by Calculated Risk on 3/27/2010 05:36:00 PM

Here is a long piece from David Leonhardt in the New York Times Sunday magazine: Heading Off the Next Financial Crisis (ht Ann). A few excerpts:

To reduce the odds of a future crisis, the Obama plan would take three basic steps. First, regulators would receive more authority to monitor everything from mortgages to complex securities. This is meant to keep future financial time bombs, like the no-documentation loans and collateralized debt obligations of the past decade, from becoming rife. Second — and most important — financial firms would be forced to reduce the debt they take on and to hold more capital in reserve. This is the equivalent of requiring home buyers to make larger down payments: more capital will give firms a bigger cushion when investments start to go bad. Finally, if that cushion proves insufficient, the government would be allowed to seize a collapsing financial firm, much as it can already do with a traditional bank. Regulators would then keep the firm operating long enough to prevent a panic and slowly sell off its pieces.

Will this work? It is difficult to know. No one can be sure where the next bubble or crisis will come from or, as a result, how to prevent it.

And on the stress tests ...

The crisis has made Wall Street much more conservative. But this will not last. It never does. Left to their own devices, financial firms will again take on big debts and big risks. They have a lot of incentive to do so. A Wall Street Journal analysis found that if one set of stricter leverage standards had been in place during the five years before the crisis, it would have reduced the biggest firms’ profitability by almost 25 percent.

The model for setting future capital rules is the stress tests that the Fed conducted last year to gauge the strength of individual banks. Geithner convinced Obama to make those tests a core part of the financial-rescue strategy, and they ended up being something of a turning point in the crisis.
...
The stress tests, remember, were conducted when banks were financially and politically weak. When times were good over the previous decade, Fed officials — and not just Alan Greenspan — neglected to use the powers they did have. They came to believe the bubble rationales that Wall Street offered. It is not hard to see how that could happen again. The most telling case study may be Geithner himself.

The banks hate the stress tests because they will expose their risk taking (and therefore reduce short term profits) - and they will fight hard to not have the tests part of the regular regulatory practice. That is a strong argument for making the stress tests a regular practice. Publish the test scenarios - and the results for each bank.

Leonhardt covers a lot of ground ... a nice weekend read.

by Calculated Risk on 3/27/2010 12:59:00 PM

From Fed Governor Daniel Tarullo: Lessons from the Crisis Stress Tests

The Supervisory Capital Assessment Program (SCAP) was fashioned in early 2009 as a key element of a crucial plan to stabilize the U.S. financial system. The stress tests, as they have been popularly called, required development on the fly, and under enormous pressure, of ideas that academics and supervisors had been considering for some time. After describing the concept, design, and implementation of last year's tests, I will explain how our experience has helped prompt major changes in Federal Reserve supervision of the nation's largest financial institutions. Then I will discuss how this experience has stimulated debate over the merits of publicly releasing supervisory information.

Tarullo reviews the stress tests, and then argues that the public release of data was helpful (I agree):

As you know, unlike other countries that conducted stress exercises, we took the highly unusual step of publicly reporting the findings of the SCAP, including the capital needs and loss estimates for each of the 19 banks. This departure from the standard practice of keeping examination information confidential was based on the belief that greater transparency of the process and findings would help restore confidence in U.S. banks at a time of great uncertainty. Supervisors released the methodology and assumptions underlying the stress test first and then, two weeks later, the results for individual institutions. ...

The merits of publicly releasing firm-specific SCAP results were much debated within the Federal Reserve. In particular, some feared that weaker banks might be significantly harmed by the disclosures. In the end, though, market participants vindicated our decision.

And then Tarullo argues for regular stress tests (I agree again):

To this end, the Federal Reserve is now implementing a more closely coordinated supervisory system in which a cross-firm, horizontal perspective is an organizing supervisory principle. We will concentrate on all activities within the holding companies that can create risk to the firm and the financial system, not just those that increase risk for insured depository institutions.

An essential component of this new system will be a quantitative surveillance mechanism for large, complex financial organizations that will combine a more macroprudential, multidisciplinary approach with the horizontal perspective. Quantitative surveillance will use supervisory information, firm-specific data analysis, and market-based indicators to identify developing strains and imbalances that may affect multiple institutions, as well as emerging risks to specific firms. Periodic forward-looking scenario analyses will enhance our understanding of the potential effects of adverse changes in the operating environment on individual firms and on the system as a whole.

In fact, I believe that the most useful steps toward creating a practical, macroprudential supervisory perspective will be those that connect the firm-specific information and insight gained from traditional microprudential supervision to analysis of systemwide developments and emerging stresses. Here, precisely, is where our SCAP experience has helped lead the way.

And Turallo argues the macro assumptions and the individual stress test results should be made public:

[T]he release of details about assumptions, methods, and conclusions would expose the supervisory approach to greater outside scrutiny and discussion. Sometimes those discussions will help us improve our assumptions or methodology. At other times disclosure might reassure investors about the quality of the tests. Either way, the public's reaction to our assumptions and methods would be useful.
...
[To increase transparency, the supervisors could] follow the SCAP precedent, with periodic release of detailed information about the assumptions, methods, and results of a cross-firm, horizontal, forward-looking exercise, including firm-specific outcomes. This approach would probably maximize both the potential benefits and potential risks. Note, however, that the possibility of a destabilizing market reaction may be lower if such information is released frequently, as major unpleasant surprises would be less likely with frequent, detailed disclosures.

I supported the stress tests of the largest financial institutions and I think this would be a helpful regular exercise (probably on an annual basis). I think another set of macro assumptions should be released (base case and severe), and the same level of detailed company specific information be released as for the SCAP.

The FSA is already doing regular stress tests in the U.K.:

We have now embedded our new approach to stress testing into our normal supervisory process. This includes supplementing firms’ own stress testing with supervisory stress testing of major firms. This involves regularly updating the stress test scenarios.

The initial stress tests were very helpful, I think it is time for the Treasury and Fed to release another set of macro assumptions and stress test the banks again - and also release the company specific results.

by Calculated Risk on 3/27/2010 08:45:00 AM

Two articles and a favorable reaction from Laurie Goodman at Amherst ...

From Renae Merle at the WaPo: Second mortgages complicate efforts to help homeowners

The Obama administration is about to ramp up its efforts to tackle second mortgages as part of an aggressive program announced by the White House on Friday to address foreclosures. ... Government officials have estimated that about 50 percent of troubled borrowers have a second mortgage. But a year after federal officials launched an initial program to lower payments on these second loans, not a single homeowner has been helped.
...
Just a few banks hold most of the second liens, according to data from Inside Mortgage Finance. Of the more than $840 billion in home-equity lines and piggyback loans outstanding, Bank of America has about $147 billion of them, while Wells Fargo and J.P. Morgan Chase have $124 billion and $118 billion of the market, respectively. Citigroup has about $53 billion of these loans on its books.

They have all signed up for the administration program announced last year, but none has taken action yet.

Note: Merle is referring to the HAMP Second Lien Modification Program (2MP) to modify 2nd liens - and that program was updated yesterday too.

From David Streitfeld at the NY Times: A Bold U.S. Plan to Help Struggling Homeowners

The new measures ... are aimed not only at the seven million households that are behind on their mortgages but, in a significant expansion of aid that proved immediately controversial, the 11 million that simply owe more on their homes than they are worth.
...
The latest programs, together with foreclosure assistance efforts already in place, are aimed at helping as many as four million embattled owners keep their houses. But the measures, which will take as long as six months to put into practice, might easily fall victim to some of the conflicting interests that have bedeviled efforts to date. None of these programs have the force of law, and lenders have often seen no good reason to participate.

To lubricate its efforts, the government plans to spread taxpayers’ money around liberally. ... All told, the new measures are expected to cost about $50 billion.

A few excerpts from Amherst Securities Laurie Goodman's analysis (no link): HAMP Enhancements: A Giant Step Forward

Today’s Treasury announcement represents a huge step forward in efforts to address the housing crisis. We have argued repeatedly that the housing market has two deep underlying problems: (1) “housing overhang” (i.e. the number of loans that are already in delinquent status or in foreclosure, most of which have substantial negative equity) and (2) the large number of borrowers with negative equity who are still paying but who are destined to go delinquent. We have estimated the housing overhang at >7 million units. Add to that the borrowers with considerable negative equity who have not yet defaulted and we arrive at approximately 12 million borrowers
conceivably facing foreclosure over the next few years.
...
While there is no silver bullet to solving the housing crisis, we believe Treasury’s new program attacks the real problem: negative equity.
...
The changes in the HAMP modification program, with principal reduction moved front and center, is a very important development. While the actual impact depends on the implementation details, we believe this will dramatically improve the success rate on mortgage modifications. This will, in turn, help cushion future home price depreciation, and limit further housing market deterioration.

Although I'm not as optimistic as Goodman on the principal reduction program (as far as the number of homeowners who will be helped), these new program are a significant change. I've calling 2010 the "year of the short sale" and I think the HAFA short sale changes (like doubling the amount 2nd lien holders receive) will have an impact.

by Calculated Risk on 3/26/2010 11:54:00 PM

This is an unofficial list of Problem Banks compiled only from public sources. Changes and comments from surferdude808:

As anticipated last week, the FDIC released its enforcement actions for February, which contributed to major changes in the Unofficial Problem Bank List. The list includes 684 institutions with aggregate assets of $351.2 billion, up from 653 institutions with assets of $332 billion last week.

Additions are 35 institutions with assets of $20.3 billion while 4 institutions with assets of $1 billion were removed. Removals include the three failures this week -- Desert Hills Bank ($497 million), Unity National Bank ($301 million), and Key West Bank ($88 million), and one action termination against Citizens Bank, New Tazewell, TN ($150 million).

Most notable among the 35 additions are Citizens Bank, Flint, MI ($11.3 billion Ticker: CRBC); Mile High Banks, Longmont, CO ($1.3 billion); United Security Bank, Fresno, CA ($694 million Ticker: UBFO); First Central Savings Bank, Glen Cove, NY ($683 million); and Finance Factors, Ltd., Honolulu, HI ($654 million).

In addition, Bank of Florida Corporation (Ticker: BOFL), with consolidated assets of $1.5 billion, announced that its three banking subsidiaries -- Bank of Florida - Southeast, Bank of Florida - Southwest, and Bank of Florida - Tampa Bay, received a Prompt Corrective Action order from the FDIC. The other new addition via a Prompt Corrective Action is AmericanFirst Bank, Clermont, FL ($90 million).

A few institutions already on the list also received a Prompt Corrective Action order including AmericanWest Bank, Spokane, WA ($1.6 billion Ticker: AWBC.PK); Ventura County Business Bank, Oxnard, CA ($93 million Ticker: VCBB.OB); and High Desert State Bank, Albuquerque, NM ($82 million).

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".

by Calculated Risk on 3/26/2010 07:03:00 PM

The hills are alive...
Not with the sound of money
But with banks failing
by Soylent Green is People
From the FDIC:New York Community Bank, Westbury, New York, Assumes All of the Deposits of Desert Hills Bank, Phoenix, Arizona

Desert Hills Bank, Phoenix, Arizona, was closed today by the Arizona Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver....

As of December 31, 2009, Desert Hills Bank had approximately $496.6 million in total assets and $426.5 million in total deposits. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $106.7 million. .... Desert Hills Bank is the 40th FDIC-insured institution to fail in the nation this year, and the first in Arizona. The last FDIC-insured institution closed in the state was Valley Capital Bank, N.A., Mesa, on December 11, 2009.

Hey - the FDIC used #40 twice! This is really 41 ...

by Calculated Risk on 3/26/2010 06:07:00 PM

Spring training begins
Banks versus Bair's big sluggers
First inning triple.
by Soylent Green is People
From the FDIC: CharterBank, West Point, Georgia, Assumes All of the Deposits of McIntosh Commercial Bank, Carrollton, Georgia

McIntosh Commercial Bank, Carrollton, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2009, McIntosh Commercial Bank had approximately $362.9 million in total assets and $343.3 million in total deposits. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $123.3 million. ... McIntosh Commercial Bank is the 38th FDIC-insured institution to fail in the nation this year, and the sixth in Georgia. The last FDIC-insured institution closed in the state was Bank of Hiawassee, Hiawassee, on March 19, 2010.

From the FDIC: Centennial Bank, Conway, Arkansas, Assumes All of the Deposits of Key West Bank, Key West, Florida

Key West Bank, Key West, Florida, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2009, Key West Bank had approximately $88.0 million in total assets and $67.7 million in total deposits....

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $23.1 million. ... Key West Bank is the 39th FDIC-insured institution to fail in the nation this year, and the sixth in Florida. The last FDIC-insured institution closed in the state was Old Southern Bank, Orlando, on March 12, 2010.

From the FDIC: Bank of the Ozarks, Little Rock, Arkansas, Assumes All of the Deposits of Unity National Bank, Cartersville, Georgia

Unity National Bank, Cartersville, Georgia, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver....


As of December 31, 2009, Unity National Bank had approximately $292.2 million in total assets and $264.3 million in total deposits. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $67.2 million. ... Unity National Bank is the 40th FDIC-insured institution to fail in the nation this year, and the seventh in Georgia. The last FDIC-insured institution closed in the state was McIntosh Commercial Bank, Carrollton, earlier today.

It is Friday!

by Calculated Risk on 3/26/2010 02:49:00 PM

There are four elements to the Making Home Affordable Program Enhancements:

1. Temporary Assistance for Unemployed Homeowners While They Search for Re-Employment

2. Requirement to Consider Alternative Principal Write-down Approach and Increased Principal Write-down Incentives

3. Improvements to Reach More Borrowers with HAMP Modifications

4. Helping Homeowners Move to More Affordable Housing

The focus is on principal writedowns, but possibly the bigger impact will be from the fourth point - the HAFA program (short sales and deed-in-lieu).

The temporary assistance is just that - temporary. Hopefully the homeowner will find a job otherwise most borrowers will be moved on to #4.

4. Helping Homeowners Move to More Affordable Housing

Increase incentives to provide more homeowners with foreclosure alternatives

Increase payoffs to subordinate lien holders who agree to release borrowers from debt to facilitate greater use of foreclosure alternatives including short sales or deeds-in-lieu.

The new payoff schedule allows servicers to increase the maximum payoff to subordinate lien holders to 6 percent of the outstanding loan balance and doubles from $1,000 to $2,000 the incentive reimbursement that is available to investors for subordinate lien payoffs, subject to an overall cap of $6,000.

Increase servicer incentive payments from $1,000 to $1,500 to increase use of foreclosure alternatives and encourage additional outreach to homeowners unable to complete a modification.

Double relocation assistance payment for borrowers successfully completing foreclosure alternative to $3,000

Help homeowners who use a short sale or deed-in-lieu to transition more quickly to housing they can afford.

I think this change will impact the most borrowers (I think principal reduction will be a limited tool). Treasury is doubling the incentive for 2nd lien holders (may still not be enough), and increasing the incentive for servicers and borrowers.

This is the HAFA program that is scheduled to start in early April. This will probably only apply to around 3 million of the 8 million homeowners who are delinquent on their mortgage (initial guess). And probably only about half of those 3 million will receive a modification or use a short sale.

by Calculated Risk on 3/26/2010 11:41:00 AM

There are a number of changes to HAMP announced today. This includes help for unemployed homeowners and more outreach. David Streitfeld at the NY Times gives an overview: U.S. Plans Big Expansion in Effort to Aid Homeowners.

Here is a fact sheet from Treasury on these changes.

The key changes are principal reductions and larger payments to 2nd liens (including for HAFA short sales). For short sales, the 2nd lien payment has been doubled from 3% of the outstanding balance to 6% - although this is probably still below the typical recovery rate for 2nd liens.

From Treasury on short sales (and deed-in-lieu):

Increase payoffs to subordinate lien holders who agree to release borrowers from debt to facilitate greater use of foreclosure alternatives including short sales or deeds-in-lieu.

The new payoff schedule allows servicers to increase the maximum payoff to subordinate lien holders to 6 percent of the outstanding loan balance and doubles from $1,000 to $2,000 the incentive reimbursement that is available to investors for subordinate lien payoffs, subject to an overall cap of $6,000.

For 1st lien principal reduction, the incentive from the Federal Government (taxpayers) is to pay 15 cents on the dollar for reductions in the unpaid principal balance for LTVs (loan-to-values) between 115% and 140%. For LTVs above 140%, the payment is 10 cents on the dollar, and for reductions below 115%, the payment increases to 21 cents on the dollar.

The Treasury has some examples here for the various changes.

An example of principal reduction (optional):

Click on example for larger image in new window.

So this is 133% LTV. So the taxpayers will pay 15 cents on the dollar to the lender to reduce the principal by $33,000. This is a payment of $4,950 (the lender takes a loss of $28,050). This still leave the borrower with a LTV of 115%.

by Calculated Risk on 3/26/2010 10:00:00 AM

From the BLS: Regional and State Employment and Unemployment Summary

Twenty-seven states recorded over-the-month unemployment rate increases, 7 states and the District of Columbia registered rate decreases, and 16 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in 46 states and the District of Columbia and declined in 4 states.
...
Michigan again recorded the highest unemployment rate among the states, 14.1 percent in February. The states with the next highest rates were Nevada, 13.2 percent; Rhode Island, 12.7 percent; California and South Carolina, 12.5 percent each; and Florida, 12.2 percent. North Dakota continued to register the lowest jobless rate, 4.1 percent in February, followed by Nebraska and South Dakota, 4.8 percent each. The rates in Florida and Nevada set new series highs, as did the rates in two other states: Georgia (10.5 percent) and North Carolina (11.2 percent).
emphasis added

Click on graph for larger image in new window.

This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

Fifteen states and D.C. now have double digit unemployment rates. New Jersey and Indiana are close.

Four states and set new series record highs: Florida, Nevada, Georgia and North Carolina. Three other states tied series record highs: California, Rhode Island and South Carolina.

by Calculated Risk on 3/26/2010 09:10:00 AM

For the MBS countdown I've been using the Atlanta Fed numbers and there was some rounding involved. Instead of $2 billion more to go, the Fed will buy $6.075 billion in MBS over the final week.

The program ends in a few days, and Adam Quinones at Mortgage News Daily was kind of enough to send me his spreadsheet (thanks!). Here is his story: Fed's MBS Purchase Program: One Week To Go

Since the inception of the program in January 2009, the Fed has spent $1.244 trillion in the agency MBS market, or 99.5 percent of the allocated $1.25 trillion, which is scheduled to run out next Wednesday. With one week left in the program, there is now only $6.1 billion in funding remaining.