Fixing The Holes? G-SIB House Hearing For CEOs Of Citi, Wells, BofA, Goldman, MS, JPMC, Etc. But Where Are Fannie Mae And Freddie Mac?

Today’s hearing in the US House of Representatives Financial Services Committee (where the committee calls Globally-Systemically Important Bank (G-SIB) CEOs to testify and ask them uncomfortable questions).

But today’s hearing should have been extended to mortgage giants Fannie Mae and Freddie Mac that unquestionably qualify as Systemically Important Financial Institutions (SIFIs), both under the statutory and FSOC definitions, and in any objective assessment of their financial importance. Are they G-SIBs? Of course.

Fannie Mae and Freddie Mac are supposed to maintain capital. Congress, in enacting the Safety and Soundness Act in 1992, established minimum capital requirements for the Enterprises and those standards have been in place for the past 25+ years. That Act requires the Enterprises to maintain minimum capital that is greater than or equal to:

  • 2.5 percent of on-balance sheet assets, which include mortgage-backed securities (MBS), mortgage loans, and other investments the Enterprises hold in their respective investment portfolios;
  • 0.45 percent of the unpaid principal balance of outstanding MBS not included in on- balance sheet assets, which include MBS the Enterprises issue and guarantee, but do not own and hold in their investment portfolios; and
  • 0.45 percent of “other off-balance sheet obligations.”

Well, the required capital for Fannie Mae and Freddie Mac clearly did not protect their shareholders from a catastrophic failure in 2008 due to declining home prices and a surge in mortgage delinquencies.

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In fairness, Fannie and Freddie are not depository institutions. But the sheer size of their loan portolios is worrisome.

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Whether you want to call Fannie and Freddie SIFIs or G-SIBs, they should have been called to testify as well.

Regulation of G-SIBs

Under the Dodd-Frank Act, all depository institutions with more than $10 billion in assets, including the U.S. G-SIBs, are supervised by the Consumer Financial Protection Bureau for compliance with consumer financial protection laws and regulations. Furthermore, the Dodd-Frank Act subjects the largest banks, including the U.S. G-SIBs, to heightened oversight and enhanced prudential standards to safeguard the U.S. financial system, which are implemented by the Federal Reserve. These requirements include enhanced capital, liquidity and leverage requirements, as well as regular stress testing to ensure banks hold enough capital to survive a future economic downturn or financial crisis. The G-SIBs are also required to submit resolution plans (also referred to as “living wills”) to ensure their firms can be resolved in an orderly way if they were to fail.

There have been several deregulatory developments and proposals in recent years. For example, S.2155, which was signed into law in May 2018 (Public Law 115-174), reduces the frequency of G-SIB stress tests, and it reduces other capital and leverage requirements. In addition, regulators have been advancing their own proposals. In April 2018, the Federal Reserve issued a set of proposals to simplify its capital rules for G-SIBs and introduced a “stress capital buffer,” or SCB, which would in part integrate the forward-looking stress test results with the Board’s non-stress capital requirements. The Federal Reserve joined the OCC in releasing a second proposal to substantially revise the current enhanced supplementary leverage ratio (eSLR) that applies to G-SIBs. After the proposal was released, former FDIC Chairman Martin Gruenberg said, “Strengthening leverage capital requirements for the largest, most systemically important banks in the United States was among the most important post crisis reforms…the amount of tier 1 capital required under the proposed eSLR standard across the lead IDI subsidiaries would be approximately $121 billion less than what is required under the current eSLR standard to be considered well-capitalized” (emphasis added). In response to a request from Committee staff for more information, the FDIC estimated the eSLR proposal would lower capital requirements for the primary federally-insured bank subsidiary of each G-SIB as follows:

● JPMorgan Chase & Co.: $34.597 billion (20.83% reduction in tier 1 capital) ● Citigroup: $26.978 billion (23.3% reduction)
● Bank of America: $22.838 billion (18.5% reduction)
● Wells Fargo: $20.406 billion (16.9% reduction)
● Bank of New York Mellon: $5.911 billion (33.65% reduction)

● State Street: $5.346 billion (37.5% reduction)
● Morgan Stanley: $2.507 billion (25% reduction)
● Goldman Sachs: $1.93 billion (9.49% reduction)

Despite proposing to reduce capital for the G-SIBs, the Federal Reserve’s own research has indicated current capital requirements are on the lower end of requirements that best balances benefits associated with mitigating systemic risk with a bank’s funding costs. Furthermore, the Federal Reserve has also been working on making stress testing more transparent to banks, potentially undermining the value of the regular exercise. Bank regulators have also proposed reducing enhanced prudential standards and liquidity requirements for banks as large as $700 billion, and there have been reports that regulators may reconsider their proposal on the Volcker Rule and propose further rollbacks of Dodd-Frank reforms.

Finally, while the Dodd-Frank Act and related reforms required additional capital and strengthened oversight of G-SIBs through the creation of the Consumer Bureau, there remain concerns regarding whether some of these institutions are adequately being held accountable for repeated consumer violations, and whether these firms may be too big to manage, as was discussed at the Committee’s hearing on March 12, 2019, with Wells Fargo’s former CEO, Tim Sloan.

Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage-finance giants have a combined capital buffer of as much as $180.9 billion should the companies be released from government control.

I would really like to hear what new-minted FHFA Director Mark Calabria has to say on capital requirements and administrative reform.  And turning Fannie and Freddie loose again in the financial system.

Hopefully Calabria will be fixing the holes in the mortgage system.

 

Refi Inferno? Residential Mortgage Refinancing Applications Jump 38.50% WoW As Mortgage Rate Decline To 4.06%

According to the Mortgage Bankers Association, residential mortgage refinancings shot up 38.50% from the previous week.

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Here is the chart of mortgage refinancing applications with the mortgage rate drop to 4.06%.

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Mortgage purchase applications were more modest at +4.06% WoW despite the rapid decline in mortgage rates.

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30-year mortgage rates have been falling thanks to deterorating conditions in the EU.

Is this a refi inferno?  Or is it just a slight increase? Call it a relative inferno!

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Low (Rate) Rider! New Home Sales Increase As Mortgage Rates Drop To 4.06% (Core Inflation Drops To 1.4% YoY As Well)

The 30-year mortgage rate is dropping fast and the housing data is low riding on the rate decline.

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And with the drop, both new home sales and existing home sales are enjoying a revival.

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The Core PCE and Core PCE deflator YoY (aka, core inflation) are both declining. The deflator is actually down to 1.4% YoY.

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Slowing! US Pending Home Sales Fall 5% YoY In February As Inventory Remains Low (Fed Rate CUT At 72% In 2019)

The US housing market is slowing and The Federal Reserve is likely to CUT interest rates in 2019 (at least the market is betting on it).

(Bloomberg) — Contract signings to purchase previously owned U.S. homes fell more than estimated in February, suggesting that the prior month’s surge resulted from pent-up demand and that a sustainable recovery may take more time.

The index of pending home sales fell 1 percent from the prior month, after a downwardly revised 4.3 percent increase in January, according to data released Thursday from the National Association of Realtors in Washington. The gauge fell 5 percent from a year earlier following a 3.3 percent annual decline.

And pending home sales fell 5% YoY in February,

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Not only are pending home sales YoY slowing, but so is home price growth.

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Existing home sales inventory is down considerably from 2007.

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At least interest rates are likely to be cut by The Fed in 2019.

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US Residential Construction Spending YoY Falls To Lowest Growth Rate -1.5% Since 2013 (Slippin’ Into Darkness)

Is housing slippin’ into darkness?

Perhaps. residential construction spending YoY fell in December to its lowest level since early 2013.

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Non-residential construction actually rose 4% YoY in December.

That’s not the way I like it.