Consumer Credit Default Rates Paint Mixed Picture

Mortgage default rates declined and outstanding mortgage balances were well below their 2008 peak in March 2016, according to the March 2016 S&P/Experian Consumer Credit Default Indices (SPICE Indices) released on Tuesday.

The composite default index, which consists of the first and second mortgage default rates, the auto loan default rate, and the bank card default rate, dropped by four basis points from February to March (0.97 percent to 0.93 percent) and by 12 basis points over-the-year in March.

The first mortgage default rate declined by seven basis points over-the-month and by 15 basis points over-the-year in March down to 0.77 percent. The second mortgage default rate of 0.59 percent in March represented a decline of one basis point over-the-month and an increase of nine basis points over-the-year.

The auto loan default rate slightly declined both over-the-month and over-the-year down to 1.02 percent. The huge increase was seen in the bank card default rate, which was down by seven basis points over-the-year but up by 36 basis points over-the-month to 2.92 percent.

S and P graph“The continuing low rates of consumer credit defaults in mortgages, auto, and bank card loans are positive signs for the economy,” said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Large mortgage debts followed by rapidly rising defaults in all kinds of consumer credit were key causes of the financial crisis. Conditions today are much improved; not only are defaults down, but outstanding mortgage balances were about 12 percent below the peak seen in the first quarter of 2008. Debt service ratios are close to the record lows set in the last two years as well. This all suggests that consumer spending should continue to support modest economic growth.”

The increasing bank card default rate and the declining mortgage rate tell different stories about consumers’ borrowing patterns, according to Blitzer. For starters, the bank card default rate has been both greater and more volatile than mortgage default rates.

“While bank card balances and defaults saw increases, consumer prices were flat, indicating that the growth in balances reflects increased spending,” Blitzer said. “Mortgage balances barely grew even though home prices, as measured by the S&P/CaseShiller Home Price Index, are rising 5 to 6 percent annually. The substantial majority of home sales are of existing homes, which means mortgages are being paid off at the same time new mortgages are being written.”

Headwinds Devastate Goldman Sachs’ Q1 Profits

rates.dropInvestment banking firm Goldman Sachs is the latest financial firm to have its profits take a turn for the worse, following plummeting incomes reported from JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and PNC.

According to Goldman Sachs’ 2016 first quarter earnings statementreleased Tuesday, net income at the firm fell 60 percent year-over-year due to operational troubles in all areas of the business.

Goldman Sachs reported net earnings of $1.14 billion for the first quarter ended March 31, 2016, up 48 percent from $765 million in the fourth quarter of 2015 but down 60 percent from a year ago when earnings totaled $2.84 billion.

Net revenues at the investment firm fell 13 percent from the fourth quarter of 2015 to $6.34 billion for the first quarter of 2016 and decreased 40 percent from $10.62 billion last year.

Lloyd C. Blankfein, Chairman and CEO at Goldman Sachs noted, “The operating environment this quarter presented a broad range of challenges, resulting in headwinds across virtually every one of our businesses.”

Diluted earnings per common share were $2.68 compared with $5.94 for the first quarter of 2015 and $1.27 for the fourth quarter of 2015, the statement showed.

Investment banking net revenues were $1.46 billion for the first quarter of 2016, 23 percent lower than the first quarter of 2015 and 5 percent lower than the fourth quarter of 2015. Meanwhile, underwriting net revenues fell 27 percent year-over-year to $692 million, due to “significantly lower net revenues in equity underwriting, reflecting low levels of industry-wide activity during the quarter,” the statement said.

“The operating environment this quarter presented a broad range of challenges, resulting in headwinds across virtually every one of our businesses.”

Lloyd Blankfein, Goldman Sachs Chairman and CEO

On the other hand, Goldman Sachs said that debt underwriting net revenues were significantly higher compared with the first quarter of 2015, “primarily reflecting an increase in investment-grade activity.” Overall, the firm’s investment banking transaction backlog decreased compared with the end of 2015, but was higher compared with the end of the first quarter of 2015.

Investing and lending net revenues fell 93 percent from the last quarter and 95 percent year-over-year to $87 million for the first quarter of 2016. Goldman Sachs attributes this decrease to a “significant decrease in net revenues from investments in both private and public equities, which were negatively impacted by generally lower global equity prices and corporate performance during the first quarter of 2016.”

Debt securities and loans net revenues were also significantly lower compared with the first quarter of 2015, primarily “reflecting lower net revenues related to loans and lending commitments to institutional clients (including higher provision for losses) and lower net gains from investments,” the statement said.

“Looking ahead, we will continue to focus on delivering superior service to our clients and managing our business efficiently, which remain essential to generating shareholder value over the long term,” Blankfein said.

GOP Just Keeps Pushing Financial Reform

Seal On Money BHRepublicans have been trying to chip away at the Dodd-Frank Wall Street Reform and Consumer Protection Act ever since it was passed nearly six years ago, and they have been making some headway in the last month.

The latest victory for the GOP in their fight against Dodd-Frank came in the House of Representatives recently when H.R. 3340, known as the Financial Stability Oversight Council (FSOC) Reform Act, passed by a vote of 239 to 179. The bill was introduced by Rep. Tom Emmer (R-Minnesota) in July 2015 and it passed in the House Financial Services Committee in November.

The FSOC, which was created by Dodd-Frank in 2010 along with the Office of Financial Research (OFR), has the power to designate certain financial institutions as “systemically important,” which increases the regulatory burdens for those institutions. H.R. 3340 amends the Financial Stability Act of 2010 and requires the budgets of both the FSOC and the OFR subject to the annual appropriations process; it also establishes requirements for reports and a public notice and comment period.

“I am a firm believer in a transparent and accountable government, and if a federal institution is failing to meet these fundamental criteria, Congress needs to fix it,” Emmer said. “Unfortunately, FSOC and OFR currently operate in the shadows, outside of the usual congressional oversight and the democratic process. I cannot stand by while businesses that had nothing to do with the 2008 financial crisis are being unjustly burdened with new regulations that result in Americans paying higher prices for essential financial products like home mortgages, as well as education, auto and business loans.”

“I am a firm believer in a transparent and accountable government, and if a federal institution is failing to meet these fundamental criteria, Congress needs to fix it.”

Rep. Tom Emmer (R-Minnesota)

Emmer continued, “Over the years, Congress has given much of its authority to unelected bureaucrats but this legislation returns the Constitutional ‘power of the purse’ back to Congress. Not only will this legislation reduce mandatory spending by $1.3 billion over the next ten years, but it will make FSOC and OFR transparent and accountable to the American people. Subjecting these entities to the congressional appropriations process, enhancing OFR quarterly reporting requirements and allowing Americans to weigh in on OFR rules and regulations gives Congress the tools it needs to provide the proper oversight of FSOC and OFR.”

H.R. 3340, like most proposed legislation that involves financial reform that rolls back Dodd-Frank, passed with an almost exclusively partisan vote. Out of the 239 yeas, only one Democrat voted in favor of it (Rep. Henry Cuellar from Texas), and out of the 179 nays, only one Republican voted against it (Rep. Walter Jones of North Carolina).

The passage of H.R. 3340 in the House is the latest in a series of setbacks for Dodd-Frank. Last week, the House Financial Services Committee passed a bill to repeal Dodd-Frank’s bailout fund for large, complex financial institutions. At the same time, the Committee passed a bill to put the CFPB’s spending on a budget in an attempt to make the Bureau more accountable to taxpayers.

In late March, a judge dealt a blow to Dodd-Frank and the FSOC when she ordered the “systemically important” designation to be removed from insurance provider MetLife. The FSOC designated MetLife as a nonbank systemically important institution in December 2014 and MetLife had fought to have it removed since.

Wells Fargo Settles for $1.2 Billion Over ‘Shoddy’ Mortgage Practices

seal-on-moneyWells Fargo has agreed to pay $1.2 billion to settle civil mortgage fraud claims against the bank and Wells Fargo executive Kurt Lofrano, according to an announcement from the Department of Justice on Friday.

According to the announcement, Wells Fargo agreed to pay $1.2 billion and admitted, acknowledged, and accepted responsibility for certifying that certain residential home mortgage loans were eligible for FHA insurance when they were not. As a result, according to the announcement, when some of those loans defaulted, the government had to pay the FHA insurance claims.

“This Administration remains committed to holding lenders accountable for their lending practices,” HUD Secretary Julián Castro said. “The $1.2 billion settlement with Wells Fargo is the largest recovery for loan origination violations in FHA’s history. Yet, this monetary figure can never truly make up for the countless families that lost homes as a result of poor lending practices.”

The settlement stems from Wells Fargo’s participation in the Direct Endorsement Lender program, a federal program administered by the Federal Housing Administration. Wells Fargo has the authority to originate, underwrite, and certify mortgages for FHA insurance based on the bank’s status as a Direct Endorsement Lender. If a loan that has been approved for FHA insurance later defaults, the mortgagee may submit an insurance claim to HUD for the balance of the loan, which HUD must pay.

The DOJ said that between May 2001 and October 2005, Wells Fargo—the largest HUD-approved residential mortgage lender— engaged in a “regular practice of reckless origination and underwriting of its FHA retail loans, all the while knowing that it would not be responsible when the defective loans went into default.” The DOJ said that the bank hired temporary staff that was not properly trained in order to increase the volume of these loans and also applied pressure on its underwriters to approve more FHA loans.

“Predictably, as a result, Wells Fargo’s loan volume and profits soared, but the quality of its loans declined significantly,” the DOJ said.

“Wells Fargo has helped millions of people buy homes and we will continue to meet the financing needs of the customers and communities the FHA program is intended to serve.”
Franklin Codel, Wells Fargo

According to the DOJ, Wells Fargo then failed to self-report to HUD the bad loans that it was originating. The DOJ said that Lofrano, in his capacity as VP of Credit Risk-Quality Assurance, executed annual certifications required by HUD for the bank’s participation in the Direct Endorsement Lender program on Wells Fargo’s behalf for the years in question.

“Today, Wells Fargo, one of the biggest mortgage lenders in the world, has been held responsible for years of reckless underwriting, while relying on government insurance to deal with the damage,” said U.S. Attorney Preet Bharara for the Southern District of New York. “Wells Fargo has long taken advantage of the FHA mortgage insurance program, designed to help millions of Americans realize the dream of home ownership, to write thousands and thousands of faulty loans. Driven to maximize profits, Wells Fargo employed shoddy underwriting practices to drive up loan volume, at the expense of loan quality. Even though Wells Fargo identified through internal quality assurance reviews thousands of problematic loans, the bank decided not to report them to HUD. As a result, while Wells Fargo enjoyed huge profits from its FHA loan business, the government was left holding the bag when the bad loans went bust. With today’s settlement, Wells Fargo has finally resolved the years-long litigation, adding to the list of large financial institutions against which this office has successfully pursued civil fraud prosecutions.”

In a press release, President of Wells Fargo Home Lending Franklin Codel said, “Today’s court filing details a previously announced agreement in principle that resolves not only the pending lawsuit filed by the U.S. Attorney for the Southern District of New York, but also a number of other potential claims going back as far as 15 years in some cases. It allows us to put the legal process behind us, and to focus our resources and energy on what we do best—serving the needs of the nation’s homeowners.”

Codel continued, “We are dedicated to providing access to credit to a broad range of customers through offerings that exist today as well as new products and programs on the horizon. Wells Fargo has helped millions of people buy homes and we will continue to meet the financing needs of the customers and communities the FHA program is intended to serve.”

Treasury Set to Fight MetLife Over ‘Too Big to Fail’ Removal

Money One BHThe U.S. Department of Treasury said it plans to appeal a federal judge’s decision to remove the designation of MetLife as a non-bank “systemically important financial institution” (SIFI), according to a statement on Treasury’s website.

Judge Rosemary Collyer, in the U.S. District Court in the District of Columbia, ruled in a sealed opinion last week that the SIFI tag should be removed from MetLife, stating that the government body that applied the designation used a “fatally flawed” process. The removal of the SIFI designation means that the failure of the global insurance provider would not have catastrophic consequences for the U.S. economy.

Along with the government’s announcement that it would appeal Collyer’s ruling, Treasury Secretary Jacob Lew defended FSOC’s decision to designate MetLife as a SIFI.

“Wall Street Reform was enacted in response to serious problems identified during the financial crisis, and to protect taxpayers from having to bear the enormous burdens of another crisis,” Lew said. “Regulators previously did not have the tools to understand and respond to the risks posed by the distress of companies such as MetLife.  In using these tools, FSOC has taken a deliberative and data-driven approach, relying on a careful analysis of available information, including intensive engagement with each company and its regulators to evaluate how the firm’s distress could affect the financial system.”

The non-bank SIFI tag was applied to MetLife in December 2014 by the Financial Stability Oversight Council (FSOC), a government body created by the Dodd-Frank Act in 2010 in order to identify risks to the financial stability of the U.S. economy. The FSOC is comprised of 10 voting members (all Democrats) and five non-voting members. The voting members consist of the heads of nine government regulatory agencies (Treasury, the Fed, FDIC, CFPB, FHFA, SEC, CFTC, OCC, and NCUA) and one independent member. That independent member, Roy Woodall Jr., was the lone dissenter in the Council’s 9-1 vote to designate MetLife as a nonbank SIFI 16 months ago.

MetLife sued the FSOC in January 2015 to have the SIFI designation removed, because as a nonbank SIFI, MetLife said it would be subject to heightened regulation which the company says will increase compliance costs, hence increasing costs to consumers without any added safety benefit for the financial system.  MetLife even set up a portion of its website devoted to providing a “central point for information related to the judicial review of FSOC’s designation.”

“We intend to continue defending vigorously the process and the integrity of FSOC’s work, and I am confident that we will prevail.” 

Treasury Secretary Jacob Lew

Collyer’s 33-page opinion was unsealed on Thursday. In that opinion, she wrote that the court was rescinding the government’s designation of MetLife as a nonbank SIFI on two grounds.

“First, FSOC made critical departures from two of the standards it adopted in its Guidance, never explaining such departures or even recognizing them as such,” Collyer wrote. “That alone renders FSOC’s determination process fatally flawed. Additionally, FSOC purposely omitted any consideration of the cost of designation to MetLife. Thus, FSOC assumed the upside benefits of designation (even without specific standards from the Federal Reserve) but not the downside costs of its decision. That is arbitrary and capricious under the latest Supreme Court precedent (Michigan v. Environmental Protection Agency in June 2015).”

Lew said in response to the ruling that Congress did not require the FSOC to conduct a formal cost-benefit analysis of SIFI designations “for good reasons.”

“Such a requirement would impair the Council’s ability to address the risks of a future financial crisis that could severely damage the financial system and the U.S. economy,” Lew said. “As we have learned, the far-reaching damage of a financial crisis is difficult to predict and can cause massive economic pain to families and firms across the United States.”

Opponents of Dodd-Frank’s financial reform who believe the financial industry is overregulated have viewed the decision to remove MetLife’s SIFI tag as a major victory for their camp. One such opponent was House Financial Services Committee Jeb Hensarling (R-Texas), who issued a statement saying that “today’s SIFI designations are just tomorrow’s taxpayer-funded bailouts. SIFI is Washington’s way of officially anointing these companies as too big to fail, despite promises that the Dodd-Frank Act would end too big to fail.”

Lew said that Dodd-Frank opponents should not be so quick to celebrate, however.

“Some opponents of financial reform have hailed the court’s decision as a win for our financial system,” Lew said. “This is wrong and dangerously ignores the lessons of the financial crisis. FSOC’s authority to designate nonbank financial companies is a critical tool to address potential threats to financial stability, and it has made our financial system safer and more resilient. We intend to continue defending vigorously the process and the integrity of FSOC’s work, and I am confident that we will prevail.”

Other nonbanks to receive the SIFI designation from FSOC were American International Group (AIG), Prudential Financial, and General Electric. MetLife is the first institution to challenge the SIFI designation.

Texas Courts Validate MERS Assignments

Two U.S. district courts in Texas held that MERS assignments were valid for two separate cases in which Bank of America was the defendant, granting motions to dismiss in both cases, according to an announcement from MERSCORP Holdings.

In the case of Campo vs. Bank of America in the U.S. District Court for the Southern District of Texas, Houston Division, the plaintiff argued that the assignment of the deed of trust to MERS failed to transfer any servicing rights because MERS had no enforceable interest in the deed of trust, and therefore the assignment to MERS was invalid.

The court, citing a precedent in the case of Reece v. U.S. Bank Nat’l Ass’n, Our Court has expressly recognized that MERS may assign a deed of trust to a third party and that such assignments confer the new assignee standing to non-judicially foreclose on property associated with that particular deed of trust.”

In a similar recent case of Rivers v. Bank of America in the U.S. District Court for the Northern District of Texas, Dallas Division, the court adopted the Findings, Conclusions, and Recommendations of Magistrate Paul Stickney, who found that “[g]iven that the Deed of Trust in this case names MERS as the beneficiary… and because MERS subsequently assigned the Deed of Trust to the Defendant, this assignment transferred all rights in the Deed of Trust, including the right to foreclose on the Property.”

“These rulings are consistent with other decisions in Texas and in courts throughout the country.”

Janis Smith, MERSCORP

“We are pleased that both courts continue to recognize that MERS has a valid interest in the deed of trust and has the right to assign that interest to third parties,” said MERSCORP Holdings VP for Corporate Communications, Janis Smith. “These rulings are consistent with other decisions in Texas and in courts throughout the country.”

MERS has won several cases last year and in the first few months of 2016 in which the deed of trust assignment was challenged, including a few in Texas. In September, a district court in Collin County, Texas, reinstated a MERS lien that had been extinguished

A district court in Collin County, Texas, reinstated a MERS lien that was previously extinguished in a quiet title action in the case of Mortgage Electronic Registration Systems, Inc. v. Kingman Holdings, Inc.  MERS contended that their due process rights under both the Texas and U.S. Constitutions were violated when Kingman did not provide MERS, as record beneficiary of the deed of trust, with notice or make MERS a party to Kingman’s action that sought to extinguish the MERS lien.

Housing Market to Remain on ‘Solid Trajectory’

American-flag-houseDespite signs of softness in several sectors of the economy reported recently, the housing market should remain on a “solid trajectory” for the rest of 2016, according to New York Fed President and CEO William C. Dudley in an address Friday at the University of Bridgeport, Connecticut.

Dudley said that despite the recent volatility in financial markets, his outlook for the U.S. economy remains the same—he expects the economy will expand for the rest of the year at a pace slightly above its long-term trend. While he does not expect the Fed to meet its 2 percent inflation objective this year, Dudley expects the factors holding down inflation will dissipate over time, which will result in inflation eventually reaching its 2 percent objective.

On the sectors of the economy that have recently shown softness, Dudley cited real consumer spending growth, which seems to have moderated from the robust pace it showed during the second half of 2015. He also cited home sales.

Bill Dudley

“Both new and existing home sales have flattened since the middle of last year,” Dudley said. “Finally, indicators of real business investment spending point to continued softness.  In contrast, manufacturing production—which had been a particular weak spot of the U.S. economy in 2015—rose in the first two months of this year.”

Slack in the labor market seems to be diminishing as evidenced by payroll gains for the first three months of 2016 near last year’s monthly average of 229,000 to go with an unemployment rate of 5 percent, Dudley said. However, some slack in the labor market remains, as indicated by subdued measures of aggregate wage growth.

“The housing market should remain on a solid trajectory, supported by rising employment and low mortgage rates.”

Bill Dudley, New York Fed President and CEO

“I continue to anticipate that consumption and housing activity will expand at a moderate pace this year,” Dudley said. “Continued job and wage gains, combined with still-low energy prices, should sustain real disposable income growth and support consumer spending. The housing market should remain on a solid trajectory, supported by rising employment and low mortgage rates.”

Mortgage rates reached a low for 2016 on Thursday, when Freddie Mac announced that the average 30-year fixed-rate mortgage interest rate was 3.59 percent for the week ending April 7.

Dudley expects GDP growth of around 2 percent for 2016, which is slightly below the average pace of growth in this expansion—but a bit above his estimate of the economy’s potential growth.

“If this materializes, then we should see some further reduction in the unemployment rate to around 4¾ percent—my estimate of the rate that I view as consistent with stable inflation over the long term,” Dudley said.