Posts Tagged ‘FDIC’

Anonymous Banker: The Worst is Yet to Come. An estimated $1 Trillion in New and Legacy CMBS TALF funds to bailout the financial industry

Sunday, December 6th, 2009

I’m a small business advocate.  Always have been, always will be.  It colors my thought process and separates me from our leaders who  believe that this nation’s economic recovery rests in the hands of big business, big banks and Wall Street.

Our leaders publicly  pronounce  the importance of small business.  They publicly sell many of their economic recovery plans under the guise of supporting small business.  The reality is that many of their plans, and in particular the New and Legacy CMBS TALF program, have absolutely nothing to do with supporting  small business recovery.  It is all about recapitalizing the banks at the expense of the taxpayers for generations to come.  It is all about profit distribution at the highest level of the food chain …. and I’m sorry to say, small business doesn’t fall in that category.  The $50 Billion and soon to be $1 Trillion dollar TALF program, including both new and legacy CMBS, is a prime example of  taxpayer sponsored programs touted to be in support of small business.  But it IS NOT!!!

The Rhetoric

In March 2009, the FRBNY explained why they were establishing the TALF program

The ABS markets historically have funded a substantial share of consumer credit and U.S. Small Business Administration (SBA)-guaranteed small business loans.  Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.  The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

 In April 2009, Ben Bernanke wrote a letter to the Congressional Oversight Panel stating:

The Term Asset-Backed Securities Loan Facility (TALF) is a funding facility through which the Federal Reserve Bank of New York extends three-year loans collateralized by certain types of ABS that are, in turn, backed by loans to consumers and small businesses. The facility is designed to help market participants meet the credit needs of households and small businesses by supporting the issuance of those ABS.

Also in April 2009, Thomas Baxter, General Council to the FRBNY stated in a letter to the Special Inspector General for the Troubled Asset Relief Program that “We remain committed to advance the policy purpose of the TALF — to make credit more readily available to U.S. consumers and businesses, a critical cornerstone for the recovery of the U.S. economy.”

In October 2009, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation stated:

The FDIC has been vocal in its support of bank lending to small businesses in a variety of industry forums and in the interagency statement on making loans to creditworthy borrowers that was issued last November. (2008)  I would like to emphasize that the FDIC wants banks to make prudent small business loans as they are an engine of growth in our economy and can help to create jobs at this critical juncture.

And as recently as October 2009, President Obama  gave a presentation    describing his commitment to Small Business and outlining his plans to improve lending to the Small Business Sector.

“Over the past decade and a half, America’s small businesses have created 65 percent of all new jobs in the country.  More than half of all Americans, working in the private sector, are either employed by a small business or own one.  These companies are the engine of job growth in America.  They fuel our prosperity and that’s why they have to be at the forefront of our recovery.”

The “Small Business Mantra” is heard from every level within our government.  But from where I sit, it is all just rhetoric.  And so I challenge them, in these writings, to put meaningful programs in place.  Most recently, I challenged the fact that TALF had not provided any financing for newly issued CMBS but had only been used to finance existing CMBS. 

At the time of that writing , I foolishly believed that  CMBS TALF funds would be used to encourage banks to lend to small businesses purchasing an existing piece of commercial property or building a new piece of commercial property or perhaps refinancing a current commercial mortgage into a lower rate.  I must have been in la-la land to even have imagined such a thing. 

The First New TALF CMBS Deal -  DDR 1 Depositor LLC Trust 2009

On November 27, 2009,  the Federal Reserve Bank of New York through the CMBS TALF program made the first $72 Million loan collateralized by a new CMBS securitization.    Here is how they are using our tax dollars (and its is not in support of small business!).   Developers Diversified Realty Corp  is a REIT that owns shopping malls across the United States.  As a group, these properties already   carried substantial loans. Goldman Sachs Mortgage Company is reported to have refinanced these 28 shopping malls  with a loan of $400 Million dollars. 

It was reported   that Developers Diversified Realty Corp.  used the proceeds of this  $400 million, five-year loan to pay down debt and reduce balances on revolving credit facilities.

The blended interest rate on the loan is 4.2 percent.

The company has repaid more than $270 million of mortgage debt with a weighted average duration of 1.2 years and an interest rate of 6.2 percent, the real estate investment trust said.

This $400 Million dollar package of  SHOPPING MALL loans  was then transferred into a securitization (Commercial Mortgage Backed Security)  called DDR I Depositor LLC Trust 2009.    The Federal Reserve Bank of New York then used this pool of shopping mall loans  as collateral to a $78 Million dollar loan to the Investment Bank within Goldman Sachs.  The lender, Goldman Sachs Mortage Company received the $400 Million dollars back from a combination of the loan proceeds from the Federal Reserve Bank of New York and the sale of the rest of the Commercial Mortgage Backed Security (CMBS) to other investors.    In reality, this transaction simply swapped old debt for new debt, and one set of investors for another set of investors …… with the Taxpayers having invested $78 Million dollars.  

Where exactly in this scenario do you see a benefit to small business?  There isn’t any.

What we need are innovative ideas and meaningful programs  in support of small business

I recently read an article entitled:  Learn the Five Secrets of Innovation in which Hal Gregersen told CNN, “What the innovators have in common is that they can put together ideas and information in unique combinations that nobody else has quite put together before.”

It is time for our government leaders to show some innovation in their thinking and in the programs they support.   Everyone, at all levels of government and within the financial industry,  recognizes that Commercial Real Estate  will create the next round of substantial losses for the banks and Wall Street Financial Companies that have been deemed too big to fail  and  for  other institutional investors and REITs.  We cannot allow the TALF program to become just another bailout for the $3 Trillion dollar Commercial Real Estate bubble that is about to implode.

In June 2009, William Dudly, the President and CEO of the FRBNY stated that:

“One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses among many of the firms that dominate the financial industry. As the magnitude and widespread nature of these problems became evident in the early part of 2007, there was an abrupt loss of confidence and a sharp and sustained increase in risk aversion among investors. Liquidity in short-term funding markets seized up as concerns over the viability of many bank and non-bank financial institutions increased.

After all, in recent years, the CMBS market has satisfied about 40% of the credit needs of the commercial mortgage sector. If this market is closed, then the refinancing of maturing mortgages will be exceedingly difficult and this will exacerbate the drop in commercial real estate prices, loan defaults and the pressure on bank capital.

I am confident that we will continue to build on our initial success, reopening credit channels to consumers and businesses.”

Well, Mr. Dudley, I am a taxpayers and therefore, through TALF, an investor in these new and legacy CMBS.   I have absolutely no confidence in the program that has been laid out.  I believe that this economy will only recover through  ongoing support of credit programs to consumers and the Small Business Community.  We need programs  that adhere to the many guidelines set forth to ensure safety and soundness in lending.  This is my percolate-up theory of economics as compared to your current trickle-down theory.  

Try some these  ideas on for size.  I’m sure you have some highly paid thinkers in your group that can tweak these ideas into effective programs.

1.  If you are going to use the TALF program to REFINANCE malls, then tag on conditions that favor small business.  Require the owners of the property (the REIT’s for example) to pass some of  savings from the reduction in the loan’s interest rate on to their Small Business tenants.  These small business tenants should  qualify based on revenue size or store size  and perhaps would have to document a reduction in revenue to receive the rent reduction.  In the Developers Diversified refinace deal there was a 2% interest rate reduction on a $400 Million dollar loan which translates into a savings to the REIT of  $8 Million dollars a year.  Even if that savings was shared by half,  the  small business tenants of these 28 malls would benefit from a combined rent reduction of  $4 Million dollars a year.  

In this manner, everyone has a chance to recover.  I have interviewed countless small business owners that rent properties in malls and I’ve recommended that they ask their landlords to grant a rent concession. Big malls always answer the same:   No way!   And yet they often write into their lease agreements that the small business tenant has to pay an increase in rent if their sales exceed a certain dollar size (for example $1 Million).  If the REITs want to share in increased earnings during prosperous years, then they should also have to share the cost savings benefits we, the taxpayers, are affording to them through the CMBS TALF program. 

I have also noticed that many of the smaller strip mall operators are making these concessions.  Where are we on this?  Is our government only capable of designing programs that support  the big boys by allowing them to reap all the cost benefits, but at the expense of small business and the taxpayer? 

2.  I understand that one of the tax requirements of a REIT is that they must pass on 90% of their income to their investors.  This rule does not encourage REITs to reserve for a rainy day and set aside capital to weather future economic storms.  Our government regulating agencies, the IRS and the SEC for example, must  work in concert to prevent a recurrence of this financial crisis.  All parties with a vested interest in the transaction must be prepared to absorb their own losses without benefit of bailout through our tax dollars.  Requiring 90% profit distribution is simply setting us all up for failure. 

3.   Set aside a portion of the TALF dollars specifically to fund newly issued CMBS comprised of commercial real estate loans under $3 Million dollars currently held on the books of  community banks across America.    Let all the community banks participate in a securitization pool and lay off their best small business commercial real estate loans into that pool.   As a group, they will share in the losses.  But since the FRBNY is lending on a non-recourse basis, the losses are limited to the “haircut”, and each bank will know exactly how much future exposure they have to losses from their investment in this pool.  In this way, the community banks will be able to participate in the recapitalization currently only afforded to the big greedy banks and Wall Street firms.  This process should  reduce the number of community bank failures and make Sheila Bair a very happy woman indeed.

When the loans are taken off the balance sheet of the community banks through this mechanism, these banks will enjoy a financial benefit.  The value of this benefit must be passed on to the borrowers through a reduction in their interest rates or at the very least shared between the community bank lender and the small business borrower.   The lower rate will translate into lower default rates and the savings experienced by the small business owner could potentially mean more jobs and lower unemployment.  All good things for our economic recovery. 

4.  The big banks, those deemed too big to fail, are not meeting their fundamental obligation to lend during this economic crisis.  And yet, I see them raising capital and paying back the government TARP loans.  I’m glad to have the funds back in our coffers.  But these same big banks are also recapitalizing on the backs of the consumer and small business owners as evidenced by the spread on rates they are paying the depositors and the usurous rates they are charging their borrowers.  In particular, I speak of the systematic rate increases applied across the industry to credit card holders.  

These are the same banks that were saved from insolvency a year ago when our tax dollars bailed out  FANNIE MAE and FREDDIE MAC.    Afterall, the financial institutions carried and are still carrying billions, perhaps trillions,  in toxic loans disguised as government guaranteed MBS’s in their capital accounts.  Yet, these “too big to fail” financial institutions continue to pay increasing dividends to their shareholders instead of using these funds to recapitalize and prepare for the next round of losses.  And there will be a next round of losses  from the commercial real estate bubble that is about to burst. 

Our government leaders know who these banks are or they would not be making such a great effort to bail them out through the TALF program.  Our government leaders need to grow a set of balls and initiate legislation that curtails  dividend payments.  These financial companies and banks must accumulate additional capital through a dividend reduction program.   The reduction in dividend payments to shareholders should also help fund some meaningful modifications of the consumer mortgages they still hold on their books.  These same banks should not be allowed to finance mortgage servicing requirements through TALF.

TALF is not about Small Business

It’s time to examine the TALF program from a different perspective because the direction it is taking today is not working for me and my fellow taxpayers.  The FRBNY, to date,  has financed $53 Billion dollars worth of ABS and has committed  over $1 Trillion dollars in support through this program.  To date, over $22 Billion has been used to divest the big banks of toxic credit card assets (43%), toxic auto loans of over $10 Billion dollars (20%), toxic commercial real estate loans of over $7 Billion dollars (14%) and a mere $1.6 Billion dollars in SBA loans (3%).  

Additionally,  our government leaders have seen fit to extend the TALF program for newly issued (which simply means refinanced) CMBS to June 30, 2010 but have only extended TALF with respect to Small Business Loans to March 31, 2010.   This is reflective of their true lack of commitment to the small business sector.  While they all talk-the-talk, their programs clearly prove that they do not understand the tremendous  contribution the small business sector could make to our economic recovery.   

How can our leaders expect us to believe, based on these results, that TALF truly has,  as its mission statement, the goal to:  

Help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

TALF is a financial industry bailout program through and through.    As Mr. Dudley so eloquently stated:  “One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses amoung many of the firms that dominate the financial industry.”   While the recapitalization of the banking and financial sector IS a vital component of this nation’s economic recovery, it is time that our leaders ensure that government programs, sponsored by our tax dollars,  provide equal benefit to the consumer and small business sector.  Without this, there is no hope of recovery.

  • Share/Bookmark

Anonymous Banker: FDIC Chairman Sheila Bair’s speech portends the end of the era of “too big to fail”

Friday, October 30th, 2009

Today, FDIC Chairman, Sheila Bair presented on Systemic Regulation, Prudential Measures, Resolution Authority and Securitization before the Financial Services Committee and U.S. House of Representatives.  It’s a must read for those of us who favor the philosophy that no institution should be ‘too big to fail’ or allowed to act  in ways that can threaten the financial stability of our country and the global economy. 

She stated, quite eloquently, the need for a system that makes our regulators accountable both for their actions and their inactions.  She proposes that a Council be established that would effectively ‘regulate the regulators’.

Primary regulators would be charged with enforcing the requirements set by the Council. However, if the primary regulators fail to act, the Council should have the authority to do so.

As always, with grace under pressure, Ms. Bair has publicly acknowledged the need for our regulators to practice their authority outside the sphere of political influence.  As we await implementation of this proposal that will surely strengthen the future economic stability of our nation, it would help if our current regulators would stop “asking” the financial institutions to comply with their directives and instead, use their powers of enforcement to make them comply.

In designing the role of the Council, it will be important to preserve the longstanding principle that bank regulation and supervision are best conducted by independent agencies. Careful attention should be given to the establishment of appropriate safeguards to preserve the independence of financial regulation from political influence.

On one major issue, I do beg to disagree.  Whether Ms. Bair likes it or not, our Regulators -  the FDIC, the OCC, the FRB and the OTS,  DID, in fact, identify the systemic risks of sub-prime and non-conventional real estate lending and they knew it was wide-spread.  Our regulators addressed this issue with ALL banks in 2005 through an interagency regulation that was put out by the  FDIC, FRB, OTS and OCC , the regulating authorities of all banking institutions and which came about through Regulation H.    Our regulators recognized the extreme risks of the sub-prime and non-traditional mortgage products and they failed to exercise their authority and curtail the banking industry’s careless lending practices.  Instead, the Regulators chose to merely issue guidance letters to the banking institutions in 2005 and then again in 2006.  The links I have provided in this paragraph are essential to understanding exactly how badly our Regulators failed us.  It proves that they knew the extreme consequences of the banks continued participation in sub-prime and non-conventional mortgages products and moreso, that the banks lax lending standards represented a systemic risk.  For Ms. Bair to publicly state that the regulatory supervisors failed to identify the systemic nature of the risks is simply not true.  I’d prefer if she would simply acknowledged that our regulators did a piss-poor job of stopping the banks from doing what they knew they shouldn’t be doing, instead of saying:

Supervisors across the financial system failed to identify the systemic nature of the risks before they were realized as widespread industry losses. The performance of the regulatory system in the current crisis underscores the weakness of monitoring systemic risk through the lens of individual financial institutions and argues for the need to assess emerging risks using a system-wide perspective. The current proposal addresses the need for broader-based identification of systemic risks across the economy and improved interagency cooperation through the establishment of a new Financial Services Oversight Council.

If you believe what Ms. Bair said, then our regulators were ill-prepared to recognize the systemic risks of unsafe and unsound real estate lending practices.  In my book, that is called incompetent.   However, if you subscribe to my position:  the regulators knew it and failed to act, then that makes them complacent.

Either way, our nation cannot afford to have  incompetence or complacency in our regulatory system.  While I agree with the need for the Council that Ms. Bair describes, I have to wonder who will be regulating the new regulators of our old regulators and will they be armed to act swifter and surer the next time around.

  • Share/Bookmark

Anonymous Banker: More bank bailout? Less Credit for Small Business?

Saturday, September 26th, 2009

FDIC press release dated September 24, addresses the sharp decline in the performance of   loan commitments of $20 Million or more.  These loan commitments are shared among US and Foreign bank organizations and non-banks such as securitization pools, hedge funds, insurance companies and pension funds.  For the layperson, a shared loan is one whose risk has been divided up among several institutions, each taking a smaller piece of the total loan commitment. 

I’ll let you read this yourself.  But here are some highlights:

  1. $2.9 TRILLION dollars in loans were reviewed.  Total borrowers:  5900
  2. There was a 72% increase in criticized loans, now  $642 Billion
  3. There was a 174% increase in classified loans:  $163 billion to $447 billion
  4. Special mention loans decreased from $210 billion to $195 billion
  5. Loans in non-accrual status soared from $22 billion to $172 billion
  6. Leveraged Finance Credits represented 40% of criticized loans:  $256 Billion
  7. Other Industy leaders?  Media and Telecom Industry: $112 Billion; Finance & Insurance:  $76 Billion; Real Estate & Construction:  $72 Billion
  8. FDIC Insured institutions have exposure to 24.2% of classified loans or $108 Billion, and 22.7% of non-accrual loans or $39 Billion.

This is not good news for bank capital requirements and therefore, not good news for small businesses that keep hoping and praying that the banks will start to improve  lending activities to their sector.  Simply put, if the banks are struggling with capital requirements, they simply will not loosen the purse strings anytime soon.

I’ve seen this several times in my career:  Corporate and investment banking runs amok and this results in Retail and Middle Market Banking taking the beating, right along with Retail and Middle Market banking customers.  Small and mid-size  businesses, along with consumers, will pay higher fees and higher rates, earn less in interest, and have less access to credit they depend on to run their businesses.  The banks will look to the small  business community to make up the losses created in their corporate and investment banking divisions.   30% interest rates on consumer and small business credit cards is a perfect example of this, especially when combined with banks PAYING interest on savings accounts at rates as low as .01% (Yes, that is one one-hundreth of 1%).

In the midst of these losses, Treasury Secretary Geithner proposed to the House Financial Services Committee that bank capital requirements be increased.  While I’m all for that proposal, and  I agree with most of his assessments, the immediate effect does not bode well for the small business community.  In the face of increased loan losses, Geithner’s proposal for higher capital requirements will  only increase the banking industry’s unwillingness to lend to the small business community. 

How then does Secretary Geithner expect to resolve this dilemma?  Well, that brings me to my favorite topic:  TALF.  Since April 7, 2009  the TALF program  laundered $46 Billion dollars in loans off of banks’ balance sheets and virtually guaranteed these loans with our tax dollars.  For the record, $21 Billion were credit cards loans, $10 Billion were auto loans, $4 Billion were Commercial Mortgages and a mere $580 MILLION were SBA loans.  As an aside, despite the new policy of transparency in these programs, I have been unable to obtain information which reveals which banks are selling these assets and participating in TALF.  This means I can’t tell which banks we are bailing out the most. I’ve been told by the FRBNY that this information is simply not available to the public.  Transparency, my tush!

Since the rules of the TALF program keep changing, it would not surprise me one bit if TALF morphed into allowing these Shared National Credits in on the deal.  First it was to be AAA rated loan portfolios, then they added sub-prime credit card and sub-prime auto loans and then they added commercial mortgages. Treasury Secretary Geithner indicated that he expected $1 TRILLION dollars in loans to be processed through TALF.   Perhaps the next change in TALF will allow the banks to divest themselves of  the $147 Billion plus dollars in toxic Shared National Credits, held by FDIC insured institutions.  

That move would certainly help improve the banks’ capital requirements.  But where would it leave the small business owner?   Without some form of strong government intervention, the banks will not move back into lending in the small business market anytime soon.  A move, I might add, that every government leader agrees is vital to our economic recovery.  Merely asking the banks to increase lending functions to the small business community, just isn’t working.    

I, for one, will hold Secretary Geithner to his closing remarks:  

“We must act to correct the regulatory problems that have left our financial system so fragile and prone to further trouble that Americans come to distrust it as a reliable repository for their savings and a stable source of the credit they need to conduct their lives and build their businesses.”

  • Share/Bookmark

Anonymous Banker weighs in on Financial Regulatory Agencies: Our Nation’s Ball-less Wonders!

Monday, June 22nd, 2009

The Fed failed us in the past.  What makes us think they will do a better job as the mega-regulator?

In light of Obama’s new Financial Regulatory Reform Plan, I feel the need to reiterate my comments on our financial industry’s regulators, which I refer to as our Nation’s Ball-less Wonders. In this article I explained how our laws are converted to regulations and the responsibility of our regulators to protect our country by actually enforcing these regulations.

The debate should not be over whether the Fed should become the mega-regulator, but rather whether the Fed has, in the past, performed its job to protect this country and our economy by actually enforcing the regulations that exist.

When we evaluate the benefits of a mega-regulator, I would say that any consolidation that reduces expenses and thereby saves taxpayer dollars, is a good plan. That being said, the Fed has failed us miserably in the past and I have no reason to believe that they will perform any better in the future.

My fear is that transferring this authority to one agency only dilutes the systems of checks and balances and reduces the possibility that some agency, any agency, will cry foul and take action when the financial companies fail to follow our laws.  Perhaps the plan might work, if, in addition to the consolidation, the people were also represented by an ombudsman to act as watchdog when the Fed fails to do its job, as it surely will.

Regulators:  Our Nation’s Ball-less Wonders!!

 

 

http://anonymousbanker.com/?p=234

Our regulators were armed with the laws to prevent this financial crisis.  They simply refused to act.    If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.Anonymous Banker weighs in on banks violation of law:  Regulation H

 

Recently there has been a lot of talk about the belief that there hasn’t been enough regulation to keep the banks in line.  I, personally, have been blaming Congress for not having enacted laws that would arm the banking regulators with the means to control and monitor the activities of the nation’s banks and the power to impose penalties or take punitive measures when the banks stray from their legally defined mission.  I assumed that the problems that led to our current economic crisis arose from issues that were not addressed – or inadequately addressed – in our laws and regulations.  

 

Bank regulators are our first line of defense:  Office of Comptroller of the Currency, Treasury, Board of Governers of the Federal Reserve System, FDIC, Office of Thrift Supervision. After Congress passes a law they leave it to the regulators to put the law into effect by writing  and adopting regulations.  Our regulators have one, and only one real purpose – to ensure that each and every bank operates in a safe and sound manner.  In order to accomplish this, they send out  teams of examiners – routinely, to every single bank in the country – to delve into the bank’s activities and check them against the requirements of regulations.  This whole procedure, the laws, the regulations and the agencies to examine compliance with the regulations – was put in place to protect the depositors’ money, the banks that hold that money and –  on a national scale, our country’s economic safety and soundness.  This process began 75 years ago, after the banking industry collapsed and led us into the Great Depression.       

 

Well, today I read Federal Reserve Regulation H —   Subpart E entitled “Real Estate Lending and Appraisal”, a regulation born from the Federal Deposit Insurance Corporation Improvement Act of 1991.  My eyes were opened!!!  My premise, that Congress failed to pass laws to protect us, was completely wrong!  This regulation, which has been in place for over ten years – sets forth all the appropriate guidelines and limitations that should have held the banks in check.

  

Now this question begs to be asked:  Who is making sure that our banks are complying with the regulations that already exist?  And when they are not in compliance, what actions are taken against them to bring them into line?

 

What I believe after reading this is that NO ONE is watching as the banks run amok in their quest for profits.  Really…. no one.  Did the controlling authorities  perhaps forget that this regulation existed since they authored it over ten years ago?   Or did they foolishly believe that the greedy bankers would, of their own accord,  grow a conscience and behave in a responsible manner? 

 

Federal Reserve Regulation H is a “uniform” regulation.  This means that each of the other three agencies also adopted an identical regulation at the same time.    They are found in 12 CFR 208.51;  12 CFR 34.62, 12 CFR 365 and 12 CFR 560.101.   Links to each of these are provided at the end of this article.  This is some of the content of Reg H and it is directed at all banks.

 

The Real Estate Lending Standards section requires banks to  “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate.  Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”

 

It instructs banks to  monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.

 

And it requires that the adopted policies reflect consideration of the Interagency Guidelines for Real Estate Lending Policies established by the federal bank and thrift supervisory agencies.”

 

The Interagency Guidelines, which are part and parcel of the regulation,  are extensive and I’ve provided links below to the full text document.   But the following quotes will make my point.

 

“Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.”

 

“The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions.”

 

“Prudently underwritten real estate loans should reflect all relevant credit factors, including—

  • the capacity of the borrower, or income from the underlying property, to adequately service the debt;
  • the value of the mortgaged property;
  • the overall creditworthiness of the borrower;
  • the level of equity invested in the property;
  • any secondary sources of repayment;
  • any additional collateral or credit enhancements (such as guarantees, mortgage insurance, or take-out commitments).”

 

Our regulators were armed with this law and these guidelines.  And yet, when they examined the banks and discovered that they were not applying a credit review process that was  consistent with safe and sound lending practices, in spirit or in fact, they failed to impose penalties that would have brought these horrific lending standards  to an abrupt end.   They had to have known that the  banks  were issuing no-asset and no-income-verification loans, delving into subprime lending markets, selling these toxic loans into the market  and subsequently repurchasing them to hold in their capital accounts.

 

Instead of taking decisive action,  they  merely issued another interagency comment to the banks (see links below for full text), urging them to cease and desist in their unrelenting participation in the subprime lending market. 

 

What should our regulators have done and what did they have the power to do?  Our regulators could have called for the firing of CEO’s of the banks and replaced the Board of Directors.  They also have the power to ban executives that are found to have violated banking regulations from ever working in the banking industry again.  Our regulators could have refused to continue their FDIC insurance for failure to comply.  They can also limit dividends paid to shareholders. If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.

 

It is interesting that one of the strongest banks in the nation, JP Morgan Chase,  states quite clearly in their 2007 Annual Report exactly how pervasive the problems were.  And we know already that the other banks behaved equally irresponsibly and equally in violation of the law and Reg H.  Some of these banks no longer exist and others will soon disappear.  After reading the following comments, can one imagine that the regulators were unaware of the banks’ violations these many past years?  Or do you have to conclude, as I have, that it was our regulators, and not Congress, that failed completely in safeguarding our county?  The law was there.  The regulators simply did not exercise their powers to enforce them.

 

JP Morgan Chase 2007 Annual Report  (released approximately one year ago)

… increasingly poor underwriting standards (e.g., loan-to-value ratios up to 100%, lax verification of income and inflated appraisals) added fuel to the speculation and froth in the markets. Many of these poor mortgage products were also repackaged and dispersed widely through various securities, thus distributing the problems more broadly.

 

…we still believe that subprime mortgages are a good product. We will continue to find a prudent way to be in this business. 

 

We should have acted sooner and more substantially to reduce the LTV rates at which we lent, given the increased risk of falling prices in a market of highly inflated housing values.  We also should have tightened all other standards (e.g., income verification) in response to growing speculation in the market and the increasing propensity of people to respond to aggressive lending standards by buying houses they could barely afford.

 

In the face of these comments and the banking industries apparent violation of Reg H, instead of being penalized,  banks were rewarded through the TARP program.   Our regulators  have done nothing to ensure that the banks meet their fundamental obligation to lend money.  They have merely asked them to do so.  And finally, our regulators are still not forcing the banks to apply income verification processes to all forms of credit including auto loans and credit cards. 

 

Somehow I don’t think the punishment has fit the crime.    And now that I have the understanding I so desperately sought, I really wish I didn’t look so hard.  I find myself even more saddened to know that while  our country  had the structure and laws in place to prevent this economic collapse, the regulators failed to protect us and the guilty continue to be rewarded for bringing this country to its knees.

 

Sources:   12 CFR 34.62         12 CFR 208.51      12 CFR 365  

Interagency Guidance on non-traditional mortgages

Interagency Guidace on Nontraditional Mortgage Product Risks

    
	     

  • Share/Bookmark