Category: Credit risk

The New Mortgage Fee Structure

Mary Pat Campbell

Link: https://rajivsethi.substack.com/p/the-new-mortgage-fee-structure

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Excerpt:

Notice that credit scores below 639 have been consolidated into a single row, and those above 740 have been split into three. In addition, loan-to-value ratios at 60% and below are now in two separate columns rather than one. This makes direct visual comparisons a little difficult, but one thing is clear—at no level of the loan-to-value ratio does someone with a lower credit score pay less than someone with a higher score. That is, one cannot gain by sabotaging one’s own credit rating.

In general, there are two types of borrowers who stand to gain under the new fee structure: those with low credit scores, and those with low down payments. In fact, those at the top of the credit score distribution gain under the new structure if they have down payments less than 5% of the value of the home. The following table shows gains and losses relative to the old structure, with reduced fees in green and elevated ones in red (a comparable color-coded chart with somewhat different cells may be found here):

What might the rationale be for rewarding those making especially low down payments? Perhaps the goal is to make housing more affordable for people without substantial accumulated savings or inherited wealth. But there will be an unintended consequence as those with reasonably high credit scores and substantial wealth choose to lower their down payments strategically in order to benefit from lower fees. They may do so by simply borrowing more for any given property, or buying more expensive properties relative to their accumulated savings. The incentive to do so will be strongest for those hit hardest by the changes, with credit scores in the 720-760 range and down payments between 15% and 20%.

Author(s): Rajiv Sethi

Publication Date: 23 Apr 2023

Publication Site: Imperfect Information at Substack

Debt ceiling fears push the cost of insuring against a US government default to highest level since 2008 crash

Mary Pat Campbell

Link: https://finance.yahoo.com/news/debt-ceiling-fears-push-cost-184617316.html

Excerpt:

The cost of insurance against the US failing to repay its debts rose to its highest level since the financial crisis last week, as traders worried that political deadlock in Washington might lead to a default.

One-year government credit default swaps traded at 106 basis points Saturday – the most expensive they’ve been since 2008, according to a Financial Times report that cited Bloomberg data.

Credit default swaps – or CDSs – are a form of insurance against a borrower not making scheduled payments on their debt.

The price of one-year government CDSs has spiked 15 basis points in 2023 with traders spooked by the looming threat of a debt-ceiling crisis, the FT reported.

The debt ceiling is a limit on how much the government can borrow, set by Congress. The US hit its $31.4 trillion debt limit in January – and that means it could run out of money to pay its bills as soon as July if lawmakers don’t vote to raise the ceiling, according to the Congressional Budget Office.

Author(s): George Glover

Publication Date: 24 Apr 2023

Publication Site: Yahoo Finance

Wall Street Boosts States’ Credit Scores as Recession Worries Cloud Outlook

Mary Pat Campbell

Link: https://www.bloomberg.com/news/articles/2023-04-19/wall-street-boosts-states-credit-scores-as-recession-woes-cloud-outlook

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Excerpt:

Illinois, Massachusetts and New Jersey this year have garnered higher credit scores from rating companies, including brighter outlooks for the states as well. The upgrades also helped shrink bond yield spreads in the primary and secondary municipal markets, signaling investor perception of state debt is improving.

The better state ratings are due in part to the positive effect of federal pandemic aid, which some states used for one-time expenses while others set cash aside for the future. State treasuries also saw an influx of tax revenue from residents — bolstered by US stimulus money sent to individuals — who spent on services at home at the height of the pandemic, and on travel after Covid lockdowns were eased. 

Still, a slowdown in the US economy this year is causing concern that states can no longer expect a cash haul. The likelihood that the economy in the next 12 months will slide into a recession is greater now than a month earlier, according to a March 20-27 Bloomberg survey of 48 economists.

The poll, conducted after several bank closures roiled financial markets, put the odds of a contraction at 65%, up from 60% in February, amid interest-rate hikes by the Federal Reserve and growing risks of tighter credit conditions. 

Author(s): Skylar Woodhouse

Publication Date: 19 Apr 2023

Publication Site: Bloomberg

Federal Financial Watchdog Aims to Expand Its Reach

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2023/04/24/federal-financial-watchdog-aims-to-expand-its-reach/

Excerpt:

The Financial Stability Oversight Council — the federal agency in charge of keeping the U.S. financial system upright — wants to change a 2019 document that limits how it tries to keep problems at life insurers, money market funds, cryptocurrency firms and other nonbank financial companies from destroying the economy.

FSOC announced Friday that it’s proposing a new version of the document that would free it from the 2019 restrictions.

….

FSOC started a fight with life insurers and their regulators by designating companies such as MetLife and Prudential Financial as “systemically important financial institutions,” or companies needing extra oversight.

Life insurers argued that the SIFI designation process was unclear, arbitrary and unfair.

MetLife sued FSOC over its SIFI designation. A federal appeals court threw out MetLife’s designation in 2018.

FSOC withdrew the last designation of a nonbank company — Prudential Financial — in October 2018.

…..

FSOC says it needs more flexibility to address potential risks as early and as quickly as possible, and that comparing the potential benefits of focusing attention on a nonbank company to the potential impact on the company is not useful.

“This is in part because it is not feasible to estimate with any certainty the likelihood, magnitude or timing of a future financial crisis,” FSOC said. FSOC argued that, if it does prevent a financial crisis, it would save the country trillions of dollars.

FSOC noted that it consults with state regulators and federal regulatory agencies regularly, and that its own members are made up mostly of state and federal agency heads.

“The council expects that most potential risks to financial stability will continue to be addressed by existing regulators rather than by use of the council’s nonbank financial company designation authority,” FSOC said.

Author(s): Allison Bell

Publication Date: 24 Apr 2023

Publication Site: Think Advisor

Credit Default Swaps Imply a Two Percent Chance the US Defaults

Mary Pat Campbell

Link: https://mishtalk.com/economics/credit-default-swaps-imply-a-two-percent-chance-the-us-defaults

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Excerpt:

The implied odds are two percent but contract trading is very thin. And some of the protection is mandatory.  If regulators raise risk flags, some banks feel compelled to buy insurance. 

So most likely the true odds of default are much lower.

There is also a three day grace period. We could have a default, but if it is rectified within three days, those betting on a default will be technically correct yet receive no payout.

I believe the odds of a payout on these contracts is essentially zero. But yeah, if there is a default for a couple of days, there will be “chaos” as several people on Twitter have commented. 

Author(s): Mike Shedlock

Publication Date: 21 Apr 2023

Publication Site: Mish Talk

Ranked: The U.S. Banks With the Most Uninsured Deposits

Mary Pat Campbell

Link: https://elements.visualcapitalist.com/ranked-the-u-s-banks-with-the-most-uninsured-deposits/

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Today, there is at least $7 trillion in uninsured bank deposits in America.

This dollar value is roughly three times that of Apple’s market capitalization, or about equal to 30% of U.S. GDP. Uninsured deposits are ones that exceed the $250,000 limit insured by the Federal Deposit Insurance Corporation (FDIC), which was actually increased from $100,000 after the Global Financial Crisis. They account for roughly 40% of all bank deposits.

In the wake of the Silicon Valley Bank (SVB) fallout, we look at the 30 U.S. banks with the highest percentage of uninsured deposits, using data from S&P Global.

Author(s): Dorothy Neufeld, Sabrina Lam

Publication Date: 4 April 2023

Publication Site: Visual Capitalist

Thousands of Retirees Can’t Withdraw Savings Invested in Firms Controlled by Indicted Financier Greg Lindberg

Mary Pat Campbell

Link: https://www.wsj.com/articles/thousands-of-retirees-cant-withdraw-savings-invested-in-firms-controlled-by-indicted-financier-greg-lindberg-6a268369?st

Excerpt:

The 52-year-old executive [Greg Lindberg] was indicted last month on federal charges that he defrauded his insurers by lending $2 billion of their funds to companies in his private conglomerate, while allegedly siphoning off huge sums to finance his lavish lifestyle. He has pleaded not guilty and is out on bail.

Until last July, Mr. Lindberg was in federal prison on bribery charges related to the insurers. He was released after 21 months when an appeals court overturned the conviction. A retrial is scheduled for November.

The executive also is fighting a drawn-out court battle with North Carolina regulators, who seized his insurers in 2019 and now say they should be liquidated. Mr. Lindberg, who previously lived in North Carolina and was the subject of investigative articles in The Wall Street Journal in 2019, says the insurers are healthy and he has a plan to rescue them.

What rankles Mr. Zintel and others is that they believe Mr. Lindberg is using their money to fight his legal entanglements, allowing him to continue living extravagantly even as they cut back. Among the alleged extravagances: The divorced executive has spent millions of dollars on gifts for women, according to court documents, including paying some women to produce offspring for him.

Some 70,000 holders of annuities totaling $2.2 billion are unable to withdraw their money, filings show. Many are retirees or conservative investors who bought five- to seven-year annuities in 2017 and 2018. Financial advisers typically marketed them as a safe, higher-yielding alternative to bank CDs.

Author(s): Mark Maremont, Leslie Scism

Publication Date: 26 Mar 2023

Publication Site: WSJ

Why the life insurance industry did not face an “S&L-type” crisis

Mary Pat Campbell

Link: https://econpapers.repec.org/article/fipfedhep/y_3a1993_3ai_3asep_3ap_3a12-24_3an_3av.17no.5.htm

PDF link: https://econpapers.repec.org/scripts/redir.pf?u=http%3A%2F%2Fwww.chicagofed.org%2Fdigital_assets%2Fpublications%2Feconomic_perspectives%2F1993%2Fep_sep_oct1993_part2_brewer.pdf;h=repec:fip:fedhep:y:1993:i:sep:p:12-24:n:v.17no.5

Full reference:

Elijah Brewer, Thomas H. Mondschean and Philip E. Strahan

Economic Perspectives, 1993, vol. 17, issue Sep, 12-24

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Excerpt:

In most states, coverage under guaranty

funds is $300,000 in death benefits, $100,000 in

cash or withdrawal value for life insurance,

$100,000 in present value of annuity benefits,

and $100,000 in health benefits. Some states

cover all insurance policies written by an insol-

vent firm located in the state; others cover the

policies of residents only. In the case of unallo-

cated annuities such as GICs purchased by com-

panies to fund pension plans, some states cover

up to a certain amount, usually $5 million. Oth-

er states, such as California, Massachusetts, and

Missouri, do not cover GICs.

Because of variations in state guaranty

funds and in the way insolvencies are handled,

the parties bearing the costs of an insurance

failure differ across states. Surviving insurance

companies initially pay their assessments and

claim them as an expense on their federal corpo-

rate income tax return, reducing their federal

income taxes. As companies receive tax credits

in subsequent years, these credits become tax-

able income. As a result, the federal government

bears part of the cost of an insolvency since it

does not fully recover the present value of the

tax decrease granted in the assessment year. In

states with premium tax offsets, however, the

majority of the cost is paid by state taxpayers.

A study of 1990 life/health guaranty fund assess-

ments found that 73.6 percent was paid by state

taxpayers, 8.9 percent by federal taxpayers, and

17.5 percent by the equity holders of the surviv-

ing firms.

Author(s): Elijah Brewer, Thomas H. Mondschean and Philip E. Strahan

Publication Date: September 1993

Publication Site: Economic Perspectives, Chicago Fed

The Banking Sector Turmoil in Charts

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-banking-sector-turmoil-in-charts-52bb6095?mod=e2twg

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Excerpt:

It has been a wild ride for banks. Silicon Valley Bank, which catered to venture capitalists and startups, collapsed March 10 after a run on deposits that was preceded by a plunging share price and a money-losing bond sale as the bank tried to raise capital. Two days later, Signature Bank SBNY -22.87%decrease; red down pointing triangle was closed by federal regulators following a run. Then, First Republic Bank FRC 29.47%increase; green up pointing triangle, at risk of a run as its share price plummeted, was flooded with cash in an extraordinary action by some of the largest U.S. banks—but its shares resumed their plunge a day later. 

Here is how some banks ended up in the market’s crosshairs.

Author(s): Nate Rattner, Alana Pipe

Publication Date: 18 Mar 2023

Publication Site: WSJ

Barney Frank blames crypto panic for his bank’s collapse. Elizabeth Warren blames Trump.

Mary Pat Campbell

Link: https://www.politico.com/news/2023/03/13/barney-frank-signature-bank-collapse-warren-trump-00086765

Excerpt:

From his front-row seat, [Barney Frank] blames Signature’s failure on a panic that began with last year’s cryptocurrency collapse — his bank was one of few that served the industry — compounded by a run triggered by the failure of tech-focused Silicon Valley Bank late last week. Frank disputes that a bipartisan regulatory rollback signed into law by former President Donald Trump in 2018 had anything to do with it, even if it was driven by a desire to ease regulation of mid-size and regional banks like his own.

“I don’t think that had any impact,” Frank said in an interview. “They hadn’t stopped examining banks.”

But Warren, a fellow Massachusetts Democrat who designed landmark consumer safeguards that ended up in Frank’s 2010 banking law, is placing the blame firmly on the Trump-era changes that relaxed oversight of some banks and says Signature is a prime example of the fallout. Warren argues that, had Congress and the Federal Reserve not rolled back stricter oversight, Silicon Valley Bank and Signature would have been better able to withstand financial shocks.

Author(s): ZACHARY WARMBRODT

Publication Date: 13 Mar 2023

Publication Site: Politico

Barney Frank Pushed to Ease Financial Regulations After Joining Signature Bank Board

Mary Pat Campbell

Link: https://www.wsj.com/articles/barney-frank-pushed-to-ease-financial-regulations-after-joining-signature-bank-board-e5c8819c

Excerpt:

Former Rep. Barney Frank co-sponsored the law that tightened banking regulations after the financial crisis, but since leaving office he has been working the other side of the street—as a board member of Signature Bank, which regulators shut down Sunday.

The 2010 Dodd-Frank legislation set tougher regulatory safeguards on banks with more than $50 billion in assets. After leaving office and joining Signature’s board, Mr. Franks, a Massachusetts Democrat, publicly advocated for easing those new standards for smaller banks.

Part of what former President Donald Trump signed into law in 2018 raised the asset threshold to $250 billion, meaning Signature and other regional banks no longer needed to comply with the extra regulation set out in Dodd-Frank. 

After the bill was signed, New York-based Signature more than doubled in size to $110 billion in assets, and $88.6 billion in deposits as of the end of 2022. The stricter requirements, had they been in place, might have prompted bank executives and their overseers to move more quickly to place the lender on sounder financial footing, some industry observers say. 

Mr. Frank, who has earned more than $2.4 million in compensation from Signature Bank since 2015, rejected the idea that the regulatory change abetted Signature’s collapse. 

“Nobody has shown me any evidence of systemic or other kinds of fraud that would have been prevented” without the 2018 rollback, Mr. Frank said.

Author(s): Julie Bykowicz

Publication Date: 13 Mar 2023

Publication Site: WSJ

The Silicon Valley Bank Bailout

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-silicon-valley-bank-bailout-chorus-yellen-treasury-fed-fdic-deposit-limit-dodd-frank-run-cc80761e?st=vt2heieydvfhixo&reflink=desktopwebshare_permalink

Excerpt:

The Treasury and Federal Reserve stepped in late Sunday to contain the financial damage from Friday’s closure of Silicon Valley Bank, guaranteeing even uninsured deposits and offering loans to other banks so they don’t have to take losses on their fixed-income assets.

This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes.

Wall Street and Silicon Valley were in full panic over the weekend demanding that the Treasury and Fed intervene to save the day. It’s revealing to see who can keep a cool head in a crisis—and it wasn’t billionaire hedge-fund operator Bill Ackman or venture investor David Sacks, both frantic panic spreaders.

The Federal Deposit Insurance Corp. closed SVB, and the cleanest solution would be for the agency to find a private buyer for the bank. This has been the first resort in most previous financial panics, and the FDIC was holding an auction that closed Sunday afternoon.

….

But there is political risk from a bailout too. If the Administration acts to guarantee deposits without Congressional approval, it will face legitimate legal questions. The White House may choose to jam House Speaker Kevin McCarthy if markets aren’t mollified. But Mr. McCarthy has a restive GOP caucus as it is, and a bailout for rich depositors will feed populist anger against Washington.

The critics have a point. For the second time in 15 years (excluding the brief Covid-caused panic), regulators will have encouraged a credit mania, and then failed to foresee the financial panic when the easy money stopped. Democrats and the press corps may try to pin the problem on bankers or the Trump Administration, but these are political diversions.

Author(s): WSJ Editorial Board

Publication Date: 12 Mar 2023

Publication Site: WSJ