TEAM EMPOWERMENT MORTGAGE CHATTER: Jan 22: a look at our friend the bank, almost as good at keeping money as a mattress

“What if the mightiest word is love, love beyond marital, filial, national.
Love that casts a widening pool of light. Love with no need to preempt grievance.
In today’s sharp sparkle, this winter air, anything can be made, any sentence begun.
On the brink, on the brim, on the cusp — praise song for walking forward in that light.”

~ Elizabeth Alexander, 2009 Inaugural Poem


JPMorgan Chase has posted a surprise profit for 2008. Wall Street was shocked by the bank’s radical business plan that included not paying $100 million bonuses to failed executives and only lending money to people who could pay it back.


Yesterday Fifth Third Bancorp, Ohio’s second largest bank, announced that they had lost $2.1 billion in the 4th quarter, they’re third consecutive quarterly loss. They have suspended bonuses, cut the quarterly dividend to 1 cent (so as to not force selling of its shares by funds required to own dividend paying institutions) and sold $3.4 billion in preferred shares to the U.S. government’s TARP. Their stock closed below $4 per share, an 18-yr low, and has lost 80% of its value in the last year.


And while we’re speaking of Ohio banks, KeyCorp also announced their third straight quarterly loss, losing $524 million. Like Fifth Third, KeyCorp cut its dividend, has $2.5 billion of capital from TARP, and its shares are down 72% in the last year.


What is up with banks around the world? Analysts are questioning their viability. If a bank has $100 million in assets and $90 million in liabilities, giving it a net worth of $10 million, but the assets include more than $10 million of bad mortgages, or can’t even be priced, and suddenly the net worth is negative. What are their options? Banks can stay in business and hope for a bailout or other government intervention, hope for a merger or takeover with a stronger bank, hope they muddle through, or go out of business. Some variation of the “Good Bank, Bad Bank” plan continues to gain momentum, which is what happened to the S&L business in the 1980’s. Shareholders were wiped out (the big fear now) and the assets were transferred to the Resolution Trust Corporation.


Tuesday this all reared its ugly head, with many big banks losing 20% of their value, and although yesterday financial stocks rallied (can our largest banks really have no value in the market?) the banks and government are still dealing with this issue. Until the Obama plan is unveiled, investors appear to be bracing for the worst-case scenario, and bank stocks may continue downward. Policy makers are now looking for alternatives to preferred-share investments to help banks build up their equity to give them confidence to begin lending again. What about the 12 regional Federal Home-Loan Banks? They are a big source of funding for thousands of commercial banks, thrifts and credit unions across the country. But several of the home-loan banks have suspended their dividends or warned that they may fall short of capital requirements, which in turn would slow down or stop their lending.


GMAC Bank’s Correspondent group, as expected, implemented negative adjustments for higher loan balances on the Government products. A 1.5 point hit is now in place for 1 Unit >$417,000, 2 Unit >$533,850, 3 Unit >$645,300, and 4 Unit >$801,950.


The New York Fed continues to buy mortgage-backed securities, although today’s amount is not known. Origination still appears to be in the $1-2 billion/day range. Certainly this has helped keep conventional mortgage rates somewhat low, although the market wonders if they government is the only buyer out there. Mortgage security prices are back to where they were two weeks ago, at best, but investors have changed margins to slow down lock volumes, or make up some profit ground for losses suffered in 2008. As one Wall Street firm put it, “The current MBS market is not about convexity or extension issues.  It’s about the Fed’s commitment to keep the 30yr mortgage rate as close to 4.50-5.00% as possible for as long as possible…if Treasury rates climb, the Fed will be forced to buy $10-12BB a couple days in a row vs. their recent pace of $3-5BB per day.”


The US Mortgage Applications Index dropped by -9.8% last week, with refinance activity -12.0% and purchases -2.5%. Interestingly, many companies seem fine with this as they are grappling with huge lock volumes from previous weeks. We also had the weekly Jobless Claims, which shot up, and Housing Starts and Building Permits, which shot down. Initial Jobless Claims hit 589,000, higher than expected, and continuing jobless claims also rose, which both point to a weak jobs number in early February. Housing Starts were -15.5% in December, Building Permits were -10.7% in December, hitting their lowest levels in the 50 years of tracking these statistics. Building contractors, and mortgage brokers, would be doing themselves a disservice if they ignored these numbers, or thought that everything was “rosy”. These numbers reminded everyone that the economy stinks, and the 10-yr is chopping around 2.50% and mortgages are better by .250.

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