Archive for the 'Bailout Buzz' Category
July 4th, 2009, 3:00 am by Mathew Padilla
Happy 4th to all! Now back to regularly scheduled programming…
Glenn Gray discovered a way for his bank to grow amid the deepest recession in decades.
 The chief executive of Sunwest Bank in Tustin decided to expand his company by buying the operations of a failed rival.
Gray, 55, explains how the Federal Deposit Insurance Corporation selected his business bank to buy most of the $73 million in deposits and $80 million in assets of Irvine-based MetroPacific Bank, which failed on June 26.
Q. How did you learn a bank was going to fail and its assets be sold?
A. It first starts with us, or any bank, that wants to be a bidder letting the FDIC know that. The FDIC goes through a process; I can assume they review our financials. They examine banks, so they likely look at the last examination schedule, and then they either put you on an approved bidders list or they don’t. We did that several months ago, when we anticipated that, unfortunately, bank failures were going to be an ongoing occurrence.
Then we turn the clock back to about four weeks ago. The FDIC notified us of a potential failed bank situation. They spoke in very general terms, describing a business bank with about $80 million in assets in Orange County with a single branch. They asked, ‘Are you interested?. Well, yes, that fits our profile: community banks in Orange County or North San Diego.
Next they say here’s your password, go to a secure Web site and find more information. Once we visit the site we understand which bank it is; the bank is identified but not the identity of employees. The site has portfolio level statistics; you don’t get a break down of every single loan. The data are macro level. But there is enough information for you to start to form an opinion, and you don’t have to put in bid yet.
Next they told us we would have two days of due diligence. We came on site, visiting the bank in an area segregated from the rest of the employees. Most employees didn’t know we were on site. There was an FDIC representative there. Now we start to get into more micro level detail. You have to cover whatever you want to cover in those two days, looking at loans, deposits, financials etc. We met some people, but couldn’t get into their background or interview them.
Once the on-site review was done, we got a couple of days to form a bid. We finished up on a Thursday and had to provide a bid the following Tuesday. The next day (Wednesday June 24) they asked for some clarification and a little negotiation. Thursday (June 25) they notified us that our bid was accepted. Friday morning (June 26) we met with a larger group of FDIC employees and they did a walk through of what was going to happen. Then it happened that Friday at 4 p.m. They went in and took over the bank and we followed them.
Q. I saw something like that on the TV show 60 Minutes. But on that show and in your case a buyer (your bank) was lined up in advance of a bank being seized. I hear a takeover is messier if the FDIC can’t find a buyer…
A. Yes, it must be messier without a buyer. That’s what I hear also. In this case it worked out. We worked through a weekend, and we opened the following Monday morning: ‘Here’s Sunwest Bank.’
Q. Where did MetroPacific go wrong?
Read the rest of this entry »
Posted in: Bad debt • Bailout Buzz • Bank failures • Bank woes • Commercial lending • Company Watch • Meltdown • Q&A | Post a Comment »
July 1st, 2009, 1:03 pm by Mathew Padilla
Bloomberg reports that Fannie Mae and Freddie Mac will begin refinancing loans they own or guarantee up to 125% of the value of a property for some homeowners in financial difficulty. Here’s more:
Housing and Urban Development Secretary Shaun Donovan made the announcement in a statement today. Currently Fannie Mae or Freddie Mac, through President Barack Obama’s Home Affordable program, can refinance mortgages they own or guarantee when the loan is worth as much as 105 percent of the home’s market value.
The continuing slide in home prices has pushed millions of Americans beyond that 105 percent loan-to-value ratio, limiting participation in Obama’s initiative. Fannie Mae and Freddie Mac have refinanced 80,000 loans under that program, which set out to help as many as 5 million people who may owe more than their homes are worth, Federal Housing Finance Agency Director James Lockhart said at a real estate conference on June 18.
The decision to change the allowable ratio is part of an effort to “adapt to an ever-changing housing market,” Treasury Secretary Timothy Geithner said in the HUD statement. “By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly.”
Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia, said mortgage brokers have told him that many aren’t sending borrowers through the program because it’s cumbersome and the loan applications “still have a lot of bells and whistles, which makes them difficult to do.”
Read the full story: Fannie, Freddie to Refinance Larger Underwater Loans.
And here is the Housing and Urban Development release.
This should improve participation in the plan somewhat, although many struggling borrowers in Orange County and other parts of the country do not have loans owned or backed by Fannie or Freddie. And bigger loans means bigger risk to taxpayers.
In other news…
Posted in: Bailout Buzz • Defaults & Foreclosures • Fannie & Freddie • Loan underwriting • Meltdown • Refi | 12 Comments »
June 29th, 2009, 8:04 am by Mathew Padilla
The Wall Street Journal reports Treasury Secretary Timothy Geithner’s plan to help investors buy troubled assets from banks has lost momentum.
Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.
The Public-Private Investment Program, or PPIP, has faced resistance since it was announced in March. And the Federal Deposit Insurance Corp. has essentially shelved the part of PPIP that called for the government-financed buying of whole loans. Treasury is supposed to move forward with a focus on buying securities, but now that may be greatly reduced.
The Journal quotes Lee Sachs, counselor to the Treasury secretary, as saying the department remains committed to the program and has received more than 100 applications from potential investment managers. Read the full story HERE.
Meanwhile, the Bank of International Settlements, which represents the world’s leading central bankers, released a report today that, among other things, argues bad assets remain a threat (I added the bold type):
Overall, governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks. The 1990s experience of the Nordic countries indicates that addressing problem assets is necessary to reduce uncertainties, re-establish confidence in a lasting way and lay the basis for an efficient financial system (see Box VI.B). Despite acknowledging these lessons, the steps taken so far have focused largely on providing guarantees and subsidised capital. At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses. Progress on problem assets has been slowed by the complexity of the securities affected, legal constraints and, above all, the limited political will to commit public funds to the clean-up effort. The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.
The lack of progress on removing troubled assets from the banks’ balance sheets and recognising the associated losses is illustrated by the US
experience. Rather than buy impaired assets directly, the US Treasury outlined a plan in March, the Public-Private Investment Program (PPIP), to value these assets and to remove them through an auction mechanism. Under the PPIP, eligible private sector investors are invited to bid on troubled real estate assets held by banks. Winning bids receive matching government capital and non-recourse funding on attractive terms, with the US government assuming any losses beyond the equity invested. The generous terms were designed partly to boost the value of the underlying securities, to provide sufficient incentives for private capital inflows and to attract expertise to value and manage these assets. Despite the favourable terms, as of May 2009 the outlook for the PPIP was uncertain.
To increase confidence in the banks, US regulators conducted stress tests on 19 bank holding companies in April 2009 to ensure that they were
sufficiently capitalised given a set of assumptions about losses on various bank assets over the next two years. Following the release of the results in early May, US regulators directed 10 of the banks examined to increase their level of capital or to improve the quality by including more common shares. Several banks took advantage of the reduced uncertainty and the increased risk appetite of investors that accompanied the publication of the stress test results to raise equity and issue debt. While the United Kingdom conducted a similar exercise, other European countries were still debating the merits of an EU-wide stress test.
What seems clear is that the deterioration in credit quality will generate more losses on banks’ loan books and other credit exposures (see Chapter III).
Banks may therefore have an incentive to delay recognising losses, aided by accounting rules that provide management more discretion over when to
write down assets. Taxpayers will not want to be exposed to greater potential losses, but key financial institutions are likely to require more government support in order to facilitate the required adjustments, to restore confidence in the financial system and to restart lending on a sustainable basis.
This suggests a drag on recovery. Read the report HERE.
More from this blog…
Posted in: Bad debt • Bailout Buzz • Meltdown | 7 Comments »
June 25th, 2009, 9:32 am by Mathew Padilla
Bloomberg reports:
The Federal Reserve will let one of its emergency programs expire and trim two others in a sign that improving financial markets allow a first step toward ending its unprecedented interventions.
The three programs provide funds or Treasury securities to securities brokers and money-market funds. They are authorized under a provision allowing loans to nonbanks under “unusual and exigent circumstances.”
Five other emergency facilities, including foreign currency-swap lines with central banks around the world, will be extended by three months through Feb. 1, the Fed said in a statement in Washington. They would have expired Oct. 30.
“Conditions in financial markets have improved in recent months, but market functioning in many areas remains impaired and seems likely to be strained for some time,” the Fed said in its statement.
The Fed didn’t announce the changes yesterday following the Federal Open Market Committee meeting because it needed to coordinate the extension of the currency swap lines with other central banks, a Fed official told reporters on a conference call.
Interesting. Things have improved somewhat, but aftershocks may continue.
Posted in: Bailout Buzz • Fed | Post a Comment »
June 24th, 2009, 12:52 pm by Mathew Padilla
The Federal Reserve today said it will continue to buy up to $1.25 trillion in mortgage securities by the end of this year and that it is maintaining its target for a benchmark interest rate at between zero and 0.25 percent.
Some market watchers have hoped the Fed would buy more securities than previously announced to push down mortgage rates, which are above 5%.
But the Fed also has to face concerns a $1 trillion expansion of its balance sheet over the past year to $2.07 trillion will fuel inflation, drive up interest rates, and hamper any potential economic recovery. The Fed said:
The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Read the full statement HERE.
 What do you think?
Should the Fed expand its purchases of mortgage securities?
Posted in: Bailout Buzz • Fed • Polls | 6 Comments »
June 22nd, 2009, 5:00 pm by Mathew Padilla
Remember those loans for 125% of the value of a home? That’s what comes to mind with this from National Mortgage News (hat tip to broker Lou Pacific):
The 105% loan-to-value ratio limit on Fannie Mae and Freddie Mac’s program to refinance underwater borrowers could be raised to increase participation, according to the GSEs’ regulator. The Federal Housing Finance Agency is “looking at going significantly higher than 105%,” FHFA director James Lockhart said. The 105% ceiling has kept too many borrowers on the sidelines, he told a National Association of Real Estate Editors conference. The GSEs have refinanced 80,000 homeowners under the special program that the Obama administration has promoted to help borrowers who can’t qualify for a standard refinancing. The administration unveiled the refinancing program in February and estimated it will refinance at least 4 million homeowners who have loans that are owned or guaranteed by the government sponsored enterprises. The 105% LTV limit theoretically allows Fannie and Freddie to securitize the newly refinanced loans and sell them to the Federal Reserve and other investors. However, raising the LTV might force the GSEs to hold the loans on their books.
In other news….
Posted in: Bailout Buzz • Defaults & Foreclosures • Fannie & Freddie • Meltdown | 9 Comments »
June 10th, 2009, 3:00 am by Mathew Padilla
Are we all better off if government keeps foreclosures in check?
Consumer advocates and some politicians have argued the humane thing to do is help people avoid foreclosure. I won’t argue with acts of compassion, though becoming a renter is not equivalent to becoming homeless.
 But sometimes pro-aid folks also argue halting foreclosures will benefit the economy — and by extension everyone in the U.S. — by also halting the decline in home prices. This is supposed to stop homeowners’ wealth degradation. Hence their spending will stabilize and maybe increase because they feel wealthier and more secure.
A related argument is that taxpayer-subsidized loan modifications are good for everyone because banks will better bear the cost of repairing broken loans, which will bolster their balance sheets, spur them to more lending, and thus boost the economy.
I assumed economists I know see some validity in these arguments. I was wrong. The first two men I called dismissed both ideas or were skeptical.
Christopher Thornberg, a principal with Beacon Economics in Los Angeles, said:
“I argue the opposite, that foreclosures are good for the economy. If someone stops paying their over-sized mortgage on a deeply underwater house they have a lot more money to spend on things like IPods and clothes. So in a sense all these foreclosures are probably one of the things stabilizing consumer spending. That’s far more important to the economy than whether people pay off their mortgages.”
But what about the banks?
“The financial meltdown is done,” Thornberg said. “And what you call a financial meltdown I call a comeuppance. The banks are already screwed. I fail to see how trying to keep people mired in debt as a way to help banks is good social policy.”
Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., said the idea that halting foreclosures helps the economy is “a little shaky.”
There may be a pyschological benefit to government involvement, reasurring some people that someone is trying to help, but that’s probably it, Kyser said.
He is equally skeptical that banks benefit from government involvement in foreclosure prevention.
Efforts to track homeowners who got a loan workout show many slide back into default, Kyser said. (Federal agencies have said borrowers who got a loan modification last year are re-defaulting more than half the time.)
I called the two economists in preparation for a story I plan on Sunday about a study showing many borrowers who faced foreclosure in recent years cashed out all their equity. Read a debate HERE about whether such borrowers deserve help.
By the way, I suppose if I keep calling economists I will eventually find one who thinks avoiding foreclosures helps the economy.
In other news…
Posted in: Bailout Buzz • Bank failures • Bank woes • Defaults & Foreclosures • Meltdown | 76 Comments »
June 9th, 2009, 12:02 pm by Mathew Padilla
The U.S. Treasury Department said today 10 big banks won approval to buy back $68 billion of their shares held by the government. Buybacks would free the banks from additional oversight on lending practices and executive pay.
Treasury didn’t name banks, but the lenders stepped forward immediately, pledging to return bailout funds. They are JPMorgan, Goldman Sachs, Morgan Stanley, American Express Co., Bank of New York Mellon Corp., BB&T Corp., Capital One Financial Corp., Northern Trust Corp., State Street Corp., and U.S. Bancorp, reports Bloomberg.
Missing from the list, and thus remainging under tougher government scrutiny, are Bank of America, Citigroup, Wells Fargo and six others.
Posted in: Bailout Buzz • Meltdown | Post a Comment »
June 8th, 2009, 7:43 am by Mathew Padilla
The Washington Post reports the Obama administration will announce, perhaps today, that some big banks can repay taxpayer-funded capital injections. Here’s more from the Post, which cites anonymous sources:
Through cheap loans, debt guarantees and a promise that big banks will not be allowed to fail, these officials say the government has created an artificial environment in which profits and stock prices have rebounded, helping banks in recent weeks to raise about $50 billion from private investors.
According to the Post, the banks are eager to return capital but want the other forms of government support to continue. This would mean taxpayers get to share in potential losses but not in profits. Read the story HERE.
I think it’s a safe guess that the healthier banks, including J.P. Morgan Chase and Goldman Sachs, are first in line to return aid, while Bank of America and Citigroup will remain under scrutiny. (Healthier being a relative term.)
Meanwhile, the Wall Street Journal reports today is the deadline for federal regulators to approve capital raising plans at the nine big banks. Banks are also supposed to have reviewed their management:
The management review is creating major headaches. One reason is that banks have had an easier time raising capital than many expected. Also, the rules for the management review were ambiguous. And separate regulators are giving conflicting guidance, confusing the process.
The Journal reports regulators want executives to have experience with commercial real estate. Makes sense since that sector is suffering amid a recession. Read more HERE.
In other news…
Posted in: Bailout Buzz • Bank woes • Meltdown | Post a Comment »
June 5th, 2009, 3:00 am by Mathew Padilla
(Update: Caution on HELOC calculation.)
Homeowners who treated their houses like cash machines, tapping the equity as home values rose, are among the most likely to end in foreclosure, even more than those who bought at housing’s peak, a new study finds.
Often homeowners have had second, third and even fourth mortgages at time of foreclosure — a trend not adequately addressed by any of the federal or state foreclosure avoidance progams, said Michael LaCour-Little, a finance professor at Cal State Fullerton who authored the study.
 LaCour-Little tracked all houses and condos set for foreclosure auctions, known as trustee’s sales, in the first two weeks of November 2006, 2007 and 2008 in Orange, Los Angeles, Riverside, San Bernardino and San Diego counties. He is presenting his study today in Washington, D.C. at the mid-year conference of the American Real Estate and Urban Economics Association.
I plan a bigger story on his findings, but wanted to share a few results now.
For example, for the early November 2008 data sample, he tracked 2,358 properties. Here’s what he found:
- They were purchased at an average price of $354,000 and average year of 2002 (long before the housing peak of 2005).
- Total debt on the properties averaged $551,000 at time of foreclosure. That’s 56% more than the properties were worth when purchased, meaning at least that much was cashed out!
- An automatic valuation model estimated average value at time of foreclosure was $317,000, which suggests a combined loan-to-value at foreclosure of more than 170% ($551,000/$317,000). And that is a conservative estimate. Properties that banks later sold had an average resale price of $271,000!
LaCour-Little is, well, diplomatic in his conclusion that “borrower behavior, rather than housing market forces, seems to be the predominant factor affecting outcomes.”
More telling is a rough calculation the professor did, estimating that for all properties in his study homebuyers made downpayments of $262 million and cashed out $2 billion, for a 40% return on their money over six years.
The professor stops there. But my inference is — are these people government officials should be trying to help keep their homes?
What do you think?
Should government help homeowners avoid foreclosure?
UPDATE: It occurred to me after posting this I should have mentioned it is not evident in county records, including those used for this study, how much of a home equity line of credit was actually outstanding at time of foreclosure. The professor figured borrowers facing foreclosure would likely have drawn down the entire line. That makes sense. But lenders have been freezing HELOCs over the past year or so.
In other news…
Posted in: Bad debt • Bailout Buzz • Meltdown | 64 Comments »
May 28th, 2009, 3:00 am by Mathew Padilla
The Wall Street Journal reported online late Wednesday that a government program designed to rid banks of bad loans may be put on hold.
The Federal Deposit Insurance Corp. is supposed to help finance purchases of bad loans from banks. Buyers would also benefit from taxpayer-funded capital placed in investment funds alongside their money. The Journal, citing anonymous sources, says:
But prospective buyers and sellers have expressed reticence to the FDIC about participating for fear the program’s rules will change in a political atmosphere hostile to Wall Street. In addition, some banks that might have sold troubled loans into the program earlier in the year have become less eager as they regained a sense of stability.
The Public Private Investment Program was supposed to be split between the FDIC, focusing on whole loans, and Treasury, focused on securities. The Journal says Treasury is expected to move ahead and could start purchases in summer. But the size of the program could be reduced.
Trade publication National Mortgage News ran a similar story earlier Wednesday, quoting Sheila Bair, chairman of the Federal Deposit Insurance Corp. She said, “We are finding both on the buyer and seller side there continues to be discomfort about Congress’ review of this program.”
Congress passed a bill that directs the Treasury secretary to craft conflict of interest parameters for PPIP.
In a separate earlier article, the Wall Street Journal reported banking trade groups have lobbied the FDIC to let banks both buy and sell assets in the program. Hence, critics say banks could game the system at taxpayer expense.
According to National Mortgage News, Bair downplayed the issue, saying, “Banks will not be able to bid on their own assets.”
In other news…
Posted in: Bad debt • Bailout Buzz • Bank woes | 6 Comments »
May 26th, 2009, 7:02 am by Mathew Padilla
Bloomberg reports:
JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.
Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.
Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.
“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”
When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.
The Bloomberg story explains the purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to mark down loans they acquire as aggressively as possible.
Thomas Kelly, a spokesman for JPMorgan, said, “We marked the portfolio based on a number of factors, including housing-price judgment at the time. The accretion is driven by prevailing interest rates.”
In other news…
Posted in: Bad debt • Bailout Buzz • Bank failures • Bank woes • Chase • Company Watch • Washington Mutual | Post a Comment »
May 21st, 2009, 8:17 am by Mathew Padilla
The Wall Street Journal reports GMAC LLC, owner of Costa Mesa-based Ditech.com, is poised to get $7 billion more from the Treasury Department, the first installment of an aid deal that could reach $14 billion.
According to the Journal, the government could end up owning a majority stake in both GMAC and General Motors.
The Obama administration wants GMAC to keep making loans to customers of General Motors and Chrysler. Treasury gave GMAC $5 billion in December. Here’s more:
The GMAC funding is an illustration of how rapidly the government effort to rescue the U.S. auto industry is escalating in cost and scope. What began as an emergency batch of loans to GM, Chrysler and GMAC in December — totaling just over $20 billion — now looks likely to balloon well beyond $50 billion and could approach $100 billion by the end of the year.
If the government did not get involved, allowing the auto industry to collapse, it would be a giant anti-stimulus at the worst possible moment. On the other hand, tossing billions of dollars at these companies will not resurrect buyer demand. And we have yet to see a blueprint for how the auto makers will operate after restructuring.These moves are not confidence builders.
In other news…
Posted in: Bailout Buzz • Company Watch • Ditech • GMAC • Meltdown | 1 Comment »
May 15th, 2009, 12:40 pm by Mathew Padilla
Bloomberg ran a story today quoting Federal Deposit Insurance Corp. Chairman Sheila Bair saying some bank chief executive officers will be replaced within the next several months as regulators monitor how banks respond to previously released stress tests.
The FDIC put out a release saying Bair’s comments were mischaracterized. Here’s the exchange between Al Hunt of Bloomberg TV and Bair (set to air this weekend):
MR. HUNT: But in the same situation, or similar situation, the government already replaced CEOs at Fannie and Freddie and General Motors -
MS. BAIR: Yes, that’s right.
MR. HUNT: And some people say, well, why is the head of Bank of America still there? Or why are some of these other banks’ CEO’s still there?
MS. BAIR: Right, well, obviously I don’t comment on open and operating institutions. I think the review needs to go with both the management and the boards as well, absolutely. And management needs to be evaluated and is this the right skill set, have they been doing a good job, are there people who can do a better job, those kinds of questions.
MR. HUNT: Do you think some will be replaced in the next couple of months without getting into the particulars?
MS. BAIR: Yeah, I think there will be an evaluation process. We’re requesting it as part of the capital plan and yes.
In other news…
Posted in: Bailout Buzz • Bank failures • Bank woes • FDIC | Post a Comment »
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