Outside Economics

Must Read for People Who Have Bank Accounts

Posted by Wendell Brock, MBA, ChFC on Fri, Apr 15, 2016

The great recession has left its mark on many of us in so many ways it is hard to understand them all - perhaps similar for generations before with the Great Depression. One major mark is in banking. The Great Depression produced the FDIC which insured customer deposits and help provide a level of financial security to the banking system. Now Europe and the E.U. has lead the way with a “bail-in” concept where depositor bank accounts are used to shore up the troubled bank, thus taking the tax payers off the hook for failed banks. 

This week Austria put this to the test. Hypo Alpe Adria (HETA) collapsed under the weight of bad loans. The bank is located in the Province of Cimages.jpgarinthia, which has mostly controlled the bank for the past year, when it first started having problems. In taking on the obligation of this bank Carinthia is worried that it may cause the Province to file for bankruptcy as well.

The Austrian Financial Market Authority (FMA) in its role as the resolution authority for failed banks has issued the key features for the steps to resolution. The Bank Recovery and Resolution Act (BaSAG) outlines how the issues surrounding failed banks are to be resolved. The most significant are:

  • A 100% bail-in for all subordinated liabilities,
  • A 53.98% bail-in, resulting in a 46.02% quota for all eligible preferential liabilities,
  • The cancellation of all interest payments from 1 March 2015, when HETA was placed into resolution pursuant to BaSAG
  • As well as a harmonization of the maturities of all eligible liabilities to 31 December 2023.

Subordinated liabilities is simply another term for depositor’s money in the bank. In the typical banking arrangement the bank’s assets are the loans on the books, while their creditors are all the depositors. The exact opposite of personal or business finance, where loans are liabilities and cash deposits are part of their assets. 

This sort of “bail-in” can cause a lot of panic in finance world, simply because people losing their deposits can demonstrate some serious concerns about how well a bank is operated. Clearly an uncharted path. Some concerns exist over the legal as well as the practical aspects of the “bail-in” concept. This makes the creditors of the bank more responsible for how the bank is run. If there appears to be any problems creditors simply will not lend money to a bank or if they do they will demand a much higher risk premium. This will of course raise interest rates for everyone.

Corinthia attempted to remove the guarantees by purchasing the bonds at a discount from the bond holders, primarily Commerzbank, AG and Pacific Investment Management Co., (PIMCO), who rejected this offer last month. The creditors are demanding that Austria pay up if Carinthia cannot pay. In either case the depositor’s monies are gone.

This rule was put into place after the Great Recession to help relieve the burden on the tax payers for bailing out banks. The results are yet to be determined, but like every regulation there are unintended consequences. Some of those consequences maybe, higher interest rates, depositors being extra cautious where they deposit their paychecks, fewer loans made to small or medium size businesses, bankers will be unwilling to take risks with business owners on such loans. 


In The United States

You maybe asking yourself why does this bank in Austria matter to me? Here is the short answer; the United States banking regulators have adopted a similar rule. When a bank fails the regulators can force a bail-in of depositors monies to right the ship. Many people do not realize or understand that this can and most likely will wash up on the shores of America as soon as we have another major financial melt-down. Watching how this precedent action plays out may be an example of how it will work here in the States. 

I am clearly not suggesting that you take your money out of the banking system and hide it under your mattress, that would be foolish. Also I think that U.S. banks operate with safety and soundness regulations that help protect depositors money. This maybe one reason why gold and silver has shot up in price this past week. People still perceive precious metals as a safe haven for currency problems. 

Sources: Bloomberg, Financial Times, Superstation95
People should be more concerned with the return of their principal than the return on their principal.
-- Will Rogers

Topics: Precious Metals, banks, failed banks, Currency, Gold and Silver

Now What’s Floating to the Top: Oil, Gold, Equities, or Bonds

Posted by Wendell Brock, MBA, ChFC on Thu, Feb 11, 2016

Talk is, that one of the reasons the market is falling right now is because it was overpriced, which may be the case, however another part of the problem has been that when considering options, where else can you put your money?

Banks aren’t much of an option – at the continuously low rates it makes it pretty painful to leave money there. At least when rates were higher and a depositor could get 4%-6% at a bank you had a fairly good risk free option. Too much cash on the sidelines will certainly cause the market to be bid up. Maybe it’s an issue of supply and demand – there aren’t enough shares to go around, so the prices get bid up.Oil_gold.jpg

Insurance companies, which are very long-term investors, are currently running about 2-4X or more the rate banks are offering. These rates are certainly going to help folks get better returns, with little to no risk. But when chasing performance even those stable rates don’t appeal to everyone. So this week I thought we would look at one reason why the market has tanked over the past several weeks, and consider the option of putting more money in the market – after many of the stocks and bonds are clearly on sale!

Below is a look at why the markets are falling, what is up with bonds, and a check on precious metals.

Why Stocks Went Down When Oil Went Down – Domestic Equities

Equity markets descended in January alongside oil prices, while testing new lows with a visible increase in volatility. Oil’s dramatic price drop has been a catalyst for stock prices heading lower, a so-called correlation that has actually existed for years.

There are various theories as to how oil and stock prices might be correlated, yet one of the most accepted revolves around macro economic global dynamics.

Oil is the most traded and actively utilized commodity in the world whose consumption represents the economic activity worldwide. So when oil supplies grow and demand drops, markets interpret that as an economic slowdown. Such a slowdown thus migrates into the equity markets, where economic activity and growth is essential for expansion and higher equity prices.

Lower oil prices can also be beneficial for certain sectors, such as consumers, transportation and airlines, whose primary expenses are fuel. Economists expect a possible lag effect with recent low oil prices, which may eventually appear on corporate income statements. Obviously, lower oil prices are not conducive to oil industry sector companies, whose margins shrink as oil prices drop.

Some fixed income investors now view U.S. energy stocks as opportunities to earn higher yields on dividends compared to where they were months ago. Lower valuations on energy stocks have led to higher stock dividend yields as prices have fallen.

Does this mean that the markets won’t recover until oil prices go up? For that answer only time will tell…

Fixed Income – Global Bond Markets

The Fed is now at odds with nearly every other developed country central bank as others employ a rate decrease and stimulus strategies.

In its latest FOMC meeting in January, the Fed decided to leave its rate hike plans intact, disappointing markets and lifting U.S. rates slightly. The Fed did acknowledge slightly lower economic growth and volatile equity market conditions as variables to monitor.

International rates fell in January as central banks moved forward with stimulus efforts aided by lower borrowing rates. The ECB and Japan both reduced their key lending rates enough to drive markets in both regions towards risk assets. Japan’s central bank surprised markets by lowering one of its main lending rates into negative territory for the first time in order to stimulate its sagging economy.

Gold and Silver - What's Up?

Considering the markets and the downward trend, it seems that Gold and Silver (precious metals) have come off the winner over the past couple months. Both gold and silver are up, about 14% and 10% respectively. It makes sense to own some precious metals, but as with any investment how much higher will it go? Typically, people own precious metals as a balance to inflation but it can be a stabilizer to an investment portfolio.

With that news, it looks like for the time being, Gold is floating to the TOP! So does this mean we are at the bottom of the current sell off? No, perhaps but not likely. Does it mean its time to put more money in the market and buy while things are on sale? Maybe. Many of these answers are particularly personal to your current situtation that is why a good comprehensive evaluation is valuable.

Sources: Federal Reserve, Bloomberg, Economic Premise #150 World Bank, IMF Research Bulletin, Federal Reserve System Perspective


"The hardest thing in the world to understand is income tax." - Albert Einstein


Topics: Gold, Oil, Silver, Bonds, equities, banks, Insurance Companies

Qualifying with the New Mortgage Laws and the Housing Recovery

Posted by Wendell Brock, MBA, ChFC on Fri, Feb 21, 2014

Since the housing bubble popped five years ago, mortgage lenders have been reluctant to lend. The banks held on through the devastating loses and are now cautiously finding themselves in a position to begin lending again. One of the reasons for banks being so cautious in mortgage lending now is that Freddie Mac, Fannie Mae and the FHA have been pressing lenders to buy back home loans that went bad after the crisis.Mortgage Approved

Another reason lenders remain cautious is in part because of financial reform rules. Under the 2010 Dodd-Frank law, mortgage borrowers must meet eight strict criteria including earning enough income and having relatively low debt. If the borrower doesn't meet those hurdles and later defaults on a mortgage, he or she can sue the lender and argue the loan should never have been made in the first place.

Those kinds of rules have helped build a wall between prime and subprime borrowers. Lenders have been soliciting consumers who are legally easier to serve, and avoiding those with weaker credit scores and other problems. Subprime borrowers accounted for 0.3 percent of new home loans in October, compared with an average of 29 percent for the 12 months ended February 2004, according to Mark Fleming, the chief economist of CoreLogic (CLGX).

As part of these rules, the lender must collect and verify a borrower's financial information. The lender has to check the information using reliable documents, such as a W-2 or a paystub. The lender generally must consider eight types of information:           

1. Current income or assets.

2. Current employment status.

3. Credit history.

4. The monthly payment for the mortgage.

5. Monthly payments on other mortgage loans borrowers get at the same time on the same property.

6. Monthly payments for other mortgage-related expenses (such as property taxes)

7. Other debts.

8. Monthly debt payments, including the mortgage, compared to monthly income (“debt-to-income ratio” which cannot be more than 43% or $43 for every $100.) The lender may also look at how much money is left over each month after paying debts.

Thanks to the Consumer Financial Protection Bureau, some other new rules that became effective in January include:

Restrictions on dual tracking. In the past, borrowers dealing with mortgage troubles sometimes found that their mortgage servicer had moved forward to foreclose on their home at the very same time it was working with them on a potential loan modification. That’s called “dual tracking” and the new rules set up clear guidelines that restrict this practice.

More help for troubled borrowers. Too often borrowers have had to apply over and over again for programs that might help them keep their homes, being asked to send in the same paperwork repeatedly. The new rules require mortgage servicers to evaluate a borrower who files a complete application for help for all the options that are available to that borrower. That means no more multiple rounds of applications and wasting of precious time and resources for the homeowner seeking help!

No more runarounds and missing documents. The rules require mortgage servicers to train their people to answer borrower's questions and, if the borrower does run into trouble, the servicer has to assign people to help them. The servicer also has to have policies in place to make sure they don’t lose their paperwork.

As mortgage revenue continues to decline, lenders such as Wells Fargo are now even considering borrowers with credit scores as low as 600 - in the past, 640 was the lowest they would consider. Lenders have plenty of incentive for reaching lower on the credit spectrum now; since the middle of last year, interest rates for mortgages have been rising and are expected to reduce the total U.S. Mortgage lending for 2014 by 36%- down to $1.12 trillion. According to the Mortgage Bankers Association, this is due to a large drop in refinancing.

A recent report from the Urban Institute and Moody's Analytics argued that a full recovery in the housing market "will only happen if there is stronger demand from first-time homebuyers. And we will not see the demand needed among this group if access to mortgage credit remains as tight as it is today."

To be sure, credit is still only trickling down to subprime borrowers. Jamie Dimon, chief executive of the second-largest U.S. mortgage lender JPMorgan Chase, said on a conference call last month that he didn't envision a "dramatic expansion" of mortgage credit because of a continued lack of clarity from the government agencies on their repurchase demands.”

But smaller, non-bank lenders are making more loans. One such company, ACC Mortgage in Maryland, is offering a "Low Credit Score Debt Consolidation Program" as well as a "Second Chance Purchase Program." Low credit scores don't matter, neither do bankruptcies, foreclosures nor short sales.

While it is good to see the lenders starting to come back to the table, there is yet another factor that needs to be considered: Will the borrowers come to the table - and more specifically, the first-time home buyers who are essential to the housing market recovery? The pundits believe that there is a large amount of pent-up demand for housing that will boost economic growth for quite some time into the future. While this may be the case in theory, it is based upon assumptions that "past is prologue". However, given the current economic dynamics of stagnant wage growth, the structural employment shift, as well as the unknown consequences of the Affordable Care Act that seems to be paralyzing small businesses, it is unlikely that the consumer will be able to re-lever their budget as in the past.

The rising risk to the housing recovery lies in the Fed's ability to continue to keep interest rates suppressed. It is important to remember that individuals "buy payments" rather than houses. Every increase in the mortgage rate results in an increase of the monthly mortgage payment. With wages remaining suppressed, 1 out of 3 Americans no longer counted as part of the work force, or drawing on a Federal subsidy, the pool of potential buyers remains constrained. While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2014, the data suggests otherwise; the real driver of an economic recovery is full time employment that leads to rising wages and savings.

So while there have been many changes made to the mortgage industry, many favoring the borrower and ensuring that the problems that lead up to the collapse don't happen again, without the other economic factors in place securing a borrower’s ability or stability, it is unlikely that the banks and the housing market will see the kind of rebound that they are needing.

Topics: housing bubble, mortgage, banks, borrowers, Freddie Mac, Fannie Mae, FHA, Dod-Frank


Wendell W. Brock, MBA, ChFC

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