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Bankers Should Have Cautious Optimism on Housing Market

Posted by Wendell Brock on Fri, Apr 30, 2010

This week, Standard & Poor's posted new figures that show the domestic housing market's rebound is anything but certain, causing bankers to have cautious optimism.

Utilizing 10- and 20-city composites, the S&P/Case-Shiller Home Prices Indices data compared one-month price changes from January to February 2010, and also twelve-month prices from February to February.

January to February

In the 20-city composite, only one location-San Diego-saw a rise in prices from January 2010. The 0.6% rise, though, was slight. All other cities saw decreases that ranged from New York's -0.4% to Portland's -2.4%. The 20-city composite fell -0.9%.

What a Difference a Year Makes

A brighter picture emerges, though, in the sampled metro areas' twelve-month comparisons. San Francisco's 11.6% rise was the largest among the surveyed cities. San Diego came in second with a 7.6% increase. The 20-city composite improved 0.6%.

Las Vegas, which has endured one of the country's largest drops in home value, continues its decline with a -14.6% drop from February to February.

Writing in, Stephanie Armour states that prices in Charlotte, New York, Las Vegas, Portland, Seattle, and Tampa have fallen to new lows.

Home prices peaked nearly four years ago in June and July of 2006. February's average prices dropped close to their numbers from 2003's summer and early fall.

But David M. Blitzer, chairman of the Index Committee at Standard and Poor's, is cautious. "It is too early to say that the housing market is recovering," he says. "The homebuyer tax the likely cause for these encouraging numbers and this may also flow through to some of our home price data in the next few months. Amidst all the news, however, we should also pay heed to foreclosure activity, which have reached their highest level in at least the last five years."

Consumer Confidence

But even with these dismal numbers, it appears that consumers think the economy is turning a corner. The Conference Board's Consumer Confidence Index shows an increase from March to April 2010.

April's Index number was 57.9, which is an improvement over March's 52.3. Providing evidence that the rebound may not be fleeting, this is the highest the Index has been since September 2008. The Index pulls its data from a survey of 5,000 American households.

Americans are also feeling good about the job market. 18% of those surveyed thought the future would bring more jobs, which is an improvement from March's 14.1%. Similarly, those who believed the number of jobs would decrease dropped from 21.1% to 20%.

In March, 45.8% of survey respondents said that jobs were "hard to get." This is a decline from February's number of 47.3. Combined with the optimistic responses to April's survey, these data could indicate a rising trend.

Topics: Banking, Loans, Economic Outlook, Growth, real estate, Standard & Poor's, Case-Shiller, Foreclosure, Consumer Confidence

First Quarter 2008 FDIC Banking Profile Highlights

Posted by Wendell Brock on Thu, May 29, 2008


The results are in for the First Quarter 2008 Banking Profile - and they are not looking good! The squeeze is getting tighter, but, taking a comprehensive perspective, it does look like we'll make it through. Among the first quarter challenges and trends, real estate problems continued to hold down earnings; restatements dramatically shrank fourth quarter, 2007 profits; market-sensitive revenues remained weak; interest rates tightened margins; charge-offs hit a five-year high; noncurrent loans grew; reserve coverage shrank; dividends were cut; growth in credit slowed; interest-bearing retail deposits posted strong growth; and the number of problem banks grew.  The following are some key highlights.

Earnings were hit hard as banks suffered from "deteriorating asset quality concentrated in real estate loan portfolios." Higher loan loss provisions reduced quarterly earnings to $19.3 billion compared to $35.6 billion a year earlier. Insured institutions set aside $37.1 billion in loan loss provisions, four times the $9.2 billion set aside a year earlier. This really hit earnings - return on assets (ROA) was only 0.59 percent compared to 1.20 percent in the first quarter of 2007. The downward trend in profitability was broad; slightly more than half of all insured institutions reported declines in quarterly earnings, however, more than half the $16.3 billion decline in industry net income came from four large institutions.

Industry net income for the fourth quarter of 2007 was restated to $646 million from a previously reported $5.8 billion. This is the lowest quarterly earnings since 1990. First quarter, 2008 was also the second consecutive quarter that lower noninterest revenues contributed to the decline in earnings. The net interest margin checked in at 3.33 percent, compared to 3.32 percent for the first and fourth quarters of 2007. For community banks, those with less than $1 billion in assets, the rate fell to 3.70 percent - the lowest level since the fourth quarter of 1988.

Banks charged off $19.6 billion during the first quarter, 2008, an increase of $11.4 billion over the same quarter in the previous year. This is a five-year high. The first quarter was also the second consecutive quarter of very high charge-offs, following the previous quarter's charge-off total of $16.4 billion. "The average net charge-off rate at institutions with more than $1 billion in assets was 1.09 percent, more than three and a half times the 0.29 percent average rate at institutions with assets less than $1 billion." 

With the high level of charge-offs, noncurrent loans (loans 90 days or more past due) rose by $26 billion in the first quarter, following a $27 billion increase in the fourth quarter of 2007. "Loans secured by real estate accounted for close to 90 percent of the total increase, but almost all major loan categories registered higher noncurrent levels." Total noncurrent real estate construction and development loans increased by $9.5 billion, and 1-4 family residential loans increased by $9.3 billion. 

The reserve coverage continues to lose ground after adding $37.1 billion in loan loss provisions. "The industry's ratio of loss reserves to total loans and leases increased from 1.3 percent to 1.52 percent, the highest level since the first quarter of 2004." The growth in reserves was outpaced by noncurrent loans, allowing the "coverage ratio" to slip for the eighth consecutive quarter to 89 cents for every $1.00 of noncurrent loans.

Most institutions cut dividends to preserve capital - only $14 billion in total dividends were paid in the first quarter, down from $12.2 billion from the first quarter of 2007. Of the 3,776 banks that paid a dividend in the first quarter of 2007, 666 paid no dividend in 2008. Those that did pay a dividend, paid 48 percent less, on average. This assisted the banks' ability to bolster their capital levels; tier 1 capital increased by $15 billion and tier 2 capital increased by $10.5 billion.

Loan growth slowed in the first quarter, increasing by only $335.4 billion or 2.6 percent. At the same time, interest-bearing deposits increased by $150.4 billion or 1.8 percent. Savings accounts and interest-bearing checking accounts accounted for more than three-quarters of the growth. Non-deposit liabilities increased by $171.6 billion, or 5.2 percent, led by securities sold under repurchase agreements (accounting for $65 billion of the increase) and trading liabilities (accounting for $63.2 billion of the increase).

The number of banks on the regulators' problem list grew from 77 to 90, while the number of total banks decreased from 8,534 to 8,494 during the first quarter. In this quarter, there were two bank failures, 38 new charters issued, 77 institutions merged into other banks, and two mutual banks converted to stock ownership. With 82 banks converting to Subchapter S Corporations during the first quarter, almost 30 percent of all banks now operate under that structure.

You may download the full report at:

Topics: FDIC, banks, Bank Regulators, Economic Outlook, Credit

The Great Credit Squeeze For Mortgages

Posted by Wendell Brock on Fri, May 16, 2008


FDIC Chairman Sheila Bair at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another; Washington, DC
May 16, 2008

Good morning and thank you for inviting me to speak.

Let me first say that this new study by Martin Bailey, Douglas Elmendorf, and Bob Litan comes at the right time.

It gives a comprehensive overview of how we got to where we are and covers the key issues policymakers must deal with to fix a broken mortgage market and ultimately stabilize housing prices.

Importantly, it connects the dots between some of the seemingly disparate financial developments of the past year. Among these is the direct connection between protecting consumers and safe and sound lending.

It's one of the best volumes I've seen since the one written last year by the late Ned Gramlich on subprime lending.

As a former academic, I can appreciate all the time and energy that went into it.

Housing crisis

Without a doubt, we have some significant challenges ahead of us. And while some credit markets may be stabilizing, families, communities, and the economy continue to suffer.

Frankly, things may get worse before they get better.

As regulators, we continue to see a lot of distress out there.

Foreclosures keep rising as mortgages reset to higher rates, home prices keep sinking, and millions of families continue to struggle with unaffordable mortgages.

I can sympathize with these families.

I've seen hundreds and hundreds of ordinary people at foreclosure workshops desperately looking for ways to keep their homes.

And all of us can see the strain on state and local government budgets and the impact on the banking and financial systems.

And there is more uncertainty ahead.

Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.

Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.

The slowdown we've seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.

This is why regulators and policymakers continue to focus on the housing market.

We need to find better ways to help struggling homeowners.

Case for greater government action

Over the past year, federal and state governments, and consumer groups have worked with some success to encourage the industry to modify loans.

But it's just not happening fast enough. Given the scale of the problem, this cannot go on loan-by-loan as it has.

Solutions must be simple and practical, and quick to implement. And they must be designed to result in limited or no cost to taxpayers.

Congress and the White House are working on proposals that would expand the role of the Federal Housing Administration (which insures mortgages).

These are laudable efforts. They will help certain borrowers.

But the FHA approach has its limitations. And new refinancing options may take more time than we have. We need something that is more immediate.

Home Ownership Preservation Loans

I think the next line of attack should be using low-cost government loans to help borrowers pay down unaffordable mortgages.

We need to take a systematic approach that pays down enough of these mortgages to make them affordable.

And it can be done at zero cost to taxpayers.

The FDIC is calling for up to $50 billion in new government loans that would pay down a portion of the value of over a million existing loans. (The Treasury would sell debt to fund the plan.)

We're calling these new government loans Home Ownership Preservation Loans - HOP loans for short.

Eligible borrowers could get a HOP loan to pay off up to 20 percent of their mortgage.

Mortgage holders would get the cash. As their part of the deal, they would restructure the remaining 80 percent into fixed rate, affordable payments. And they would agree to pay the government's interest for the first five years.

That way, the HOP loans would be interest-free to the borrower for the first five years.

After that, borrowers would begin repaying them at fixed Treasury rates.

This would give borrowers a breather, and dramatically reduce the chance of foreclosures.

As another part of the deal, the mortgage holders would agree that the government would be paid first after any sale or refinancing of the house.

As a result, taxpayers would be protected from any losses, even if the borrower cannot repay the mortgage for any reason.

The plan would leverage the government's lower borrowing costs to significantly reduce foreclosures with no expansion of contingent liabilities and no net exposure to taxpayers.

The HOP loan program has a number of major advantages.

First, it's not a bailout. (That's a very big plus.)

Second, it would help stabilize a huge number of high-cost mortgages, (which would be good for credit markets).

And it would also keep people in their homes, and making their payments (which would slow the decline in home prices).

HOP loans would essentially give borrowers breathing room by reducing their debt burden to a more manageable level.

And they would focus on homeowners who want to stick it out and stay in their homes long-term.

Let me explain how HOP loans would work with a brief example.

Take a look at this projection on the screen.

Loan Restructuring Example - PowerPoint (PPT Help)

For a borrower with a $200,000 mortgage in this example, the HOP loan program would slash the current payment by about $500 to $1,200 a month. (That's a 30 percent reduction.)

After five-years, when it's time to repay the Treasury, the HOP loan payment plus the regular mortgage payment would push the monthly total to about $1,400 a month.

That's still $300 less a month than the original payment.

And it's now five years down the road, giving borrowers time to stabilize their finances and to rebuild some home equity.

There are other advantages.

The HOP program focuses on making unaffordable mortgages affordable. And it has incentives for mortgage investors to qualify borrowers who have a good chance of paying-off a restructured loan over the long term.

It would complement the current FHA proposals now before Congress, which may be most effective for people who are deeply underwater with mortgages worth much more than their homes.

It also works within existing securitization contracts, avoiding costly legal disputes.

Unlike any other current proposal there would be no need to negotiate with the owners of second-liens, such as a home equity loan.

And it can be implemented quickly because it's administratively simple.

In most cases, eligibility can be determined with information readily available from existing records.

No property assessments are required.

So, what about the naysayers?

No matter your political stripes or economic interests, foreclosures, especially preventable ones, are to be avoided.

They cost lenders and borrowers a lot of money.

A modified, performing loan is almost always of significantly greater value to mortgage investors than a foreclosed home.

As for the taxpayer, as I said, this is no bailout at taxpayer expense. The HOP loan program is designed to result in no cost to the government.

The loans and their financing costs would be fully repaid.

What about the speculators?

I was at a foreclosure prevention meeting in Los Angeles a few weeks ago.

The place was filled with hundreds of families wanting to fix their mortgages, with hundreds more lined up around the block.

I saw a lot of anxious, terrified faces.

But I didn't see any loan flippers or condo speculators.

Yes, there are borrowers out there who knowingly overleveraged, hoping to make a quick profit as home prices rose.

But there are also many people who were the unknowing subjects of misleading marketing and inexcusably lax underwriting.

All they wanted was to live in a home of their own. What they got was a mortgage they couldn't repay.

What is accomplished when these good faith borrowers are forced into foreclosure?

  • Another empty house on the market.
  • Another blight on a neighborhood.
  • Another hit to surrounding property values.
  • More erosion of local tax bases.

These foreclosures are hurting us all.

Is the HOP loan program the Holy Grail?

No. But it could help break the logjam.

Too many unaffordable mortgages are causing a never-ending cycle, a whirlpool of falling house prices and limited refinancing options that contribute to more defaults, foreclosures and the ballooning of the housing stock.

And the only way to break this perilous cycle is by a wholesale restructuring of these unaffordable mortgages.


I think it's time we come to grips with the need for more pro-active intervention. And we need to act soon.

The housing crisis is now a national problem that requires a national solution. It's no longer confined to states that once had go-go real estate markets.

Creating additional tools to help borrowers that are cost neutral and are systematically applied makes too much sense to not act upon.

The FDIC has dealt with this kind of crisis before.

Remember the S&L disaster of the 1980s and 1990s?

Fortunately, we're in a much stronger position today. Banks are healthy, and we want them to stay that way.

But we haven't forgotten the lesson. Not by a long shot.

We learned the hard way that early intervention always costs less, and is always better than a policy of after-the-fact clean-up.

I hope that is the path we follow.

And I urge all of you here today to climb on board, help us make the right policy choices, and help restore the American promise.

Thank you very much.

Topics: FDIC, banks, Bank Regulators, Economic Outlook, Credit

FDIC 2008 Annual Performance Plan

Posted by Wendell Brock on Thu, Apr 03, 2008

Chairman Blair's Message

By Wendell Brock, MBA, ChFC 

Recently Ms. Sheila Blair presented the FDIC's 2008 Annual Performance Plan. Ms. Blair's published introduction to the Plan discusses the historical mission of the FDIC as well as the current economic environment. This year, the FDIC will celebrate its 75th year of insuring the nation's bank deposits. And the organization is perhaps finding itself in one of the most demanding years since its founding. Indeed, the FDIC plays a critical role in "maintaining public confidence in the nation's financial system." The challenges associated with this role, given the current financial difficulties, are broad and deep.

The maintenance of public confidence requires the FDIC to manage many different aspects of our nation's financial system. The organization currently administers approximately 250 programs to help keep the banks operating in a safe and sound manner; the FDIC is tasked with insuring deposits, keeping the public informed, helping the banks manage risks, as well as many other action items associated with our banking and financial system.

When problems arise, the goal is to address them promptly, solving them before they become issues that can cause serious financial problems. This requires the FDIC to be prepared to handle failures of insured institutions, "regardless of their number and size." Yes, this means that the FDIC is expecting some bank failures this year and perhaps even some large banks. There have already been two to date; see BankNotes for the press releases on these events. Both failed entities were small banks in Missouri, not much in the overall financial market, but still important nonetheless. In preparation for more extreme events, the FDIC is finalizing a "claims process to manage large/complex bank failures, including a new automated system to support this process."

The FDIC is also working closely with consumer protection groups to help with the current foreclosure issues facing many Americans. While we as Americans pride ourselves in our education system (for all its faults, it is still very good), our financial literacy is quite low-a statement that can be supported by our low savings rate. The FDIC is working to improve that by finalizing plans to distribute 10,000 booklets addressing financial literacy.

An additional challenge the FDIC is facing is the attrition of its workforce. Nearly 40 percent of the FDIC workforce will be retiring within the next ten years. This will create a large demand for new employees to be trained to take over and manage this critical institution. The FDIC expects to be regarded as an "outstanding employer." It will be looking to secure well-educated people with advanced technical and analytical skills, who can effectively support and carry out the FDIC mission. The plan has many more discussion points, which will be addressed in future articles.

Wendell Brock, Principal
De Novo Strategy 

Topics: FDIC, Economic Outlook, Annual 2008

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