Wednesday, August 22, 2007

Disturbing and quieting signs 

Let's start with better news. The discount window strategy of the Fed might be working.
U.S. banking giants Citigroup Inc., J.P. Morgan Chase, Bank of America and Wachovia Corp. said on Wednesday that they borrowed $2 billion from the Federal Reserve as part of a new program set up last week to pump cash into the creaking financial system.

Citibank, a unit of Citigroup, said it took out a $500 million, 30-day loan from the New York Fed's discount window program for its clients. The company didn't identify those clients.

"Citibank stands ready to continue to access the discount window as client needs and market conditions warrant," the bank said in a statement. "Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients.
Using the banks as go-betweens for paper that mortgage companies and hedge funds need to use is part of the strategy. The banks may be better judges of the paper's value than Fed officials. There's no doubt this jawboning, as Bill Polley calls it, is working with those banks. I'm reminded of the Knickerbocker crisis of 1907, when NYC banks did act as a lender of last resort before there was a Fed. (See Tallman and Moen for more.)

There are stories all over of mortgage bank units being closed.
I don't see any stories of people jumping from windows (though an abandoned Maserati of some hedge fund official is rather humorous.) I am not necessarily calling this bad news; it's part of what has to happen when some people take risks that go sour.

It may be that they took more risks than we realized, if this story from Barry Ritholz bears out.
What happens if a lender fails to comply with the TILA [Truth in Lending Act] rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
It's not clear to me whether judges are going to allow borrowers to get out of the first liens on their homes by this, but it doesn't sound entirely implausible. This could be part of that information problem we've discussed -- the collateral the lenders think they have might not be good.

Here's the one that will have to go down as bad news:
The number of troubled assets among federally regulated thrifts rose rose 49% in the second quarter from 12 months before to the highest level since the savings and loan crisis, the Office of Thrift Supervision reported Tuesday.

The agency also reported that the number of "problem thrifts," or companies rated poorly by regulatory standards, had risen to 10, up from just 4 in the second quarter of 2006.

Thrifts are federally regulated banks that originate one out of every four mortgages. The companies largely originate prime or jumbo loans, so their stressed loan portfolios suggest that more loan types - not just subprime mortgages - are under pressure.

The thrift industry had $14.2 billion in troubled loans, which are either noncurrent loans or repossessed assets, the OTS said. That's up from $9.5 billion in the second quarter of 2006. This is the highest level of troubled assets since 1993, though as a percentage of total assets its only the highest level since 1997. Noncurrent loans include mortgage delinquencies, which have grown precipitously as the adjustable-rate mortgages that were very popular during the recent housing boom reset into much higher monthly commitments.

"This is what is keeping us as regulators up at night," James Caton, director of financial monitoring and analysis, said at a press briefing to discuss the data.

The OTS attributed the growth in noncurrent loans to two business lines - one-to-four family mortgages and construction and land loans. For one-to-four family mortgages, 1.26% were considered noncurrent as of June 30, up from 0.78% on June 30, 2006.

For construction and land loans, 1.61% were noncurrent at the end of June, compared with 0.47% on June 30, 2006. Troubled loan levels are expected to continue rising in the third quarter, OTS senior deputy director Scott Polakoff said.
I think this is as much a symptom of the bursting of the housing bubble as it is the fault of subprimes. (h/t: Calculated Risk.)

Of course the most worrying thing: Congress wants to get involved and do more for borrowers.
Sen. Charles Schumer (D., N.Y.) is pushing federal regulators to raise portfolio caps at Fannie Mae and Freddie Mac and ask banks to help with workouts for borrowers hit by the mortgage lending meltdown.

�The Federal Reserve Bank has taken good steps to restore liquidity to the financial system, but there is still much more that needs to be done to address the risks that we face to our broader economy caused by the ongoing turmoil in the mortgage market,� Schumer wrote in a letter to federal regulators.

Schumer, a member of the Senate Banking, Housing and Urban Affairs committee, asked Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other federal regulators to get behind a plan to provide $100 million to not-for-profit housing groups to help borrowers refinance their subprime loans, spokesman Brian Fallon said. Fallon said that 20% to 40% of borrowers hit in the subprime lending crisis should have qualified for prime-rate loans.

To see why that probably won't help, read the post just below this.

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