Philip Gvinter

Asset Reflation Does Not Signal Recovery for U.S.'s Collapsed Economy

I agree with all of the point made above but would like to add one important aspect of the current events which seems to have been overlooked.

One of the cornerstones of American capitalism was the separation of banking from commerce. This principle is of utmost importance in any free market economy which has a central bank and a banking cartel. This separation was broken with the Citi Corp - Travelers merger and has been further eroded with the conversion of Goldman and Morgan into bank holding companies and the mergers of BofA and Merrill. The banking cartel is now being run by investment bankers, who are really commercial entities tied loosely to the financial system. This perversion of our capitalist system and the new status of the investment bankers who by their nature are gamblers and advisors rather than bankers, as systemically important and above the rules applied to all other capitalist entities has caused an acceleration of the distortion caused by Fed interference. A Fed owned by the bankers is a necessary evil, a Fed owned by Wall St. is a quick path to utter systemic failure.

Wells Fargo's Record Quarter - Really?

I am very suspicious of the claims made by WFC. They still have tons of home equity and jumbo mortgage exposure. Those asset classes continue to deteriorate. I am wondering how much of the amazing quarterly numbers are a direct result of playing accounting games after the revision to FAS157. WFC is the most conservative of the major banks but that is not meant as a compliment on their risk taking standards but rather an attack on the standards of the rest of the industry. These guys were the #1 buyer of stated income jumbo loans and have tons of exposure in California. This is not the final chapter in this bear market story.

Wells Fargo: John Stumpf's Letter to Shareholders Is a Must-Read

I think that Mr. Stumpf should tread lightly as the statements made in the letter to shareholders dance in a gray area which can be considered securities fraud. Wells Fargo, like every other major banking institution completely compromised their credit standards. During the mortgage boom Wells Fargo was one of the largest buyers of Jumbo loans with no income or asset documentation and unsustainable debt to income ratios. Wells Fargo also compromised their credit standards by lending out staggering amounts of money on Home Equity loans and lines of credit secured by California residential properties with equally unsustainable debt to income ratios and serious questions about the sustainability of the property values. Wells also had a HUGE subprime origination operation. While WFC's credit standards were roughly on par with those of JPM and significantly better than CFC's or the residential lending units of BSC and LEH they were somewhat more loose than the credit standards of BAC and even C. The major difference between WFC, C and BAC is the fact that WFC stuck to the core business of banking, C became a financial supermarket with a ton of off balance sheet liability from SIVs and BAC took the middle ground and overpaid for CFC and ML in order to create a financial supermarket with less off balance sheet exposure but more direct consumer lending exposure than C. WFC made a tremendous error in purchasing WB. The loss estimates for WB are still too low and the lack of quality in their mortgage portfolio extends far beyond the Golden West Option ARMs and into the prime jumbo, home equity, construction, credit card and other consumer loan portfolios.

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

I have to disagree strongly on USB. They were a very active subprime lender in the wholesale market and continued to do subprime loans all the way into Q2 2008. At that point there was no secondary market for the subprime loans as the securitization process had locked out subprime during the summer of 2007 and ALT-A by fall 2007. This means that a substantial portion of their subprime originations which were done by third party brokers are in their own loan portfolio. I would also be willing to guess that the same decision making process and lack of appropriate risk management which lead to making subprime portfolio loans also probably lead to other credit policy mistakes. One very telling thing that set the initial red flags off for me was when management repeatedly talked about growth at the expense of weaker competitors during Q1 and Q2 08. This growth was most likely fueled by what turned out to be overly risky deals which looked much better before the reality of what was upon us truly made itself obvious to everyone. To its credit USB has avoided the ill conceived mergers like BAC-CFC, BAC-ML, WB-Golden West, WFC-WB, or even to some degree JPM-WM, JPM-BSC and PNC-NCC. At the same time I have a feeling that their loan portfolio has much more hidden risk than is currently assumed and that management stayed in certain niche lending markets far too long.

Populism vs. Bernanke, Round Two

So here's the giant elephant sitting in the "let's audit the fed" room. What happens when we find out that :

1. the fed is holding trash assets
2. the fed is a crony of the banks which own it
3. the fed is insolvent but for their ability to ignore the performance of their assets

On the one hand the truth is the truth on the other do we really want to open that Pandora's box or are we better off praying that it will not be opened until we are dead? How much of a global financial crisis would the revelation of an insolvent Fed cause?

CDS and the Looting of AIG

Couldn't agree with you more. CDS writers need to have regulations in place dictating reserve requirements and be treated like the excess line insurers that they are. Speculative CDS needs to either be made illegal or at the very least be moved onto an exchange and treated like equity option contracts.

While I understand that the government's propping up of AIG is meant to keep CDS counterparties solvent I am deeply disturbed by the lack of transparency in the process. Is the government allowing AIG to pay out all CDS claims or only those which can prove actual losses/ownership of underlying bonds? I am not happy about but can accept the need to have the government pay (via AIG) claims on CDS which are tied to actual securities but cannot see the legitimacy of paying naked CDS claims.

Populism vs. Bernanke, Round Two

I hope that you are right but the chances of systemic collapse vs. harmless nationalization seem fairly high. Also how well have our elected officials really done in representing the national interest? I mean congress is elected and are public servants right?

I truly fear that the level of corruption we are experiencing is beginning to rival the levels the USSR experienced in the 1980s. The same abandonment of principles is happening here as happened towards the end of the communist regime there.

Once the core principle of our financial system, the efficient allocation of resources to businesses and individuals looking to increase production, has been abandoned and replaced with useless paper instruments that do not invest in underlying economic activity the end becomes inevitable. We have moved away from investing in actual assets and into trading paper instruments which have no purpose but speculative gambling. Any financial product backed by swaps and sold to the general public or any swap that is not a genuine hedge should not be sold.


On Jul 10 07:22 PM dcb wrote:

> No, we nationalize and get to a real solution instead of one that
> suits wall streets interests and wastes money and time. while our
> economy goes to hell and bankers get their bonus!!

What Were Subprime Loans Modeled On?

The biggest difference between CRA and Subprime which has not been mentioned are the underwriting standards. CRA was a subsidy placed on top of FNM/FRE loans which made them cheaper in designated areas. Subprime are loans made to non credit worthy borrowers with lax underwriting standards. The fact that both types of loans were made to similar demographics obfuscates the true intent and nature of the programs.

CRA = welfare. It was meant to subsidize those considered disadvantaged in the process of becoming home owners.

Subprime lending = high risk lending.

Subprime lending when done as a niche of the overall mortgage market was still punitive in structure for the borrowers. In the 1990s subprime loans were typically used as "credit repair" loans. They were granted to borrowers who met lower than agency but still somewhat reasonable underwriting guidelines which required the documentation of income. The loans were structured to reset in rate after 2 or 3 years at which time the timely payments made on the loan should have allowed borrowers to refinance into an agency or other prime loan. These loans were indeed very profitable because they carried high interest rates and low life expectancies with a significant amount of fee income. They were done by portfolio lenders who had a major stake in their performance.

This changed dramatically with the passage of the Financial Services Modernization Act of 1999 also know as Gram Leach Blyley which allowed the cross selling of financial products. GLB which replaced the depression era Glass-Steagle Act allowed commercial banks, insurance companies, mortgage banks and investment banks to sell the full range of financial services products. This allowed the investment bankers on Wall St. to look for opportunities in markets previously closed to them. Among those markets was the subprime mortgage market. As interest rates fell and house prices rose the default rates on subprime loans declined. This allowed for these risky loans to be packaged up and sliced up into traunches the majority of which could be rated investment grade. This created tremendous demand for the underlying loans as the packaging and re-selling of these loans was highly profitable. In order to meet this demand the traditional underwriting standards in the subprime business began to be relaxed. Higher loan to value ratios, higher debt to income ratios and worst of all the use of stated rather than documented income were the tools used to entice borrowers who would not have qualified.

This created a new set of buyers who placed tremendous demand on the housing market at a pace which could not be matched by the supply of homes further boosting house prices. Everyone seemed to be a winner as more people owned homes, the value of homes went up and everyone was making tremendous amounts of money. The elephant siting in the corner that no one wanted to acknowledge was the fact that the affordability of homes as well as the underwriting standards were reaching historic lows. No one in either political party or in the influential home building and financial services industries wanted the party to stop. It is always extremely difficult to be the wet blanket who turns off the music and ruins everyone's fun.

The need for action was fairly clear in 2003 and 2004 when house prices had reached an unsustainably low level of affordability as measured by median home price to median income ratios and underwriting standards had clearly been compromised and included products like 100% financing with seller paid closing costs and no verification of income assets or employment (no doc loans.) But everyone had too much invested in the housing market bonanza to do anything about it. By 2005-2006 there were not enough borrowers willing to take on huge mortgage payments to keep prices moving up. By 2007 the poor underwriting standards lead to massive foreclosures and the price action reversed. By 2008 the leverage which the financial system had been allowed to use in funding these loans nearly brought it to its knees as default rates quickly surpassed what had been predicted using rose colored models.

Today we are still in the middle of the process as there are still several waves of mortgage defaults coming from traditional factors like job loss to the payment resets on interest only and neg am loans scheduled to take place between 2010 and 2012.

Tier 1 Capital Ratios of Large U.S. Banks

Two problems here.

1. The Tier 1 ratio does not include massive off balance sheet liabilities which can account for as much as 75% of some banks' assets.

2. Tier 1 ratios can be (and in my opinion are) manipulated by including intangible assets such as good will as well as retained earnings to boost said ratios.

A much better measure of bank health is tangible common equity. The banks above have very low TCE ratios.

Do the Rich Really Get Richer?

How is a wealth gap a sign of economic progress? It is the buildup of the wealth gap which helped facilitate the economic disaster that we are living through right now! The greatest period of sustained economic growth happened during a period where the wealth gap shrank significantly (1945-1970) and the last time we saw a great widening of the gap was in the 1920s and we all know how that ended.

The Latest Investment Bank Scam

Properly rated securitization is equivalent to conflict of interest free investment banking transaction. Theoretically this is possible but it has not been seen in a long time and is not likely to be seen again.

Agency Mortgages: Pulling Back the Curtain

Karl,

The amount of trash that FNM and FRE hold is pretty astounding. I agree with you that backstopping their losses by Treasury would be impossible, however that does not seem to be the course of action decided upon by our collective brain trust.

Instead they have decided to allow the Fed, the only entity with a set of books which is not audited to backstop the losses. The Fed will buy up the worthless garbage. The garbage will underperform. The Fed will not report the full scope of the underperformance. The system will remain intact. The price for this is an aversion of deflation and the enrichment of those who perpetrated the scheme. While this is morally reprihensible it is in some ways the least painful course of action from a systemic point of view. The creditors for FNM/FRE are protected. No truly new money is created as the old money which only existed for a temporary period of time is re-created. The inflationary effect will be significant but not uncontrolable. The integrity of the system will remain nonexistent but this lack of integrity will be brought more to light....but not too much more.

I am not a huge fan of this course of action but can think of no other. If we cut off access to reasonable (low down payment but low debt ratio) credit than the housing market will plunge another 40% and the entire global financial system will infact melt down. This is not a superior solution. We do need to gradually raise lending standards but for now FNM/FRE pricing makes it such that any loan with less than 20% down goes FHA. The loans that do go the the GSEs have overly high DTIs (up to 50 rather than the more desirable 33-38 range) and do not ask for sufficient asset reserves (should be at least 12 months but is typically only 2) but are still far better than the loans which lead to the bubble. FHA underwriting standards are overly lax but these lax standards are all that stand between property prices and the abyss. The price to rent ratios and price to median income ratios need to come back in line but that cannot be done overnight. This must be a careful and gradual approach.

Helicopter Ben Turns into Ballistic Missile

I don't know what is sadder the fact that the Fed had to resort to this or the fact that people automatically throw up the inflation is coming doomsday banner before they actually take a look at what is going on and do some analysis.

All non government backstopped securitization facilities have now closed. The consumer is in serious retreat psychologically. Payrolls, the source of funds for 70% of domestic economic activity (70% is consumer spending consumers pay for purchases and debt service with their paychecks) are being slashed. The reduction in available credit (real supply of capital) is getting decimated.

Despite all of this the gold bugs and fear mongers continue to cry about inflation? What is going up in price? What asset class, product or service is showing pricing power and a shortage of supply? Where is this inflation magically going to come from?

Big New Housing Problem: Mortgage Insurers Back Off

The FHA loans are 96.5LTV and the 1.5% "funding fee" is indeed upfront MI with 55bip annual premiums. To the best of my knowledge the FHA MI program is run by the FHA itself not by an outside vendor. The FHA is going to take some bad losses on the mortgages it is currently insuring.


On Jul 16 06:39 PM mortgageminister wrote:

> I can't believe no one has mentioned the 97.5% LTV FHA loan that
> requires a 1.5% up front mortgage insurance premium to HUD as well
> as MI on the back end to protect the lender. Another housing bubble
> in the making. Since the crisis FHA loans account for, don't quote
> me on this 43% or more of all purchase transactions and increasing
> on a daily basis in a DECLINING market. Almost all of the FHA loans
> made at the beginning of last year, (I'm in CA) are underwater now.
> Does this mean that FHA loans will eventually become uninsurable
> should all MI companies vanish or I guess they will make exceptions
> for FHA loans because an FHA loan is essentially a Gov loan.

Dallas Fed on Curbing Irresponsible Lending

Having worked in loan origination I have conflicting feelings about the LTV caps.

On the one hand lower LTVs do make consumers put more skin in the game. At the same time there are other factors which help to keep borrowers from defaulting.

Having skin in the property gives a borrower the motivation but not necessarily the ability to continue to maintain paying on the property. In my opinion it is the ability to continue making payments which are more important.

The first determining factor is DTI (debt to income ratio) and the second are asset reserves. Both of these standards have been grossly compromised. Traditionally DTIs were limited to 33% housing and 38% total debt. The official guideline on FHA is now 40% (not much of a stretch from 38% and still not unreasonable ) but unofficially loans with up to 50% DTIs are being approved all the time. This is lunacy as it allows consumers to live paycheck to paycheck with any kind of interruption in income or unexpected expense enough to push them over the edge. Fannie and Freddie's automated underwriting systems routinely approve DTIs in the low 50s with "compensating factors" like LTV, FICO (garbage) or asset reserves. This is lunacy.

Asset reserve requirements used to be 6 months of PITI (principle, interest, taxes, insurance and in the case of condos condo fees and or HOA fees) payments. This has been reduced to two months by FNM/FRE and no requirements at all with FHA. I feel that asset reserves are extremely important as they provide the direct buffer against loss. In fact I know many people that prefer to get FHA financing in order to hold on to cash reserves rather than spend these reserves on a down payment. I feel that requiring these reserves to be put into some form of escrow would be an even more prudent alternative to a large down payment as it would ensure the borrowers ability to pay timely payments for the duration of the escrow period. Requiring 12 months of payment reserves for loans with low down payments would still put "skin in the game" while providing some cushion against defaults in the case of job loss or other financial calamities. Another issue with the change in reserve requirements stems from the types of assets which count towards reserves. Traditionally only liquid and accessible funds such as bank deposits, CDs and taxable investment accounts were allowed. This requirement was changed to include retirement accounts which may have serious restrictions on their use. This is lunacy.

In short I believe that there are less onerous requirements which should be imposed aside from a large down payment but these requirements are not being imposed and are being ignored and compromised leading to the origination of a new batch of low quality loans. While these loans are nowhere near as bad as the subprime, alt-a and stated income jumbo prime loans of 2004-2007 they are still far from being solidly underwritten and of true A credit quality. I think that today's "prime" loans are actually closer in true credit quality to the original ALT-A loans of 2001-2004 with the FHA loans being of slightly lower quality due to the higher LTVs and lower reserve and credit score requirements.