#mortgage finance

14 11, 2024

FedFin Assessment: The Complex Outlook for Consumer-Finance Regulation

Eliza Allen2024-11-14T15:45:08-05:00November 14th, 2024|The Vault|

As with merger policy (see forthcoming FedFin report), consumer-finance regulation will be crafted in the Trump Administration by complex pull-backs of current, progressive standards and pull-forward of populist goals which often parallel progressive ones. This is most clearly the case where powerful business lobbies such as merchants wield the greatest force (e.g., interchange fees), but will also be evident in consumer-privacy, tech-platform, credit-card, and “relationship-banking” efforts. This report assesses these and other issues under the CFPB’s jurisdiction, looking also at the outlook for the agency itself as Republicans gain Congressional control, allowing them to press for structural change to this controversial agency…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.

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22 07, 2024

Karen Petrou: The Toxic Brew of Insurance Companies, Private Equity, and High-Risk Mortgages

Eliza Allen2024-07-22T11:13:54-04:00July 22nd, 2024|The Vault|

As financial regulators fret about risk migration to nonbank financial intermediaries, a new race to the sunny side of the regulatory street is already underway. As detailed in a comprehensive Bloomberg article, insurance companies are increasingly investing in high-risk whole residential-mortgage loans, doing so either with no capacity to service them unless they rely on parent-company private-equity firms to do so somehow. What could go wrong?

This transaction is redolent – indeed, it’s a repeat – of how nonbanks barged into mortgage finance before the great financial crisis without a clue about the real risks they ran. Well, I recall Bear Stearns’ big bet on mortgages placed without any concomitant servicing capacity because, as they said at the time, mortgages never go to foreclosure. Speculative house-price increases led them to this sanguine conclusion because there hadn’t been many foreclosures for a couple of years, but neither Bear Stearns’ mortgage portfolio nor the firm is here today to ruminate over hard lessons learned in the 1980s.

Bear Stearns’ failure quickly became a systemic threat, with wider damage delayed until the 2008 crash thanks only to the first of the Fed’s high-cost subsidized mergers that bred moral hazard that fired speculation up to a still more frenzied height until Lehman Brothers failed.

As before the great financial crisis, insurance companies are investing in high-risk mortgages because yield-chasing and capital arbitrage rewards them, at least for now. The whole mortgage loans insurance companies are buying carry wide spreads over RMBS is only …

2 07, 2024

FedFin: Taking Trump Still More Seriously

Arezou Rafikian2024-07-02T16:24:40-04:00July 2nd, 2024|The Vault|

In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance. We reviewed our forecast at the start of this year on exactly this point. Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons. Our updated, complete forecast follows….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

20 05, 2024

Karen Petrou on: How FSOC Enables Systemic Risk

Eliza Allen2024-05-20T11:37:05-04:00May 20th, 2024|The Vault|

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are. But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion: all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out. This is certainly what taxpayers have learned the hard way and investors have come to expect. Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls. Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law? In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out …

13 05, 2024

FedFin on: FSOC’s Analytical Methodology

Arezou Rafikian2024-05-13T16:52:29-04:00May 13th, 2024|The Vault|

Never Mind…

When FSOC released its systemic-designation methodology last year, the Council made it clear that nonbank mortgage companies faced top-down federal regulation. Never mind. As with so many other FSOC-declared systemic risks – see, for example, stablecoins – federal regulators have decided not to use the prudential tools they have in favor of asking for statutory change they know they won’t get.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.

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30 11, 2023

FedFin on: FHA’s Mission and Mishaps

Arezou Rafikian2023-11-30T14:04:44-05:00November 30th, 2023|The Vault|

A new FRB-NY study confirms that 83% of loans from 2000-2022 went to first-time homebuyers, compared to 56% for the GSEs and 57% for private lenders. FHA loans of course have very high LTVs and low scores, with scores improving after 2008 when the PLS market stopped adversely selected FHA even though over half of FHA loans still have scores under 680. FHA sustainability has varied based on these and other factors, but 21.8% of borrowers from 2011-2016 still lost their homes.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

8 08, 2023

FedFin on: Say It’s Simple

Arezou Rafikian2023-08-09T14:19:41-04:00August 8th, 2023|The Vault|

Our most recent analysis of the inter-agency capital proposal focuses on significant changes to the rules for securitization and credit-risk transfer positions. In short, super-traditional securitizations have an easier path to the secondary market, but GSEs still beat banks. Complex ABS face often-formidable obstacles, as does CRT given or taken by banks.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

4 08, 2023

FedFin on: Credit-Risk Capital Rewrite

Arezou Rafikian2023-08-04T13:41:04-04:00August 4th, 2023|The Vault|

In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

31 07, 2023

Karen Petrou: Two Tenets of the Capital Proposal That Make No Sense No Matter How Much One Might Want to Love The Rest of It

Eliza Allen2023-07-31T10:40:41-04:00July 31st, 2023|The Vault|

In the wake of the 1,089-page capital proposal, debate is waging on well-trod battlegrounds such as whether the new approach will dry up credit and thus stifle growth. I’ve my own view on this, but my initial read of the proposal points to a still more fundamental issue: some of it makes absolutely no sense even if one agrees with the agencies’ goals. Here, I lay out two bedrock assumptions that contradict the rule’s express intent and will have adverse unintended consequences to boot. God knows what lurks in the details.

The first “say what” in the sweeping rules results from the new “higher-of” construct. Credit and operational -risk models are entirely gone and market-risk models are largely eviscerated. Instead, big banks must hold the higher of the old, “general” standardized approach (SA) or the new, “expanded” SA. Each of these requirements is set by the agencies – models mostly never allowed. Further, a new “output floor” – different from Basel’s approach to this model’s constraint – is also mandated as yet another safety net preventing anyone gaining any advantage from any possible regulatory-capital arbitrage.

Why then not just demand that big banks use a standardized weighting the agencies think suffices? Must banks be put through the burden of calculating two ratios when they have no ability to arbitrage requisite capital weights? Do the agencies not even trust themselves to set capital standards that are now sometimes higher, sometimes lower as God gives them to know probability of default …

10 07, 2023

Karen Petrou: The Bankruptcy of Bank-Merger Policy

Eliza Allen2023-07-10T14:18:07-04:00July 10th, 2023|The Vault|

On Wednesday, a Senate Banking subcommittee will consider bank-merger policy, surely providing a platform for its chair, Sen. Warren’s pronounced views opposing all but the smallest bank mergers and maybe not even those. Many other senators are not as adamant, but even pro-business Republicans – see J.D. Vance – think bank mergers beyond the itty-bitty are at best problematic. The politics of this debate is obvious; the substance not so much. As with many other questions, bank-merger policy is best set with a keen understanding of recent, objective research and what it actually says about concentration as it occurs outside the gaze of those fearful only of still bigger big banks.

That there is undue market power in a financialized economy that brings a raft of woes is all too clear. I thus hoped that Assistant Attorney General Kanter’s remarks last month would be a meaningful update of the Department of Justice’s anachronistic 1995 policy. It helped, but only a bit because Mr. Kanter focused principally on enforcement, leaving “broader” questions solely to the banking agencies.

They in turn have long promised a transparent merger policy, but it’s still deal-by-deal, case-by-case, crisis-by-crisis. More than a few mid-sized banks will wither away as deliberations continue because the sheer uncertainty and delays of most bank mergers undermine their economic value, particularly at a time of high interest rates, slow or no growth, tough new rules, and withering competition.

Recent antitrust research does not substantiate easy, blanket assertions about the benefits or …