Smart Real Estate News & Commentary by Chris McLaughlin September 12, 2011
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BOA – restructuring, not pink slips
Bank of America (BOA) is widely believed to be on the verge of deep cuts in both its retail business and related personnel. Reports speculate that as many as 40,000 Bank of America employees may need to be let go as the embattled bank seeks to raise capital. Yet, the issue is not profitability or capitalization, but rather the ongoing uncertainty about how much the bank is going to have to pay in legal liabilities and obligations tied to its ownership of residential mortgage-backed securities, according to a new report from Christopher Whalen with Institutional Risk Analytics.
Bank of America CEO Brian Moynihan will address wary investors at a conference organized by Barclays Capital. Moynihan recently shook up company management to align it with the bank’s three core customer groups: consumers, companies and institutional investors in part of an ongoing internal reorganization. Still, more is needed. He is expected to speak today on the prospect of $1 billion in monthly savings, and outline a plan to make it happen, presumably including the above strategies. Nonetheless, Whalen believes such a strategy is ill-timed and confidence-breaking. “We do not see any need for layoffs or piecemeal asset sales at BOA, yet that is precisely the strategy being pursued by BOA management led by Moynihan,” Whalen writes. “Could you possibly pick a worse time than today to be a seller of a loan servicing or origination business?”
Bank of America stated it intends to sell its correspondent mortgage lending business. And if no buyer comes forward the bank will slowly wind the operations down. Furthermore, the initiatives will not cure the bank’s real problems which stem from legal and regulatory liabilities tied to representation and warranties on RMBS and an influx of lawsuits over mortgages. “At the current run rate, the BOA subsidiary banks are on track to do $84 billion in revenue in 2011, down from $86 billion in bank revenue during 2010,” Whalen said. Whalen added that reports suggesting Bank of America is selling or shutting down its correspondent banking unit did little to ease the qualms of investors. “The firm faces tens of billions in current legal claims and may see these claims evolve and grow into larger demands for rescission of RMBS,” Whalen wrote. “Whereas two months ago we were talking settlement of at least put-back claims, now it is questionable whether BOA can settle any of the outstanding claims in the near-term. Why should Plaintiffs settle?” Other growing concerns, according to Whalen, is the “imponderable risk that BOA and other lenders may face criminal prosecution in New York for these busted RMBS deals.” As the market waits for more guidance from Moynihan, Whalen writes “for now, this situation is in the control of the federal and New York State courts, not Brian Moynihan, federal bank regulators or the Obama Administration.” He added, “The fact that the FDIC and the FHFA both had to object, belatedly, to the Countrywide put-back settlement shows you what lies ahead in terms of additional claims from the GSEs and bank holders of RMBS. To paraphrase Freeman Dyson, the unthinkable has a bad habit of occurring.”
JP Morgan – bank rules are anti-American
In an interview with the Financial Times, Jamie Dimon, chief executive of JPMorgan Chase, said he was supportive of forcing banks to have more capital but argued that moves to impose an additional charge on the largest global banks went too far, particularly for American banks The Basel III capital rules are designed to make the financial system safer by making banks build up risk-absorbent “core tier one” capital to at least 7% of risk-weighted assets. The biggest, including JPMorgan, have to reach 9.5%. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.” Mr Dimon also criticized global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government-backed mortgage-backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest. Regulators say all countries compromised on agreeing the rules, which put eight banks – five from outside the US – in the top level of capital. But Mr Dimon said there was a threat that Asian banks, in particular, could take US market share because of the combination of US domestic and global rules.
“I think any American president, secretary of Treasury, regulator or other leader would want strong, healthy global financial firms and not think that somehow we should give up that position in the world and that would be good for your country,” said Mr Dimon. “If they think that’s good for the country then we have a different view on how the economy operates, how the world operates.” US banks are struggling to deal with new regulations and litigation, both stemming from the financial crisis. Mr Dimon said it could be “three to 10 years” before the industry emerged from lawsuits brought by investors looking for compensation for the losses incurred on structured products underpinned by bad mortgages. He said he was ready to agree a settlement over lax servicing and foreclosure standards that is expected to see the industry pay $20 billion in penalties. But he said banks could not be placed in “double jeopardy” and needed an appropriate release from legal liability.
HARP improving or expanding?
Getting on-time borrowers with high loan-to-value ratios into refinanced mortgages is likely to be a key focus of any federal refinancing plan to stave off defaults, according to analysts at Barclays Capital. Allowing borrowers with higher LTVs to refinance at lower rates is part of the government’s attempt to reduce credit risk for Fannie Mae and Freddie Mac, the analysts said. The Federal Housing Finance Agency (FHFA), which oversees the mortgage giants, is considering removing barriers for borrowers with LTVs past 125% to refinance. “If there are frictions associated with the origination of Home Affordable Refinance Program (HARP) loans that can be eased while still achieving the program’s intent of assisting borrowers and reducing credit risk for the enterprises, we will seek to do so,” said Edward DeMarco, acting director of the FHFA.
Barclays analysts said Demarco’s statement argues for improving the HARP program, not expanding it. “It seems that the FHFA is not looking to increase the amount of borrowers eligible for the HARP program by expanding the cut-off date, but is rather looking to enhance the efficacy of the existing program for current HARP-eligible borrowers,” according to the BarCap analysts. Changes to the two-year old federal plan have some concerned about a possible wave of refinancings and what that would do to mortgage-backed securities. “There is also likely to be a renewed focus on refinancing high LTV borrowers with strong pay histories, in a shift from the current scenario, where it effectively became a streamlined refinancing vehicle for low LTV borrowers,” the analysts said.
Greece down the tubes?
Germany may be getting ready to give up on Greece, as measures in the credit markets signal growing concern about the smaller nation’s ability to repay investors. Yields on Greek two-year notes rose above 60% today for the first time. Credit-default swaps to insure the country’s five-year bonds and to speculate on government securities closed at an all-time high of 3,500 basis points on Sept. 9. The contracts are the highest in the world and more than three times the 1,134 basis points for Portuguese debt. After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default. Officials in Merkel’s government are debating how to shore up German banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said Sept. 9. The move capped a week of escalating German threats that Greece won’t get the money unless it meets fiscal targets, and as investors raised bets on a default. US Treasury Secretary Timothy Geithner says that European authorities must “demonstrate they have enough political will” to end the crisis.
Carney – could Obama’s plan worsen the European crisis?
We don’t have many details about the Obama administration’s latest mortgage refinancing scheme but Ezra Klein helpfully points to a Congressional Budget Office (CBO) analysis that might shed light on how it could work.
‘For a sense for whether a refinancing scheme could actually help the economy, here’s a new analysis from the CBO. This isn’t an official estimate, since there’s no official plan yet. Instead, CBO’s economists invented their own (plausible-sounding) refinancing scheme. Their plan would be available for one year and allow borrowers who aren’t behind on their mortgages to refinance at current market rates. One key point is that borrowers wouldn’t have to pay the large risk-based fees often demanded by Freddie and Fannie, which deter many people from refinancing—the fee would just be the one paid on the initial mortgage.
Here’s what the CBO predicts the results would be: About 2.9 million homeowners would take the government up on its offer, saving $7.4 billion in lower monthly payments in the first year alone. An additional 111,000 borrowers would avoid default, which would, in itself, save Fannie Mae and Freddie Mac—and hence taxpayers—$3.9 billion. Against that, however, government investors in mortgage-backed securities—including the Treasury Department, the Federal Reserve, Fannie, and Freddie—would lose about $4.5 billion, as loans get paid off early. So the net cost to the government would be pretty modest. Private investors in mortgage-backed securities, meanwhile—a group that includes banks, pension funds, mutual funds, etc.—would take a hit of about $13 billion to $15 billion. Now, since many of these investors are foreign, and since these investors wouldn’t all necessarily reduce spending by the amount of their losses, the CBO estimates that the “net effect would be an economic stimulus” for the US economy. The money gained by borrowers does more to boost the economy than the money lost by investors.’
A lot of those foreign investors, of course, are European financial institutions. So if the mortgage plan works to help borrowers refinance, the already shaky European banks could find themselves under even greater pressure. I wonder how that will sit with European politicians?
See you at the top!
Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 150 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
420 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* In 2010, Chris’ 4 Central Florida real estate offices
closed 2,786 sides for a closed sales volume of
$392,912,927!
* Highly sought-after speaker, consultant, and
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