t happen again, you’re wrong.  It both can and will, and nobody will be held to account for the lies they tell, just as they weren’t the last time.

Our government isn’t helping.  We should have taken all the big banks into receivership and went through every one of their alleged “assets” in 2008, forcing them to prove by independent valuation that they were holding them at reasonable valuations and that their “credit insurance” was backed by someone with 100% of the actual cash required to pay.  We didn’t, because Paulson and Geithner both knew that under such a standard not one of the big banks would survive.

So instead of forcing bondholders to eat it, which is what should have happened, they rolled the dice.  They bet that there would not be another Creditanstalt.

This is now looking like a bet they are going to lose.

How the banks could inflict such damage on the country’s home title and mortgage registry system would take another investigation by Congress to determine – assuming Congress was interested.

The Mortgage Electronic Registration Systems company (known as MERS), which has been at the center of legal problems affecting the securitization of home mortgages and foreclosures, has given up one of its principal corporate objectives. It is now instructing its members to cease foreclosing on residential properties in the name of MERS, and to begin immediately to register all assignments of mortgages with local county recorders of deeds. (Image)

The whole purpose of MERS when it was established in 1996 was to by-pass the county recording process, and the billions of dollars of fees that banks and mortgage companies would have had to pay to comply with state and local real estate laws. MERS operated on a legal assumption that it could have its cake and eat it too, by acting as an agent for its member banks in their real estate transactions, but also acting if necessary as a principal in its own name when it came to assigning mortgages and foreclosing on properties.

This legal principle took a devastating blow last week when US Bankruptcy Judge Robert Grossman of New York issued a ruling stating that MERS cannot operate as a principal when it came to assignments and foreclosures. The company only maintained a parallel data base of mortgage assignments that gave it no legal rights to interfere in real estate legal processes. By making changes to its rules today that will abandon any pretense that MERS is a principal to real estate transactions, the company is bowing to Judge Grossman’s ruling. By also instructing its members to begin filing mortgage assignments with county clerks, MERS is defeating one of the basic purposes of its establishment: the avoidance of real estate fees.

Fee avoidance was essential if the home mortgage was ever going to be securitized, since securities require multiple assignments of the same mortgage which eventually finds itself in the hands of a trustee for the security. It is now open to question whether mortgage backed securities can remain profitable with fees having to be paid multiple times for as many as 1,000 mortgages in a security. This is going to have serious implications for Fannie Mae and Freddie Mac, which are the only parties left in the US which issue and securitize home mortgages. Fannie and Freddie were founding partners in the establishment of MERS, so this is as much a blow to their business model as it is to MERS, which the two government agencies can ill afford when Congress is debating their future.

Judge Grossman was fully aware of the implications of his ruling.

The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law. Link

MERS claims that over 50 million mortgages in the US have been registered on its system. Given the action MERS took today, it will be much harder now for lawyers to argue in court that assignments made only on the MERS registry are legally valid. Unfortunately, for any of these 50 million mortgages that were securitized, chances are the various assignments along the way to the trustee were not recorded on local government records. This now means the chain of title is “clouded”, and such uncertainty affecting tens of millions of mortgages is the last thing the housing market needs. Sellers and buyers don’t know if the title will be clear of any other claims should they engage in a transaction, and homeowners might not even know if they are making monthly payments to the right bank.

Similarly, trillions of dollars of mortgage backed securities are now clouded too, because they aren’t backed by mortgages. MERS is effectively admitting that these securities are uncollateralized, which means investors now have a sound legal claim that the banks issuing the securities should buy them back at 100% of face value. There are, in fact, reasonable claims already being made by some investors against, for example, Wells Fargo and JP Morgan Chase, that these banks perpetrated a fraud by selling so-called “mortgage backed securities” which they should have known were uncollateralized.

It is questionable if MERS can even survive this capitulation to legal reality, but MERS only has 50 employees. Whether Fannie Mae and Freddie Mac can survive is now also open to question, especially if the housing market is going to revert to the old model where mortgages are kept forever by the bank originating the transaction, since securitization will be defunct. Even if Congress intervenes and passes a national law that recognizes the principal rights of some entity that replaces MERS, this will still probably require that each assignment in a securitization be registered locally and fees paid.

How the banks could inflict such damage on the country’s home title and mortgage registry system would take another investigation by Congress to determine – assuming Congress was interested. One thing is for certain: if the CEOs of all the major banks don’t resign because of this scandal, if there isn’t a thorough house cleaning of the boards and executive ranks of the major banks behind the mortgage securitization process, if in fact no one takes any responsibility for placing tens of millions of American homes in legal limbo, than we can conclude malfeasance and corruption have taken firm root on Wall Street.

First published at The Agonist

The following organizations are Shareholders of MERS.

American Land Title Association
Bank of America
CCO Mortgage Corporation
Chase Home Mortgage Corporation of the Southeast
CitiMortgage, Inc.
Commercial Mortgage Securities Association
Corinthian Mortgage Corporation
EverHome Mortgage Company
Fannie Mae
First American Title Insurance Corporation
Freddie Mac
GMAC Residential Funding Corporation
Guaranty Bank
HSBC Finance Corporation
Merrill Lynch Credit Corporation
MGIC Investor Services Corporation
Mortgage Bankers Association
Nationwide Advantage Mortgage Company
PMI Mortgage Insurance Company
Stewart Title Guaranty Company
SunTrust Morgage, Inc.
United Guaranty Corporation
Washington Mutual Bank
Wells Fargo Bank, N.A.
WMC Mortgage Corporation

Source:  MERS

Adam Levitin testifying before Congress regarding foreclosure practices:

MERS & The Foreclosure Crisis

The Big Banks & Lenders Have Committed Mortgage Fraud

Now, someone tell me exactly why MERS and its owners/members have not been prosecuted?  And please tell me why foreclosures initiated or assigned by MERS, especially in non-judicial states, are still continuing.

h/t Analyzer

In response to $30 Billion Offer No One Wants – Small Businesses Hit by Deflation I received this email from a director of a small bank.

Hello Mish,

I sit on the board of a small community bank and I can attest to the fact that our loan portfolio is in excellent shape even when taking into consideration today’s dismal economy. That is not to say a loan is good when made can go bad but if that happens, our bank has sufficient collateral pledged against the loan to cover such short falls. We also review our loan loss reserve and increase as needed based on criteria established under current banking regulations.

Sure there are numerous troubled banks identified by the FDIC but I feel many of these banks will survive.

All banks should be making reasonable earnings with today’s low interest rate environment. For community banks, loans are vital and banks are interested in making loans to individuals or businesses that meet our underwriting standards but loan demand is down. A big majority of our loans are just loans leaving another financial institution. Why would someone leave one bank for another?

Of course loan interest rates play a part in the decision but I think a big part is the relationship a customer develops with the loan officer. Dealing directly with a local loan officer who understands your business and is genuinely interested in your business is vital.

Today many larger banks only use local loan officers to bring in the loan request but the decision to make the loan and the terms rest in some committee located in a town far away. Most small business persons will leave such a bank for a local bank with more personalized service.

It’s ridiculous that Congress passed and our president signed a bill to provide funds to smaller banks for more loans. As a bank director, there is no way this plan can work. If a bank needs more deposits for loans, assuming the bank has sufficient capital, a banker can easily get more deposits from the public at a much lower cost than the bill passed by congress.

Our government is totally out of touch with the real world and passed this legislation strictly as a political move to make the public think they are trying to help small businesses.

This bull, I mean bill, should be labeled TARP II or some similar acronym.

Bazooka Lending Theory and Practice

Unlike October 2008, when Paulson forced the CEOs of the 9 largest banks to accept funds (See Compelling Banks To Lend At Bazooka Point) no one is forcing small community banks to do anything.

This is what I wrote in 2008 …

For now, you can force banks to take money, but you can’t force them to lend it.

Bazooka Theory

There seems to be a fine line between …

1) Illegally forcing supposedly well capitalized banks at bazooka point to take money on questionable terms

2) And illegally forcing those same banks at bazooka point to lend it

Self Preservation

Thus the best thing banks can do with that money is sit on it. Yet the penalty for sitting on it is the difference between what the Fed will pay on bank reserves and the 5% interest banks have to pay at bazooka point for borrowing money they did not want in the first place. If banks do start lending like Paulson wants, defaults are guaranteed to increase dramatically.

Someone needs to tell Paulson to go to hell but no one at the table had enough courage to do it.

Here We Go Again

Banks paid back those “forced loans” as soon as they could. Small business lending did not go up, nor should it have. Credit worthy customers were (and still are) few and far between.

Nonetheless, here we go again, except this time it’s voluntary.

Hells bells, if a program that forced banks to take money at bazooka did not compel banks to lend, how is a small voluntary program supposed to do it?

Supposedly, this plan will create another 4 million jobs according to president Obama. Hmm. It seems we spent a trillion dollars yet created no jobs, so offering $30 billion (little if any will be taken) to create 4 million jobs would be a feat indeed.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

By Stephane Fitch, Forbes.com

Did you think the housing collapse killed off “liar loans”–those infamous bubble-era mortgages for which people were allowed to get creative in portraying their ability to make the payments? Well, they’re back, and that may be a good thing.

All the rage during the peak of the housing boom, these mortgages went by names like “no-doc” (meaning no documentation of income required), “low-doc” or “stated-income” mortgages. In all cases, banks set aside their underwriting standards based on what borrowers could prove they were earning with pay stubs, tax returns and the like. Instead, lenders started trusting borrowers to “forecast” future income and underwrote loans based on those projections (using as a fallback the house itself as collateral).

In the height of the housing boom in 2006 and 2007, low-doc loans accounted for roughly 40% of newly issued mortgages in the U.S., according to mortgage-data firm FirstAmerican CoreLogic. University of Chicago assistant professor Amit Seru says that for subprime loans, the portion exceeded 50%.

Then came the housing collapse, with subprime loan defaults playing a leading role, particularly the low-doc “liar” variety. The delinquency rate for subprime loans reached 39% in early 2009, seven times the rate in 2005, according to LPS Applied Analytics.

Ashlyn Aiko Nelson, a public policy lecturer at Indiana University, studied the low-doc loan craze. She and two of her colleagues concluded that low-doc borrowers exaggerated their incomes by 15% to 19%. “Our sense was that investors knew that people were lying, but figured it was OK because house prices would keep going up and the homeowners could refinance,” says Nelson.

The most outrageous types of no-doc lending disappeared entirely in 2009. Many mortgage pros say they’re unaware of banks making any low-doc loans in recent months. (A Forbes editor was, however, approached by a leading bank recently with an offer to refinance his home without documenting his income.)

In fact, the financial reform package passed by the House of Representatives recently, and under consideration by the Senate, discourages them. It requires lenders who offer mortgages to borrowers without full documentation to post a reserve equal to 5% of the loan’s value before they are securitized. That rule, they say, will make low-doc loans even less appealing for banks going forward.

“There’s no large-scale bank that’s a real player in them,” says Tom Meyer, chief executive of Kislak Mortgage, a Florida-based residential mortgage lender.

Forbes has learned that banks are quietly reestablishing the no-doc and low-doc mortgage market. In fact, low-doc loans accounted for 8% of newly originated loan pools as of this February, FirstAmerican Corelogic reports.

Wall Street Funding of America, a mortgage lender based in Santa Ana, Calif ., was recently circulating offers to make low-doc loans to borrowers with credit scores as low as 660 on the Fair Isaac Corp. (FICO) scale, as long as the borrower was self-employed, seeking no more than 60% of the value of a home and had six months of mortgage payments in reserve. The lender was offering interest rates 1.5 to 2 percentage points over the going rate on conventional mortgages. A borrower with a credit score over 720 might get a slightly better rate, perhaps just 1.25 percentage points over.

On June 23 Wall Street Funding’s fliers caught the attention of Zillow.com blogger Justin McHood. Forbes’ calls to Wall Street Funding were not returned. (We’ll update you if they are.)

In New York City mortgage broker GuardHill Financial tells Forbes that it is making no-doc loans on behalf of four of the 50 lending mortgage lenders it represents (whose names GuardHill declines to disclose). Perhaps $100 million of the $2 billion in loans GuardHill handles this year will be low-doc, says Dave Dessner, its sales director. The banks extending these loans are small community and regional outfits attracted to their relatively high interest rates (anything from 25 basis to 200 basis points over a conventional loan’s interest rate). The lenders intend to keep the loans in their portfolios rather than securitize them.

Dessner insists it would be a mistake to associate the loans GuardHill and its bank network are originating with the doomed liar loans that lenders stuffed into mortgage pools between 2004 and 2007. “I’d be on my soapbox railing against those loans,” says Dessner. “The people in government who are now screaming about liar loans aren’t looking at the quality of the loans we’re making.”

GuardHill serves all kinds of borrowers, including a goodly number of self-employed folk, successful artists and financiers who tend to garner wealth in windfalls but don’t have a sheaf of pay stubs to staple to a conventional loan application. Case in point: One of Dessner’s people is toiling now on a loan application from a hedge fund manager wishing to borrow $800,000 against a $4 million home purchase. The hedge’s fund did poorly last year, so as a sign of good faith for his investors he’s drawing no salary. Good for his business, perhaps, but rotten for a conventional mortgage application.

“This guy made $5 million in 2007 and 2008. He’s liquid for $10 million, and he’s borrowing 20% LTV (loan-to-value),” says Dessner. A no-doc loan to that kind of borrower shouldn’t be political dynamite, especially at a time when the Federal Housing Administration is making 95% LTV loans to low-income borrowers with poor credit and little savings, he argues.

Indiana University’s Nelson says the return of a sensible level of low-doc lending may be a good sign. “The market may have overcorrected a bit by shutting these down entirely,” she says. “If the lenders are hewing to the original idea, where they could get a better spread making loans to insanely wealthy people who don’t mind paying a little higher rate, that may be a good thing for everybody.”

ABC News

Skittish Lenders, Bad Credit Slowing Economic Recovery