by Calculated Risk on 9/27/2009 09:52:00 PM

The Financial Times reports that U.S. financial regulators are considering new ratios for banks to determine the dependence on short-term borrowing: US banks face short-term borrowing rules

... “Capital is critical, but liquidity enhancement is a necessary piece of the puzzle,” said Kevin Bailey, deputy comptroller [OCC] ...

One ratio would compare a bank’s assets to its stable sources of funding, such as deposits or longer-term unsecured debt.
excerpted with permission

These measures are intended to gauge the liquidity of banks - and prevent future banks runs like with what happened at Bear Stearns and Lehman Brothers.

The Wall Street banks relied heavily on commercial paper, and when that market froze, the banks experienced a severe liquidity crisis.

Some smaller regional and local have relied on brokered deposits to fund their short term needs. The NY Times had a article on brokered deposits back in July: For Banks, Wads of Cash and Loads of Trouble

To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. ...

Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing.

So far the banks are winning, and the hot money continues to fuel bank growth.

It sounds like the regulators are pushing back.

by Calculated Risk on 9/27/2009 05:12:00 PM

From the NY Times: New Rules Coming Soon

On Oct. 1, new rules adopted by the Federal Reserve will go into effect, requiring greater diligence on the part of mortgage lenders and brokers who make so-called high cost loans for borrowers with weak credit. The interest rates on these loans are at least 1.5 percentage points higher than the average prime mortgage rate.
...
The regulations — finalized in July 2008 but only now being put into effect — bar lenders from making a high-cost mortgage without verifying that a borrower could repay the loan in the conventional way, and not simply through a foreclosure sale.
...
During the home lending boom from 2003 to 2006, subprime lenders would often offer loans without requiring borrowers to prove that they could make the monthly payments. With stated-income loans — or as some called them, “liar loans” — borrowers could easily fabricate annual income figures and even buy a home without a down payment.
...
According to Uriah King, a senior policy associate for the Center for Responsible Lending, a consumer advocacy group based in Durham, N.C., the new federal rules are “important, and they are good.”

But Mr. King says the new regulations are “five years too late.”

It is hard to believe it has taken this long. I think Uriah King meant "eight years (or more) too late"!

Here is the 2008 Press Release from the Fed:

The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. For loans in this category, these protections will:

• Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

by Calculated Risk on 9/27/2009 12:46:00 PM

In Delaware from The News Journal: Justison Landing developer to auction condos

In a risky strategy to move condominiums, the developers of the much-ballyhooed Justison Landing complex on Wilmington's Riverfront plan to auction off a third of the units in the waterfront community next month.
...
Robert Buccini, a partner in Buccini/Pollin Group Inc. in Wilmington, said the auction of 38 condominiums and two town houses in a 120-condo building on the Christina River is designed to stimulate sales ... So far, about 25 condos have been sold in the building -- about two sales a month since the building was completed a year ago.

"We're basically selling at discount so we can move on to our next project," Buccini said.

From the Jacksonville Business Journal: Summer House condos to be auctioned

Twenty-three condominiums in the Summer House in Old Ponte Vedra will go up for auction.

From KUOW News in Seattle: Condo Glut

This weekend, 40 units are up for auction and the minimum bids are typically less than half the listed price. ... there is a veritable glut of brand new condominiums on the market. A few years ago, it seemed, every parking lot in downtown Seattle was being turned into condos. Many of those projects are coming on line now, during the worst real estate market in decades.

At Brix, which completed construction late last year, two thirds of the building's units are still unsold.

And a twist in New Jersey, from the NY Times: In Jersey City, Jump-Starting Condo Sales

At the Saffron, a nearly complete 76-unit condominium complex in the thick of this city’s downtown, the Fields Development Group is trying something new ... The first units — a minimum of 9, a maximum of 15 — will be auctioned off before the grand opening and the start of conventional marketing.
...
Ending sales with an auction — after fair-market values for a building have already been well established — is a tried-and true-technique, of course. But the auctioneers for the Saffron, at Sheldon Good & Company, say they have never conducted a “jump-start” auction before.

"Stimulate"? "Jump-start"? Why not just call it "dump" or "liquidate"?

But this is a reminder that new high rise condos are not included in the new home inventory report from the Census Bureau, and are also not included in the existing home sales report from the NAR (unless they are listed). These uncounted units are concentrated in Miami, Las Vegas, San Diego and other large cities - but as these articles show, there are new condos almost everywhere.

by Calculated Risk on 9/27/2009 09:21:00 AM

From the WaPo: As Subprime Lending Crisis Unfolded, Watchdog Fed Didn't Bother Barking

... Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

... since its creation, the Fed has held a second job as a banking regulator, one of four federal agencies responsible for keeping banks healthy and protecting their customers. ... During the boom, however, the Fed left those powers largely unused. ... The Fed's performance was undercut by ... the doubts of senior officials about the value of regulation ...

The failure of oversight was a serious and unfortunately common problem during the boom. For more examples see: Inspector General: FDIC saw risks at IndyMac in 2002 and Federal Reserve Oversight and the Failure of Riverside Bank of the Gulf Coast.

The WaPo title reminds us of the conversation between Colonel Ross and Sherlock Holmes in Sir Arthur Conan Doyle's "Silver Blaze":

"Is there any point to which you would wish to draw my attention?"
"To the curious incident of the dog in the night-time."
"The dog did nothing in the night-time."
"That was the curious incident," remarked Sherlock Holmes.

by Calculated Risk on 9/26/2009 09:25:00 PM

The American University School and MSNBC have created a tool for tracking the "troubled asset ratio" for banks. This tool allows you to search for individual banks.

Here is the description:

[The] “troubled asset ratio” ... compares the sum of troubled assets with the sum of Tier 1 Capital plus Loan Loss Reserves. Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.

Wendell Cochran, senior editor of the Investigative Reporting Workshop, and a former business reporter for the Kansas City Star, the Des Moines Register and Gannett News Service, was likely the first journalist to create this measure of bank health. He did that while covering banking for the Des Moines Register in the early 1980s. Later, at Gannett News Service, he was involved in projects published at USA TODAY and elsewhere that calculated this ratio for every bank and savings and loan in the nation.

Others do similar calculations. The most widely used is the so-called Texas Ratio, created during the 1980s by a banking consultant. You can find various formulas for calculating this ratio, but they generally are in line with the method used by the Investigative Reporting Workshop. There is no attempt here to value the non-loan assets that may also be causing bank problems, such as mortgage-backed securities, collateralized debt obligations, etc.

According to BankTracker, the national median troubled-asset ratio is 13 (a percentage of Tier 1 Capital plus Loan Loss Reserves). The most recent bank failure, Georgian Bank in Altanta Georgia had a ratio of 198.3.

I looked up a few banks from the Unofficial Problem Bank List with Prompt Corrective Actions:

Name	City	State	PCA	Troubled Asset Ratio
Peoples First Community Bank	Panama City	FL	6/11/2009	362.8
Warren Bank	Warren	MI	8/3/2009	351.1
Home Federal Savings Bank	Detroit	MI	3/5/2009	193.2
Bank of Elmwood	Racine	WI	7/23/2009	182.5
American United Bank	Lawrenceville	GA	8/13/2009	155.3
Heritage Bank	Topeka	KS	3/31/2009	149.1
Bank 1st	Albuquerque	NM	8/31/2009	146.1

by Calculated Risk on 9/26/2009 04:06:00 PM

From the WaPo: Barney Frank Talks Back A couple of excerpts:

Klein: What's the most important part of financial regulation?

Frank: Limiting securitization. I believe the single biggest issue here is that people invented ways to lend money without worrying if they got paid back or not by securitizing the loan. When I was younger, the theory was if you had a high risk tolerance, you went into stocks. If you were safe and stodgy, you bought debt. But debt became the volatile aspect here.
...
Klein: One theory of the crisis is that the problem wasn't traders and their high tolerance for risk. It was people fooling themselves into thinking this stuff was safe by slapping a triple-A rating on everything.

Frank: I agree; the theory has always been that people bought debt because it was safer. The basic problem was that 30 years ago when people lent other people money, they expected to be paid back by the people they lent money to. So they were very careful. Two years ago, most loans were being made by people who were going to sell those loans to other people and didn't expect to be paid back.

This is an interesting answer. About two years ago, I was asked to sum up the causes of the crisis in a few words, and I responded "Securitization and the lack of regulatory oversight". I then explained how rapid innovation in lending resulted in a disconnect between the borrower and the eventual debt holder.

The mortgage lenders and Wall Street firms were disconnected from the performance of the actual loan (the "Originate-to-sell" model). At the same time, the rating agencies were evaluating the debt based on the historical performance of the old style lender-borrower relationship. The eventual debt holders relied on the rating agencies, without realizing the entire model had changed.

Meanwhile the regulators were not following this advice:

“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.”
William Seidman, "Full Faith and Credit", 1993.

There is nothing inherently wrong with securitization or financial innovation. But the regulators should always be on the lookout for "a new way to make a loan that will not be repaid".

by Calculated Risk on 9/26/2009 01:28:00 PM

A quote from Bloomberg: Strauss-Kahn Says Crisis Consequences Will Last Long Time

“We will still have rising unemployment at least for a year,” [International Monetary Fund Managing Director Dominique] Strauss-Kahn said via videolink in an address to the Yalta European Strategy Conference from Washington. “From this point of view, the crisis isn’t over. It is too early to claim victory, even that we have avoided the worst situation. The consequences will be there for a long time.”

Strauss-Kahn makes several key points:

Unemployment will continue to rise for some time.

The consequences of the crisis will "be there for a long time".

It is too early for a victory lap.

Earlier this week, Strauss-Kahn expressed concern about the social consquences of the crisis (via Reuters):

"In many areas of the world, what is at stake is not only higher unemployment or lower purchasing power, but life and death itself," Strauss-Kahn said.

"We don't just care about growth for growth's sake, we also want to safeguard peace and prevent war," he said, adding: "Indeed, when low-income countries were doing well over the past decade or so, the incidence of war declined significantly. The great fear is that this trend could be reversed."

by Calculated Risk on 9/26/2009 08:33:00 AM

From Peter Hong at the LA Times: Don't bank on your home as an ATM (ht Ann). A few excerpts:

For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.
...
Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.
...
Leslie Appleton-Young, chief economist for the California Assn. of Realtors, said that the state's median home price used to rise and fall roughly in line with the national median. ... "It didn't really get out of whack until about four or five years ago," she said. "It was tied into financing."

With lax mortgage standards a thing of the past, at least for now, Appleton-Young said, home price increases will be more moderate in the future, which should lead people to "a much more realistic assessment of why they're buying a home. They'll do so more for the consumption value; it's a place to raise your family, not your nest egg."
...
"In the period post-World War II, you bought a home, gave your family a great place to live relative to the alternatives, and if all went well, in 20 years you didn't have a mortgage," said [Thomas Lawler, influential housing consultant and a former Fannie Mae official]. "That's what people ought to go back to."

It makes sense for people to buy houses as a place to live, not as an investment.

Perhaps Leslie Appleton-Young has lost track of time, but four years ago was 2005 - the peak of the housing insanity. She probably meant four or five years before 2006 (when prices peaked) as to when house prices in California started to detach from fundamentals.

by Calculated Risk on 9/26/2009 01:47:00 AM

From the NY Times: Group of 20 Agrees on Far-Reaching Economic Plan

The leaders pledged to rethink their economic policies in a coordinated effort to reduce the immense imbalances between export-dominated countries like China and Japan and debt-laden countries like the United States, which has long been the world’s most willing consumer.

The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

... for the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the International Monetary Fund.

Imagine an export led recovery in the U.S. (as opposed to the typical recovery with consumer spending and housing leading the way). I'll believe it when I see it.

by Calculated Risk on 9/25/2009 07:36:00 PM

This is an unofficial list of Problem Banks.

Changes and comments from surferdude808:

Another week with significant changes to the Unofficial Problem Bank List as the FDIC released its enforcement actions for August. We will not get another release from the FDIC until the end of October.

The Unofficial Problem Bank List grew by 23 institutions to 459 and aggregate assets total $297.2 billion, up from $294 billion last week. During the week, we added 25 institutions to the list while we removed 2 because of failure. The failures were Irwin Union Bank and Trust Company ($2.8 billion) and Irwin Union Bank, F.S.B. ($518 million).

The largest asset additions include First Mariner Bank ($1.3 billion), Baltimore, MD; Anchor Mutual Savings Bank ($657 million), Aberdeen, WA; and NexBank ($560 million), Dallas, TX.

For the other 23 additions, the average asset size is $178 million. The additions are concentrated in handful of states including Minnesota (5), California (4), Washington (4), and Georgia (3), which all continue to see banks with large CRE or C&D lending concentrations come under enforcement action.

The list includes 2 new Prompt Corrective Action orders the FDIC issued against American United Bank ($112 million), Lawrenceville, GA; and Bank 1st ($109 million), Albuquerque, NM. It is long overdue for the agencies to start issuing more PCA orders.

One other interesting item this week is that the FDIC issued a Cease & Desist order on August 31st against Georgian Bank ($2.2 billion), Atlanta, GA, which was closed today. We typically remove failures from the subsequent week’s list but, in this case, we did not add Georgian Bank otherwise aggregate assets would have been $299.4 billion.

The list is compiled from regulator press releases or from public news sources (see Enforcement Action Type link for source). The FDIC data is released monthly with a delay, and the Fed and OTC data is more timely. The OCC data is a little lagged. Credit: surferdude808.

See description below table for Class and Cert (and a link to FDIC ID system).

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header (Assets, State, Bank Name, Date, etc.)





Class: from FDIC

The FDIC assigns classification codes indicating an institution's charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. Click on the number and the Institution Directory (ID) system "will provide the last demographic and financial data filed by the selected institution".