Remember the Treasury Department’s plan to purchase toxic assets from financial institutions as a means of thawing frozen credit markets? Well, that was then and this is now. And now, Treasury has decided that buying toxic underwater assets, as envisioned by TARP (Troubled Asset Relief Program) – the legislation authorizing the plan – wasn’t such a good idea after all.
Instead, the department plans to develop a program – details of which are still being formulated – to create a special purpose lending facility that would provide funding to institutions financing automobile, credit card, and student loans.
“This market…has for all practical purposes ground to a halt,” Treasury Secretary Henry Paulson said in announcing the change in plans. The illiquidity in these key sectors, he warned, “is creating a heavy burden on the American people and reducing the number of jobs in our economy.”
The general idea is that Treasury would contribute 5 percent to 10 percent of the initial capital for the new facility – about $50 billion —from funds allocated for TARP; the Federal Reserve would raise the rest by selling non-recourse commercial paper to investors. The government investment could leverage nearly $1 trillion in financing for consumer loans, according to Treasury’s estimates.
In addition to targeting the consumer lending sector, Paulson said, Treasury “is carefully evaluating programs that would further leverage the impact of a TARP investment by attracting private capital. We will also consider capital needs of nonbank financial institutions not eligible for the current capital program,” he added, noting that “broadening access in this way would bring both benefits and challenges.”
Notably lacking from Paulson’s list of potential targets for TARP assistance are programs to help struggling homeowners avoid foreclosure, to the growing annoyance of Congressional leaders, who say that was a major area TARP was specifically designed to address.
“Using some of the TARP money to reduce foreclosures wasn’t only contemplated in the legislation,” Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, complained. “It was one of our major focal points.”
Defending both the initial TARP plan and the decision to abandon it, Paulson told reporters, “[Buying] illiquid assets looked like the way to go,” when the details of the rescue package were being negotiated in September. But changing market conditions required a change in strategy, according to Paulson, who said he “will never apologize for changing the approach and the strategy when the facts change.” In the current environment, he told reporters, “I cannot imagine anything else that will have a bigger stimulus impact than getting credit going again and getting lending going again.”
There is no question that efforts to date—$125 billion funneled to 9 large banks and investment banks, another $125 billion to regional banks, and $40 billion to bail out the insurance giant AIG —have not done much, if anything, to ease the constraints that have drained liquidity from the credit markets. Although banks now appear to be more willing to lend to each other, they have shown little interest in lending to businesses or consumers.
The Federal Reserve’s quarterly survey of loan officers found that nearly 80 percent had tightened standards for home equity lines of credit and almost half were less willing to approve consumer installment loans. On the business side, 79 percent said they had tightened standards for commercial and industrial loans and 87 percent for commercial realty loans.
Lawmakers have been pressuring Paulson to attach more strings to the TARP funds, requiring banks to step up their lending activity instead of simply encouraging them to do so. But Paulson has made it clear that he is not inclined to make those demands. “No one wants to push anyone to make a loan they don’t want to make,” he told the Wall Street Journal recently. “Creating confidence in the banks and having the banks be well-capitalized is the most important thing you can do.”
A DIFFERENT VIEW
The Treasury Department’s change in direction on the TARP initiative (see above) has been praised by some analysts and financial industry executives as a necessary and welcome adjustment. But credit unions have not joined in the applause. The National Association of Federal Credit Unions (NAFCU) and the Credit Union National Association (CUNA), which lobbied successfully to make credit unions eligible for TARP assistance, say the change will leave them out in the cold.
“We must be assured that the interests and needs of our 8,000 cooperatively owned financial institutions are addressed so they may help their 90 million members deal with this financial crisis,” CUNA Chairman Dan Mica said in a letter to Treasury Secretary Henry Paulson. “At the least,” Mica said, “we urge the Treasury to consider a set aside of funds to be used by Main Street financial institutions, such as credit unions.”
Delivering the same message, but with a noticeably sharper edge, NAFCU President Fred Becker criticized Treasury’s policy shift as “an egregious abuse of the American Taxpayers’ funds” that will benefit the “bad actors” responsible for the problems while punishing credit unions and others that, Becker said, didn’t cause the problems but are being harmed by them. “NAFCU strongly believes the Treasury Department must adhere to the clear Congressional intent,” and allocate funding for the purchase of troubled mortgage-related assets that at least equals the funding allocated for Treasury’s new capital purchase program, Becker argued in his letter to Paulson. Absent a more even-handed approach, he said, “credit unions will be unfairly constrained in their ability to address the economic challenges they now face through no fault of their own.”
Completing a trio of credit union letters to Paulson, Michael Fryzel, chairman of the National Credit Union Administration (NCUA) also complained about the “second place status into which credit unions and other financial institutions have been placed” in Treasury’s refocused financial aid plan. Some credit unions, along with other depository institutions, will likely post year-end losses reflecting “the continuing deterioration in the credit markets,” Fryzel noted in his letter. Even if only a few institutions are in that position, he said, failure to make assistance available to them “would severely undermine [consumer confidence] at a time when the federal government is expected to be undertaking firm and coherent steps to improve the situation.”
We don’t mean to pick on the Treasury Secretary – well, maybe we do, a little. But he’s not exactly batting a thousand on consistency (and accuracy) of message. In addition to the 180-degree change on the implementation of TARP (see above), Sec. Paulson recently announced, confidently, that the government services enterprises (Fannie Mae and Freddie Mac) are on “stable” financial footing. That may require redefining the term “stable.”
Both companies have indicated in recent securities filings that they do not entirely share Paulson’s confidence in their financial future. Freddie Mac announced a $25 billion third quarter loss that reduced the company’s net worth to a negative $14 billion. Another cash infusion from Treasury will be necessary to avoid receivership, according to the recent filing, which also expressed confidence that the necessary funding (about $14 billion) will be forthcoming. “We expect to receive such funds by Nov. 29," the filing states. But the company also acknowledged that keeping capital levels above regulatory minimums "could constrain some of our business activities."
Fannie Mae, posting a $29 billion third quarter loss and projecting red ink totaling between $20 billion and $40 billion over the next four quarters, faces similar challenges. Officials there have warned that the back-up assistance ($100 billion for each company) Treasury promised when placing the GSEs under government conservatorship in September may not be enough to keep the company solvent.
Given the financial pressures with which they are coping, Fannie and Freddie haven’t been able to do nearly as much as Administration officials, legislators and regulators are hoping to help bolster the ailing housing market. Lacking adequate capital, the GSEs haven’t been able to purchase mortgages in sufficient volume to drive rates down and spur home buying activity. Rates for 30-year fixed mortgages remain above 6 percent, close to where they were before the government seized control of the GSEs a few weeks ago.
A recent Wall Street Journal article analyzing the problems didn’t hold out much hope for near-term improvement, citing the continuing reluctance of investors to provide capital given the uncertainty about how the GSEs will be restructured in the future. For now and the foreseeable future, Jim Vogel, an executive vice president at FTN Financial Capital Markets, told WSJ, “There is no clear path for them to be a major support for the mortgage market.
REFORMING RESPA – ONE MORE TIME
Following a drafting process almost as lengthy and as bruising as the recent Presidential campaign, the Department of Housing and Urban Development (HUD) has finalized its revised Real Estate Settlement Procedures Act (RESPA) regulations.
Designed to improve the disclosures mortgage borrowers receive and make it easier for them to compare loan terms and understand the costs and characteristics of the loans they receive, the new rules represent “a big step forward in restoring trust and transparency,” HUD Secretary Steve Preston said in unveiling the first RESPA overhaul in more than 30 years. “It has been a long road, but today, we can finally announce a better way to buy homes in America,” Preston said in a press statement. “Consumer need and deserve to know what they are getting themselves into before they sign on the dotted line. The new disclosure requirements and reformatted disclosure documents will help consumers shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers,” Paulson said.
HUD’s upbeat announcement noted that the RESPA revisions were “long-anticiapted,” but did not mention that the reforms were also opposed vigorously by financial industry trade groups, which lobbied successfully to block previous reform proposals, and have not entirely abandoned hope of derailing this one. The newly finalized rules attracted more than 12,000 comments during the approval process, leading HUD officials to make a few key changes in the initial proposal, primary among them:
- The final rule eliminates the requirement that closing agents read a “closing script” to borrowers, summarizing the loan terms and costs. The final rule substitutes a page added to the HUD-1 settlement statement, comparing final closing costs with the loan terms disclosed in the Good Faith Estimate (GFE) lenders must give borrowers.
- The GFE has been reduced to three pages from the four originally proposed, with an instructional page designed “to help borrowers better understand their loan offer. HUD continues to believe that consumers need to be aware of key aspects of their loan as well as assorted settlement costs,” the agency’s summary material explains.
- Apart from those changes, the final rule is pretty much as originally proposed, requiring lenders to organize closing costs more helpfully in categories and to summarize the estimated costs “prominently” on the first page; limiting the amount by which final closing costs can vary from the estimates; and requiring “more meaningful disclosure” of yield spread premiums lenders pay to brokers for originating loans above the lender’s “par” rate.
HUD estimates the new rules will save consumers $700 per loan and will eliminate the abuses that contributed to the subprime implosion and spill-over trashing of the financial and housing markets. “We are convinced that we successfully balanced the needs of consumers with those in the business of homeownership,” Brian Montgomery, assistant HUD secretary and commissioner of the Federal Housing Administration, said. But in striking that balance, he emphasized, HUD officials had the turmoil in the housing market very much in mind. “None of us can lose sight of the fact that millions of Americans simply don’t understand the fine print of their mortgages, and this, in many respects, is at the heart of today’s mortgage crisis,” Montgomery said.
Banking industry executives and consumer advocates who criticized the proposed reforms also criticized the final regulations, with bankers complaining that the new disclosures are overly complex and insufficiently helpful to borrowers, and consumer advocates saying the rules don’t do enough to protect borrowers and prevent abuses.
Washington Post columnist Michelle Singletary derided the regulations as “a big whoop-de-do. Now we get reform,” she said, “after people have bought homes they couldn’t afford with exotic loans that should never have been sold to them.”
While industry executives reportedly are looking for ways to scale back some of the new requirements (the YSP disclosures and limits on “variances” between estimates and final costs are among the prime targets) , Howard Glaser, a mortgge industry analyst, predicts that that the incoming Obama Administration may seek even broader and stricter protections than HUD has approved. The RESPA revisions, Glaser told American Banker, “probably won’t be viewed as sufficient to restore borrower confidence in the mortgage process.”
SAVE MORE – BUT NOT NOW
For years, economists have been wringing their hands over the low (and sometimes negative) savings rate in this country. The economic melt-down seems to be forcing consumers to follow the advice the experts they have been ignoring: Spend less and save more. And now the experts are warning that this shift in consumer behavior threatens to deepen the economic downturn.
Household net worth, as measured by the Fed, declined by a nose-bleed-inducing $2 trillion in the second quarter compared with the prior year, and that was before the continuing downward spiral in the stock market reduced the value of investment portfolios by nearly $4 trillion. Consumers, who were already feeling pinched by declining property values, are feeling even less comfortable now.
Retails sales have already begun to plummet, triggering predictions of a bleak holiday season for many companies. " We are going through a quantum downward shift in consumer spending,'' Allen Sinai, chief economist at Decision Economics, told Bloomberg News recently."Any industry that is tied to the consumer will have to downsize and consolidate,'' he warned.
The rising unemployment rate, already at a five-year high and expected to climb even higher, is likely to exacerbate those negative trends. “In the long run, higher savings would be good news for the U.S. economy, because the extra money would help put household finances on a sounder footing and lessen U.S. dependence on investment by China and other foreign countries to finance economic growth,” the Bloomberg article notes. “In the shorter run, though, it will likely mean wrenching changes for companies [like the automobile manufacturers for example] that have become reliant on rapidly growing consumer spending.”