Trapped! Dodd-Frank And The Demise Of Bank Real Estate Lending

Nothing has been the same since the financial crisis and the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB).

Whether you like more regulation or not, Dodd-Frank and the CFPB have had a chilling effect on the mortgage market. Note that before The Great Recession, real estate loan growth at commercial banks YoY regularly exceeded M2 Money Stock growth YoY. Not so starting in late 2008. With the exception of a brief respite in 2016, M2 Money Stock growth YoY has exceeded Real Estate Loan growth YoY.

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An alternative explanation of the slowdown in Real Estate Lending YoY since 2008 is the growth of excess reserves of depository institutions.

To deal with the 2008 financial crisis, the Federal Reserve pumped large amounts of reserves into the banking system and introduced new programs that altered the terms of the trade-off banks make when deciding their level of excess reserves. In short, the marginal benefit of holding additional reserves has increased, whereas the marginal cost has decreased. As a result of these new Federal Reserve policies, holding reserves is now much more attractive to banks. It is more attractive because the cost of holding excess reserves—in the form of forgone interest—is significantly lower than it was before the crisis.

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So, the US still has excess reserves trapped in the Federal Reserve system. Between excess regulatory burden (Dodd-Frank, CFPB) and slow wage growth, we have a problem with the banking industry. It is not generating sufficient lending growth to stimulate the economy.

Will The Federal Reserve raise the interest rate on excess deposits that will encourage commercial banks to jump back into the residential mortgage market? Currently, a number of non-bank lenders are leading the mortgage market, such as Quicken Loans and PennyMac.

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An alternative to the traditional depository institution lending model is represented by Quicken Loans. These loans are NOT kept on Quicken’s balance sheet, but sold to other market plays and can be securitized.

So, we continue to have a mortgage lending hangover thanks to the excesses of the subprime and ALT-A markets of the last decade. It resulted in the predictable regulatory overreach which has discouraged traditional banks from making residential mortgage loans (except Wells Fargo, of course).

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Here is CFPB Director Richard Cordray!

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Deutsche Bank Ramps Up Leveraged Loan Business In “Hail Mary Pass” For Revenues (More Risky Lending)

Deutsche Bank is still suffering from the global financial crisis where their stock price peaked at $125 and is now only $16.93, despite the staggering intervention from the European Central Bank (ECB).

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Deutche’s revenues have been faltering due to a decline in trading revenue. DB’s trading revenue was down 30% year-on-year to €1.512 billion versus €2.162 billion in Q2 2017.  Trading revenues in Q2 2017 fell 18% year-on-year to 1.666 billion euros versus 2.027 billion euros.

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Hence, Deutsche Bank is now throwing a “Hail Mary pass” and  hoping that leverage loan growth saves the day.  A leveraged loan is a commercial loan that is extended to companies or individuals that already have considerable amounts of debt. Lenders consider leveraged loans to carry a higher risk of default, and as a result, a leveraged loan is more costly to the borrower.

That’s the ticket. Bet on risky corporate loans as your HMP (Hail Mary Pass). Well, leverage loans had their best year in 2017.

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But DB’s rank in terms of leveraged loans is shrinking.

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DBs earning per share is the stuff of … the German Battleship Bismarck.

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Yes, global central bank policies have definitely encourage more risk taking.

Deutsche Bank? F*** that $hit. JP Morgan Chase!!!

Here is Boston College’s Doug Flutie making his memorable “Hail Mary” pass against Miami. The blueprint for DB’s leverage loan pass for increased earnings.

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Simply Unaffordable: These Cities Make USA Housing Look Dirt Cheap

As the late Robert Palmer crooned, housing is simply unaffordable in many cities. And most of those cities are outside the USA.

(Bloomberg) — As people around the world move into cities and look for housing, one thing is clear: Most will have a hard time paying for it.

Average monthly take-home pay won’t cover the cost of buying a 1,000-square-foot residence or renting a three-bedroom home in any of the 105 metropolitan areas ranked by the Bloomberg Global City Housing Affordability Index – based on a general rule of thumb among U.S. lenders that people should spend no more than 28 percent of net income on housing costs. Only 12 cities would be considered affordable if they spend 50 percent.

 

Residents face many obstacles, including urban land-use regulations, underdeveloped rental markets and difficulty getting financing, according to Enrique Martínez-García, a senior research economist at the Federal Reserve Bank of Dallas who studies housing prices. Policy solutions to these problems aren’t clear, he adds.

 “Not having access to credit is a challenge to develop a healthy housing market,” he said. “But opening it up too fast might be a problem as well; it might actually lead to a boom-bust episode.”
 

The Bloomberg index calculates the affordability of renting or buying in city centers and suburbs. Rankings are based on self-reported data, including net salary and mortgage interest rates, compiled by Numbeo.com, an online database of city and country statistics.

Since 2012, 48 cities in the Bloomberg index have become less affordable, while affordability improved in 51. (Historical data aren’t available for all 105.) In nine of the bottom 10, average net income fell, while income in eight of the top 10 cities rose as rental and mortgage costs declined.

Emerging economies currently have the least-affordable housing, led by Caracas and Kiev in Ukraine. The remaining cities among the bottom 20 include seven in Asia and six in Latin America. London is the least-affordable major city in Western Europe, with average monthly rent and mortgage payments equaling 135 percent of monthly net income.

In Rio de Janeiro, Brazil’s second-largest city, average monthly take-home pay of $640 won’t unlock a rental even on the outskirts of town, let alone provide the means to buy a house or apartment in the city center, where monthly mortgage payments approach $2,000. This contributes to multiple-income households and also may explain why more than one in five Rio residents lived in informal shantytowns called favelas in 2010, the most recent data available. Six of the 10 cities with the greatest deterioration in the past five years are in Latin America.

Seven of the top 10 most-affordable cities are in North America: four in the U.S. and three in Canada.  The least-affordable metro area in the two countries is Vancouver, where an influx of foreign cash has caused a surge in home prices. New York ranked near the middle of the index.

Two of the cities with the greatest improvement are in China: Shenzhen and Guangzhou. Even so, housing demand across the country continues to outweigh supply, “despite rapid construction and the large-scale delivery of new homes” in cities including Shenzhen, according to Kate Everett-Allen, head of international residential research at real-estate consultant Knight Frank in London. That’s because of “mass urbanization” and relatively low wages, she said, adding that home prices in several cities grew at an annual rate of as much as 40 percent last year.

Four Chinese metro areas, including Hong Kong, were among the 20 least-affordable in the index. 

Yes, the USA, while more affordable that the rest of the world, is suffering from low wage growth while home price growth is more rapid. In fact, the FHFA home price index is growing YoY at over 2X average hourly wage growth YoY. 6.63% versus 2.54%.

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Note that home price growth started to exceed hourly wage growth in 1998, the beginning of the dreaded housing bubble that blew sky high.

I guess Americans have been addicted to gov since the 1987 stock market crash.

Hurricane Equifax II: Even Wells Fargo Says To Consider A Credit Freeze

How bad is the Equifax data breach? Where 143 MILLION consumers potentially had their Social Security numbers, credit card numbers and birthdates revealed? It is so bad that a major US bank, Wells Fargo, suggested that customers consider placing a freeze on their credit.

That is fine for those who don’t use credit on a regular basis, but what about those people who still wish to borrow funds to purchase a home or automobile? By NOT freezing your credit, you are at risk of loans being (fraudulently) taken out in your name.

Although Equifax was the primary recipient of market wrath, the other major credit monitoring companies Transunion and the UK’s Experian have experienced declined in their equity values as well.

And with real estate, automobile and credit card lending already in a decline YoY, imagine what a credit freeze will do?

Here is the Federal Trade Commission’s FAQ on freezing your credit.

Now the Wells Fargo wagon is suggesting freezing your credit which means no more loans.

Fintech Fry-up: UK’s Subprime Lender Provident Declines 70% Overnight As Move To iPads For Door-to-door Sales Force Founders

UK subprime lender Provident experienced a 70% decline in their stock price overnight as earnings plummet and an investigation in launched.  Their CEO Peter Crook (no kidding) has resigned. Crook, who was CEO for a decade, said in June that many of its 4,500 salesmen and debt collectors quit or stopped working as hard when they were informed they would be replaced by a smaller number of iPad-toting full-time staff.

Here is Provident’s earnings-per-share plunge (red line) and the crash in their stock price. The company now expects a “pre-exceptional” loss for the home credit business of between 80 million pounds ($103 million) and 120 million pounds. It predicted a 60 million-pound profit as recently as June, when it issued a profit warning as loan sales and debt collections plunged. Wolstenholme said in the statement that it will take “an elongated period of time” to turn the division around.

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And here is Provident’s stock price compared to Royal Bank of Scotland’s  stock price to highlight RBS’s decline around the global financial crisis and Provident’s rise then decline.

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Provident is similar in spirit to the Netflix show “White Gold” about British door–to-door vinyl window and door replacement sales in the 1980s. Yes, the UK still has door-to-door subprime lenders, now using FINTECH (sort of) in the form of iPads.

From Provident’s webpage: “Representative example: £270 loan over 26 weeks. 26 payments of £16.20 per week. Rate of interest 112% p.a. fixed. Representative 535.3% APR. Total amount payable £421.20.”

Yes, Provident really does sound like Netflix’s White Gold except for personal loans from  £100 – £1,000.

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‘Deep’ Subprime Car Loan Delinquencies Highest Since 2007 (As Auto Dealer Offers Bad FICO Rebate!)

It was bound to happen, despite Dodd-Frank legislation and the creation of the Consumer Financial Protection Bureau following the financial crisis.

(Bloomberg) — Amid all the reflection on the 10-year anniversary of the start of the subprime loan crisis, here’s a throwback that investors could probably do without.

There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.

“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends. 

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I like seeing my friends in the news, like Amy Cutts at Equifax.

“It isn’t a case of chasing a larger subprime share,” Cutts said in an email Tuesday. There’s been “almost no change in median credit scores. That means they are letting other underwriting characteristics slide,” she said, referring to the lenders that issue the bulk of subprime loans — so-called monolines that specialize in one area of the credit market and dealer-finance companies that work specifically with car sellers. 

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Deep subprime (WAFICO < 550) was 30% of market in 2016.

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This is not all that surprising given that at least one car dealer is giving a rebate IF you have a FICO score UNDER 620.

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This is reminiscint of this scene from “The Big Short.”

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