Neel Kashkari Discusses Bailouts, Dodd-Frank, and More

On Tuesday, President of the Federal Reserve Bank of Minneapolis and former Assistant Secretary of the Treasury for Financial Stability Neel Kashkari held a Q&A  with members of the Financial Planning Association of Minnesota in Golden Valley. Kashkari was the first Assistant Secretary of the Treasury for Financial Stability under the Bush and Obama administrations.

During the Q&A, Kashkari voiced his views on bank restructuring, and he also shared his personal experiences with trying to obtain a mortgage, and the frustration caused by the mortgage lending process. He stated that higher capital for big banks and relaxed policy on smaller banks may provide relief for banking institutions.

“If we can make sure we’ve taken care of the biggest banks and the risk they pose, I think we could relax a lot of regulations on just about everybody else,” said Kashkari, “so that people are freer to run their businesses, to make the investment decisions they believe are right, we all then would have confidence that the biggest banks are safe, and not so micromanaged.”

According to Kashari, the Troubled Asset Relief Program wasn’t about protecting the banks, it was about protecting the people from the inevitable fallout.

“I was the guy who bailed out the banks.” he said. “We hated it. You know, we were a free market Republican administration. We wanted to let the markets work and let all these banks fail. The problem was if we allowed the financial system to collapse, instead of the great recession, we would have been looking at the great depression.”

Kashkari spent some time during the Q&A discussing the recession. He remarked that in 2006, it was about “time for a financial crisis,” since it had been eight or 10 years since the last crisis. He also stated that a national housing bust was never on the radar, and that a “nationwide delusion that homes prices only go up” was the root cause of the financial crisis.

The session concluded with a question on the struggle of community banks in the face of the big banks. Kashari also spoke about Dodd-Frank, which he stated increased the cost of compliance, which many small banks are incapable of handling.

“We need to relax some of the regulations that are smothering community banks,” he said. “If we can address the big banks, and relax regulations smothering community banks, we can probably solve both problems at the same time.”

Watch the entire Q&A with Neel Kashkari here.


Home Depot Ends 2016 on Top

Home Depot defied naysayers with stronger-than-expected sales for Q4 2016, and sales scheduled to may be poised to stay on track thanks to rebounding home sales.

The home-improvement retailer came out with the news in a report Tuesday that profits had leapt to $1.44 a share over that time period, capturing $1.7 billion in net earnings.

Those numbers are up from $1.17 per share and $1.5 billion in net earnings reported in fiscal year 2015. The change reflects a 5.8-percent increase year-over-year.

In a statement, Home Depot CEO Craig Menear credited a consumer-related focus for the good news.

“Our focus on providing localized and innovative product selection, improving the interconnected customer experience, and driving productivity resulted in record sales and net earnings for 2016,” Menear said.

According to reports, market watchers had expectations that Home Depot wouldn’t see such success on the heels of rising mortgage rates.

“The market had growing fears around trends in the home-improvement category due to rising interest rates and a commensurate drop in mortgage refinancing—which is often used for larger projects,” Bloomberg News reported David Schick, Research Director for Consumer Edge Research, as saying by email.

“Home Depot fourth-quarter results and guidance reconfirmed consistent demand and the structural strength of their business model,” said Schick to Retail Dive.

With home prices up over the course of the last few years, more consumers were willing to invest in remodeling and home repairs, experts have said.

In its earnings report, the home-improvement retailer said it planned to reward shareholders this new fiscal year.

The company also forecasted that sales would increase 4.6 percent this year, furnishing roughly $99 billion in revenue.

Federal Court Denies Stockholders’ Claims Against the GSEs

Fannie Mae Freddie Mac BHA split ruling by a federal appeals court in Washington on Tuesday dashed the hopes of hedge funds in their legal challenge to the U.S. government’s capture of billions of dollars in profits generated by Fannie Mae and Freddie Mac after their bailout, which sent GSE shares in a downward spiral.

As a result, Fannie Mae fell 35 percent to $2.71 in New York trading, while Freddie Mac shares were down 38 percent to $2.47. Some classes of Fannie’s preferred shares were down more than 30 percent.

Shareholders argued that the government illegally seized profits from the companies after it decided in 2012 to collect a share of earnings every quarter. Today’s ruling means that hedge funds still won’t be able to sue the US government over seizing profits made by the mortgage-loan companies.

Fannie Mae said it would pay $5.5 billion in dividends to the U.S. Treasury on February 17. With that payment, to be made in March, the company will have paid a total of $160 billion in dividends to the government. On February 16, Freddie Mac reported Q4 2016 earnings of $4.8 billion. With the earnings, the GSEs are expected to pay the Treasury a combined total of $10 billion in March.

In place since January 2013, the net worth sweep allowed the U.S. to recapture all of the $187 billion in taxpayer money it spent to stave off the companies’ collapse—and more.

According to Bloomberg, Perry Capital and Bruce Berkowitz’s Fairholme Funds Inc. are among the major owners of Fannie’s and Freddie’s preferred shares, while Bill Ackman’s Pershing Square Capital Management is a major owner of the companies’ common shares.

These and other big investors lost in their effort to overturn a judge’s ruling that said they can’t sue the government over the dividend change,  which forced the companies to send almost all their profits to the U.S. Treasury, leaving shareholders with nothing.

The appeals panel allowed shareholders with valid contract-based claims to pursue that part of the lawsuit. The revived case likely returns to U.S. District Judge Royce Lamberth, who threw it out in 2014.

“The institutional plaintiffs could still benefit from the damages claims brought by the class, assuming they fall within the definition of the class, which they likely do,” said Hamish Hume, a lawyer who represented a few of the prevailing shareholders.

The hedge funds can also ask for a rehearing by the full appeals court in Washington, or ask the U.S. Supreme Court to hear the case.

As reported in Business Insider, Gary Cohn, director of the White House National Economic Council, told The Wall Street Journal earlier this month that the administration planned to direct the Treasury to review the role of Fannie Mae and Freddie Mac. Treasury Secretary Steven Mnuchin said in November, “We’ve got to get them out of government control.”

Matthew McGill, a lawyer for Perry, disputes the court’s decision that the FHFA had the authority to impose the sweep. “We obviously disagree with that,” he said. He paraphrased the court’s conclusion as, “You may have been allowed to do it, but if you breached the contracts with the stockholders, you may still have to pay.”

Bottom of Form

Mortgage Defaults are Holding Steady

On Tuesday, S&P Dow Jones Indices and Experian released data for the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults.

From December 2016 to January 2017, the index level for first mortgages has increased from 0.71 percent to only 0.72 percent. Second mortgages saw a similarly small increase from 0.41 percent to 0.48 percent. Likewise, mortgage delinquency has shown signs of stabilization. Delinquency rate dropped by 7.3 percent last year, but remained unchanged in the last two quarters.

Mortgage originations saw a significant increase in 2016 as well. Joe Mellman, VP and Mortgage Business Leader at TransUnion said, “Originations have continued to grow across all risk tiers, which suggests lenders may be warming up to originating mortgages to non-prime borrowers, even though that share of the market remains small at under 4 percent.”

Across the five metropolitan statistical areas (New York, Chicago, Dallas, Los Angeles, and Miami), Miami had the highest rate of defaults at 1.67 percent, up 14 basis points since December. Dallas (0.75 percent) and Los Angeles (0.80 percent) both reported eight basis points increases, and Chicago reported a five basis point increase to 1.03 percent. New York reported the smallest default rate increase of one point to 0.88 percent.

David Blitzer, S&P Dow Jones Indices committee chairman and Managing Director, said that consumer sentiment has risen in the past couple of years.

“Recent data point to consumer optimism: retail sales rose 5.5 percent in January 2017 compared to a year earlier, consumer sentiment measures rose over the last two years, and employment and labor market conditions are favorable,” he said. “Federal Reserve data on consumer credit and mortgage debt outstanding reveal that consumers are borrowing money.”

In addition to mortgage defaults, the S&P/Experian Consumer Credit Default Indices also covered bank card defaults. As of January, bank cards saw an increase in defaults, up to 3.21 percent, the highest level since July 2013. At the same time, results from the report show that mortgage delinquency has not shown significant change.

President Trump’s First 30 Days: The Administration’s Progression

The 30-day mark for President Trump Administration has come and gone, so DS News decided to take stock of what has been accomplished in the areas that affect our readers the most—housing and mortgage.

First and foremost, during his first 30 days President Trump implemented an Executive Order that calls for the review of Dodd-Frank. This is his first step in fulfilling his campaign promise to peel back the banking law.

Also during his first 30 days, President Trump saw his Treasury Secretary pick confirmed. Steven Mnuchin, a former executive at Goldman Sachs, is now the 77th U.S. Secretary of the Treasury, assuming the position from Henry Paulson.

However, Trump has not yet had equal success seeing the confirmation of his HUD nominee. The president first proposed Dr. Ben Carson on December 5 but his nomination still needs to be approved by the Senate.

Carson is considered a wild card choice for HUD Secretary due to his having no background in government or housing.

Senate Banking Committee Chairman Mike Crapo (R-Idaho) however does not feel this should be an impediment, saying “HUD will benefit from having a Secretary with a different perspective and a diverse background, and I’m excited to support Dr. Carson.”

“Throughout my life, I have done things that many deemed impossible,” Carson said in his confirmation hearing two weeks ago, “I pledge to work with this Committee and the dedicated career staff at HUD to solve difficult, seemingly obstinate issues and address the needs of those who rely on the services provided by HUD.”

During his time in office, the Bureau of Labor statistics reported an unemployment rate of 4.8 percent with 227,000 jobs added. “President Trump is inheriting an economy on its way to full employment, but there is still more work to do,” Elise Gould, an economist at the Economic Policy Institute said.

In these areas alone it is clear that Trump’s first 30 days have been impactful and we will be following closely what the next 30—and the following 1,398—bring.

Five Minutes With Michael Danlag

DSN-story (2)Michael Danlag is VP and Global Head of Service Delivery with Sutherland Mortgage Services, Inc. Danlag joined Sutherland in April 2015 with over 28 years of proven success in the financial and mortgage industries. His experience includes managing multiple departments within the post-closing and loan servicing functions such as servicing transfers, escrow administration, default administration, customer service, custodial document control, and cash management/payment processing. Prior to joining Sutherland, Danlag has held positions with PHH Mortgage, Bank of America, American Express, and Countrywide Home Loans.

What role will technology play in mortgage servicing going forward?

Technology will move the needle in transforming processes for mortgage servicing. Process transformation will continue to play a critical role in modernizing the way in which we service mortgages, just as it has for other industries. As an example, process transformation has forced entirely new markets to form in order to build and support applications on mobile devices, used by consumers in countries around the world. Many industries leverage technology to enhance their customer experience, reduce expenses, and place a stronger focus on adherence to complex regulations–we expect this to also impact mortgage servicing.

What’s more, technology will serve as an indicator of market leaders in the mortgage and loan servicing industry. As consumers become more tech-savvy, we will see increased demand for enhanced technology, and service providers will be expected to keep up. Enhancing technology is more than just upgrading antiquated systems. Rather, new and evolving technology will completely reshape how a loan is serviced in this continuously evolving age of savvy consumers and innovative technology.

How will leveraging advanced technologies reshape the servicing of a loan?

Advancing technology to improve the overall mortgage servicing experience is a top priority for the industry. With industry thought leaders blazing the trail, the landscape will be reshaped to a new paradigm. With this paradigm shift, the mortgage customer experience after loans close should be world class and on par with customer service interactions received from other industries. For example, servicers will leverage analytics to proactively identify customers eligible for reductions in interest rates. Doing so will enhance the refinance process, drive higher customer satisfaction, and extend the life of customers with their mortgage servicer.

From the customer’s point of view, they would ideally be alerted of eligibility for a lower interest rate via a smart phone application. The customer will then indicate their interest via the app to initiate the refinance process. Finally, the app could establish customer payments and serve as a hub for their mortgage servicing information.

Beyond data and analytics, machine learning and robotics will greatly support mortgage servicing by processing high volume, repeatable tasks. By handling recurring functions, machine learning and robotics will reduce costs and increase the quality of tasks being performed, enabling employees to focus on complicated items or exceptions. Not to mention, servicers will better manage volume fluctuations given their ability to turn robots on or off instead of headcount.

What specifically can technology do to improve mortgage servicing?

During the life of a loan, any customer interaction with a mortgage servicer outside of making normal monthly payments is often due to an issue or error. With technology, the servicer will be able to better anticipate these issues, be proactive in avoiding and solving the issue, and communicate back to the customer as quickly as possible in their preferred method of communication. Customers are usually forgiving and if the servicer responds quickly and resolves the issue for the customer completely without delay, the servicer can turn around a negative situation to a positive experience.

Bottom line, improving mortgage servicing technology greatly moves the needle when it comes to delivering outstanding customer service. This ultimately helps servicers retain customers, improves the servicer’s reputation and improves profit margins across the board.

Where do you think technology in mortgage servicing will go from here?

The entire mortgage industry will leverage data-driven insights to offer a more customized customer experience. Data analytics will play an integral role in driving processes and activities in the future. Specifically, mortgage servicers will use data and analytics from external sources to better understand customer behavior and preferences. From that intelligence, servicers will develop tools and applications to ultimately enhance the overall customer experience.

Black Knight Financial Releases Latest Foreclosure Findings

Delinquent Notice BHA recent report from Black Knight Financial Services released on Thursday looked at month-end mortgage performance statistics for January 2017. The report found that delinquencies improved by 3.9 percent compared to December and was down 17 percent from January 2016.

In addition, prepayment speeds decreased by 30 percent in January to the lowest numbers since February 2016.

However, foreclosure starts spiked by nearly 18 percent, bringing the nation’s foreclosure starts to 70,400, which hasn’t reached this level since March 2016. The last two months have seen a significant increase in foreclosures. “The foreclosure rate for 2016 had the largest improvement of any year since 2000,” as stated in Black Knight Financial Services’ December 2016 month-end mortgage performance report.

The national foreclosure pre-sale inventory rate continued to improve, decreasing in January to 0.94 percent, which is close to a 28 percent year-over-year decline.

The states with the highest level of delinquencies were Mississippi, Louisiana, West Virginia, Alabama, and New Jersey. Mississippi was at the top of the list with a non-current percentage of 11.36, while New Jersey came in fifth at 7.79 percent.

Nearly 2.6 million borrowers are behind on their mortgages payments, which is the lowest number since August 2006.