What’s Next For Fannie, Freddie and Credit Unions?

As the pace begins to pick up in Congressional efforts to re-examine the tax code, credit unions are understandably nervous about even the whiff of legislation to do away with their tax exemption.  But another issue, on which they need to be ready to mobilize, is reform of the housing market.

According to today’s Wall Street Journal, a bipartisan group of Senators led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner is working on a proposal that would replace Fannie and Freddie with an entity that would act as a public guarantor of mortgage-backed securities.  I’ve commented in other posts about similar proposals that have been made by housing specialists.  The basic idea is that instead of having Fannie and Freddie buying mortgages from credit unions and banks, which they then package as securities, a public guarantee corporation would insure mortgage-backed securities against default in return for those securities meeting baseline underwriting standards.  It would not be in the business of buying mortgages.  Advocates of this approach argue that it would get the GSEs with their now explicit government backing out of the business of buying mortgages and competing against the private sector for securitization.  In addition, by guaranteeing mortgage-backed securities against default, the legislation would take its aim at one of the primary culprits behind the Great Recession.

Now for the bad news.  Credit unions need a secondary market in which to sell their mortgages.  Therefore, it is absolutely crucial that whatever structure ultimately is proposed by Senators includes a mechanism for mandating that securitizers not be able to discriminate in deciding what mortgages to buy.  This brings me to a second idea.  According to the same article in today’s journal, a second group of Senators led by Rhode Island’s Jack Reed, is floating a proposal that would reform Fannie and Freddie but not do away with them completely.  Whatever proposal is ultimately put out there by the Senate will have to overcome the opposition of House Republicans who honestly believe that but for Fannie and Freddie there would not have been a housing crisis.

I’ve learned my lesson over the almost two years that I have been writing this blog, and I am giving up predicting if and when Congress will ever take up housing reform.  But, if press reports are accurate, the process is finally moving forward, albeit at a snail’s pace.  I would like to see more of a discussion within the industry about what type of Fannie/Freddy world best protects the interest of credit unions and their members.

It was nice to see you all at the Sagamore.  Now get back to work!

End Of The World As We Know It?

In poker, as in life, you can do more harm than good by over-reacting to the worst case scenario.  For instance, if you fold every time someone raises, then you’re never going to be in the game for the big money.  Imagine if the Tom Brady, the Patriot’s quarterback, reacted to the news that his team had recruited Tim Tebow by demanding to be traded.  What does this have to do with credit unions?

Well, yesterday the Senate Finance Committee released a paper outlining possible tax reforms and not surprisingly one of the suggested reform options is the elimination or narrowing of the credit union tax exemption.  So first, let’s not over-react.  According to the Senate Finance Committee’s website, this tax reform options paper includes “ideas from across the spectrum and, as such, do[es] not necessarily have the endorsement of the Chairman or Ranking Member.”   In addition, let’s keep in mind that it would be difficult to find any proposal reconsidering the government’s tax policy over the last fifty years that doesn’t at least broach the subject of the credit union tax exemption.

But yesterday’s report is different.  First, as CUNA has correctly pointed out, tax reform has never been this seriously considered since at least 1986.  While it is looking increasingly unlikely that Congress will be able to seriously consider fundamental tax reform this year, who knows what the political winds will bring in the coming months.

Yesterday’s option paper might also signal a more nuanced attack on the credit union tax exemption.  By suggesting that Congress should consider tightening requirements for non-profit organizations exempted from the unrelated business income tax (UBIT), we may be seeing the first salvo in an argument in which credit union critics argue that they are not pushing to get rid of the credit union tax exemption in its entirety, but simply looking to make sure that the tax exemption only applies to activities related to the core functions of credit unions.  However, as we have seen in the IRS’s unsuccessful efforts to impose UBIT taxes on state chartered credit unions, if we allow the IRS to decide which activities and services are related to helping consumers, particularly people of modest means, we might as well all start converting to banks.

On that note, I’m going to go get some breakfast with my fellow credit union conventioneers in beautiful Bolton Landing, New York.  As I believe the Romans once said, let’s drink and be merry for tomorrow we may die.

Overdraft Protection And Regulatory Overkill

Late yesterday, the CFPB unveiled a report on overdraft fees.  Although it hasn’t yet proposed any regulations on this matter, you know where this is headed with the certainty of a Met fan watching his team’s relentless assault on 100 losses this season:  they’re both inevitable.   In fact, no area of regulation better exemplifies why the CFPB and modern day consumer advocates are so misguided in their approach to regulatory oversight.

First, some good news.  The CFPB acknowledged that the opt in requirements mandated since 2010 had made a material difference in reducing unwanted overdraft protection on the part of consumers.  Second, the report provides additional evidence of what financial institutions have known for a long time, that overdraft protections are disproportionately used by a relative handful of consumers.  I would argue that most of these people are making a rational choice to give themselves protection against bouncing their mortgage payment because they don’t have the time or inclination to balance their checkbook.

So, does that mean we can move on to another regulation, confident that the money and time we have invested in complying with these regulations has been well-spent?  Of course not.  The CFPB remains concerned with the wide variance of members who have opted in to overdraft protections on a financial institution to financial institution basis.  As it surmises in its conclusion, the wide variance in opt in rates most likely reflects differences in marketing approaches to maximize fees paid.  The inevitable solution will, of course, be well-designed, easy to read disclosures, which I wouldn’t be so opposed to if I thought the people most likely to avail themselves of overdraft protection were the type of people to read and act on disclosures in the first place.

To me, no area of regulatory concern better epitomizes what’s wrong with the approach of the CFPB and consumer advocates in general when it comes to regulation.  Cass Sunstein (formerly President Obama’s regulation czar, and author of Nudge, the best explanation of the intellectual framework animating the CFPB’s work) explains in an essay in Foreign Affairs that the modern day consumer nudgers ”recognize the importance of freedom of choice” but — and there’s always a but –” people may err and that in some cases most of us could use a little help.”  In other words, it’s the role of government to not only recognize when people are acting stupidly, but to mitigate that poor judgment by having apolitical regulators guide them towards the right choices.

For credit unions, this means that every regulation is a first draft to be refined until enough members act the way rational people would act.  It’s a beneficent view of government’s role that has a certain facial appeal until you realize that the underlying assumption is that you can fool all the people all the time and that only government stands in the way.  No thank you.

Do We Spy On Our Members?

The news reports over the last few days detailing the extensive nature of the government’s data collection efforts make this as good a time as any to broach a question that’s been bugging me for a long time now.  Does the government have too much power to compel financial institutions – both credit unions and banks — to disclose personal financial information about their members and customers?  Increasingly, I think the answer is yes.

First, does the ability of the federal government to track financial activity through suspicious activity reports (SARS) help thwart terrorism?  Absolutely, but as anyone involved with the financial industry knows, the information collected extends well beyond terrorism or, for that matter, any activity that could pose a direct and imminent threat to citizens.  Elliot Spitzer maybe guilty of incredible hubris and extremely bad judgment, but is he a terrorist, drug dealer or money launderer?  Remember that the government only discovered Client No. 9 because of a SARS.

And the truth is that every year, financial institutions are coerced into filing more and more SARs involving potential criminal activity using a standard that would get a prosecutor laughed out of court if he tried to use it to subpoena someone’s bank documents.  How are you coerced?  Well, the way the regulatory scheme is set up, if there is any doubt at all as to whether or not you should file a SAR, the safe thing to do is to file it.  The member can’t sue you and how many of you have been criticized by your examiner for filing too many SARs as opposed to too few?

“What’s the big deal?”, you say, my members aren’t criminals and they don’t find out about SAR filings anyway.  Okay, fair enough, so starting tomorrow I want you to post the following sign in your credit union lobby:

1) pursuant to federal law, [i]f a financial institution or any director, officer, employee, or agent of any financial institution, voluntarily . . . reports a suspicious transaction to a government agency–

a) no one from the financial institution may legally inform you that such report has been made or why it was made; and

b) no government official or affiliated individual may inform you that you’ve been the subject of a SARs report, and

c) the financial institution has complete immunity for filing a SARs but may be subject to regulatory sanctions for choosing not to do so.

Call me old-fashioned, but I believe in protecting my privacy and that what I do with my money is my own business.  For too long now, Congress has paid lip service to protecting financial privacy concerns in public while creating an ever widening back door to access financial data.  There may be some crimes or activities that justify these intrusions, but right now there are inadequate safeguards for people like myself who think that it should be difficult for the government to find out what I am up to.

Thoughts To Ponder On A Monday Morning (edited)

How do we judge our success?  How do we end up where we are and how do we figure out where we are going?  A commencement address given by FED Chairman Ben Bernanke at Princeton University this weekend is getting rave reviews for its tongue-in-cheek delivery.  I read the speech this morning and if you get a chance, read it yourself or at least pass it on to a young person just out of college trying to figure out what being an adult is all about.  Come to think of it, give it to any adult trying to figure out what being an adult is all about.  It may seem like a bit of a stretch, but on some level these are precisely the questions your members are wrestling with as they plan for the future.

Here are some of my favorite observations from the Chairman:

• “Life is amazingly unpredictable; any 22-year-old who thinks he or she knows where they will be in 10 years, much less in 30, is simply lacking imagination.”  Does this mean that since our lives are so influenced by chance that planning and striving aren’t worth it?  Of course not.
• “ Whatever life may have in store for you, each of you has a grand, lifelong project, and that is the development of yourself as a human being. . .paraphrasing a Woodrow Wilson School adage from the time I was here, ‘Wherever you go, there you are.’ If you are not happy with yourself, even the loftiest achievements won’t bring you much satisfaction.”
• “I think most of us would agree that people who have, say, little formal schooling but labor honestly and diligently to help feed, clothe, and educate their families are deserving of greater respect–and help, if necessary–than many people who are superficially more successful. They’re more fun to have a beer with, too.”
•  ”Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much.”

Happy Days Are Here Again?

Yesterday was a banner day for the glass half full crowd when it comes to the economy.  The papers are prominently featuring articles this morning reporting that the influential S&P/Case-Shiller Home Prices Indices reported double-digit increases in housing prices in the first quarter.  Some of the areas worst hit by the downturn had their largest gains in more than seven years.  This is the surest sign yet that the housing market, for better or worse the lynchpin of economic growth in this country, is gaining momentum.

A second dose of good news was that consumer confidence is also bouncing back.  According to the Conference Board Consumer Confidence Index, consumer confidence now stands at a five-year high at 76.2%, up from 69% in April.  More important than the overall number is that the poll’s internal numbers are also improving.  For example, the number of people saying business is good increased to 18.8% from 17.5%.  In addition, people were generally more optimistic about the labor market with more people expecting the job market to improve in the coming months.  By some estimates, up to 70% of the American economy is driven by consumer spending.  So, this can only be good news for our economy.  Plus, the stock market reacted to the news by reaching new record highs in a classic example of an economic feedback loop.

Still, there’s more than enough for the glass is half empty crowd, which will keep us all guessing for the next several months.  First, Case-Shiller reports that at least some of the housing improvement reflects the winding down of foreclosed property.  Second, just as New York never experienced the worst of the economic slowdown, housing prices are making their slowest climb in the Northeast.  And let’s not forget that we still have historically high numbers of long-term unemployed.  Plus, bond yields are beginning to rise.  The ten-year treasuries hit their highest yields in thirteen months, which for many credit unions is good news but is sure to make those regulators on edge about interest rate risk that much edgier.

And then there’s Washington.  Sensible people like the Board of Governors at the Federal Reserve will agonize over whether the latest signs of economic growth should expedite the FED’s timeline for pulling back on its $85 billion monthly purchase of mortgage-backed securities and government bonds.  In contrast, for the ideological extremists dominating Congress, this latest economic data will be seized on as proof certain that Government spending cutbacks haven’t hurt the economy and that even more should be done to reduce our budget deficit.

Expect more brinksmanship starting in September as we come closer to a drop dead date for once again raising the nation’s debt ceiling.

The Real Interest Rate Risk To Credit Unions

I’m feeling a little bit like Nostradamus this morning before Fed Chairman Ben Bernanke gives his semi-annual assessment of the U.S. economy to Congress today.  Here’s what Nostradamus has to say.

This is the most important presentation to be given by the Chairman in quite some time.  For years now federal regulators have been harping about the dangers imposed by a sudden rise in interest rates, a fear exacerbated by the Fed’s decision to buy $85 billion of mortgage- and treasury-backed securities each month in order to  keep mortgage rates artificially low (by the way, as someone looking for a house right now, Nostradamus says thank you!).  Still, the most extreme concerns of a sudden rise in interest rates caused by a reheated economy are kind of like my prediction about the end of the world.  Some day I will be right, but in the meantime let’s get on with the business of banking.

In reality the only plausible scenario for an interest rate spike, at least any time soon, would involve a mismanaged exit from the FED’s bond buying program.  This is one you don’t have to take my word for.  In his speech the other day, William Dudley, the Chairman of the Federal Reserve Bank of New York, noted “There is a risk is that market participants could overreact to any move in the process of normalization.  Indeed, there is some risk that market participants could overreact even before normalization begins, when the pace of purchases is adjusted but the level of accommodation is still increasing month by month.”

This is why Big Ben’s testimony is so important today.  The question is no longer just when the FED will ease its bond-buying program but how exactly it will disentangle itself from the bond market without leaving a sudden spike in its wake as investors seek to calibrate the after effects of the FED’s bond buying binge.  His task is not an easy one.  He will never advocate prematurely ending the program and as of right now, not even Nostradamus knows what impact budget negotiations will have on future economic growth.  Conversely, an increasing number of Federal Reserve Board Members are open to considering that now may be the time to begin slowing down this period of quantitative easing.  Nostradamus predicts that the Chairman will emphasize the continued economic uncertainty — let’s not forget the economy is still sluggish, to put it euphemistically – and make it clear that he will be one of the last people to advocate an end to the Fed’s current policies.  This approach gives him the flexibility he needs to respond to unexpected improvements in growth while minimizing the chance that his mere words will cause interest rates to rise.

By the way, Nostradamus also predicts that disgraced former Queens Congressman Anthony Weiner will enter the race for New York Mayor.  Actually this isn’t a prediction at all, his video announcement is all over today’s papers.   I have no way of knowing whether or not he’d make a good or bad mayor, but when did we become such a forgiving society that a complete abdication of personal responsibility, accountability and self-respect doesn’t disqualify you from public office?  People love to say that politicians are cynical, maybe it’s the people who are too cynical for electing politicians who feel they can get away with anything so long as they publicly apologize.

Have a nice day.

FED Report Underscores Need For MBL Reform

A report released by the Federal Reserve Bank of New York yesterday underscores that MBL reform is more than a proxy for the never ending battle between banks and credit unions:  it is also a common sense proposal to increase access to capital for small businesses that continue to be choked off from growth.

According to the results of the New York FED’s small business credit survey covering New York, New Jersey and Connecticut, “the ability to access credit remains a wide-spread growth challenge for small businesses in the region even among profitable firms.”  Here’s the bottom line from a policy perspective.  Of the 800 small businesses surveyed, 49% cited access to capital as a barrier to growth but only one-third reported even bothering to apply for credit, apparently believing that the effort wouldn’t be worth the time.  This is actually an improvement over previous surveys.

What about the bankers’ argument that they are actually ready, willing and able to make small business loans but just can’t find applicants?  The success rate for small businesses applying for credit ticked up slightly in 2012 at 63% and this slight increase was primarily attributable to increased availability of lines of credit.  In one of the more disturbing statistics from the report small businesses seeking loans over $100,000 had a 73% success rate; whereas those seeking loans below $100,000 had a 57% success rate.

Here’s my polemical point of the day.  According to the survey, the average small business loan was $100,000.  Could someone other than a banker opposed to MBL reform please explain to me why a law that defines a $50,000 loan as a business loan makes any sense?  Politicians all say they want to help small business, but most of the small businesses I know of are run by one or two people and when the equipment goes down, they can’t work.  A law that allows every financial institution that wants to lend out money for a new truck for the landscaper or a new mill for the lumber jack would help more than just those lending institutions.  It would help our economy grow.

 

Three Things To Ponder On A Spring Friday

As I scoured the world-wide web for what I think you should know as you start your credit union day, here are three developments any one of which is blog worthy on its own.

First, NCUA is finally going to propose regulations permitting credit unions to use derivatives to hedge interest rate risk.  NCUA has floated this idea since 2011, when it issued the first of two Advanced Notices of Proposed Rulemaking seeking input on the topic.  For years now, NCUA has warned of the dangers of interest rate risk in general and too heavy a reliance on mortgages specifically.  But if you are going to criticize credit unions, then you have to give them the means to hedge their risk.  Hopefully, the derivative regulation, if and when it is finally promulgated, will give credit unions the authority to ability to more effectively hedge their mortgage portfolios.  This may seem like esoteric stuff, but NCUA is about as nervous about putting forward expanded derivatives authority as a dad handing his 17-year-old the keys to the family car for the first time.  I’ll follow up on this once the actual regulation is proposed next week.

Second, the CFPB is putting forward a regulation to indefinitely postpone the June 1, 2013 effective date of a Dodd-Frank mandated requirement prohibiting the financing of credit insurance products.  In recent weeks, CUNA has worked with the CFPB to either get clarification of how this regulation is to be interpreted, or to postpone its implementation.  The CFPB has decided to take a two-step approach, putting forward a proposal to postpone the June 1 effective date and then following up with an additional regulation or guidance explaining how institutions are to comply with the requirement.

Third, I am constantly amazed by just how creative some of our cyber criminals are.  This morning came news that federal prosecutors in Brooklyn have indicted several residents of Yonkers, New York for taking part in a world-wide scheme involving hackers who were able to lift the limits on prepaid debit cards and cashers who were responsible for withdrawing cash using these unlimited cards.  According to the indictment, the 8 criminals based in New York were able to steal more than $2.5 million in a matter of hours as part of a $45 million world-wide heist.  Remember that the ultimate goal of the BSA regulations is to ensure that your credit union has a framework in place where it periodically reviews the latest threats to your credit union and makes the necessary adjustments.  If you are a credit union that has dipped a toe into prepaid cards or is thinking about doing so, you should take a look at what they did and if you don’t have prepaid cards, you might just be interested in learning about their criminal chutzpah.  I know I am.

And Fourth, let’s go Islanders!

Student Loan Nonsense

Sorry for the delay in the post this morning but my home computer may be headed for the eternal cloud.

Yesterday, Massachusetts Senator Elizabeth Warren introduced as her first piece of legislation a proposal that would allow undergraduate students to take out student loans at the same rate that banks borrowing on a short-term basis  from the Federal Reserve do (approximately 0.75% currently).  Without federal action, the interest rate for government subsidized student loans will rise to 6.8% on July 1, up from 3.8%.

No one wants to see rates spike in July and I doubt they will  but by implicitly  blaming the banking industry for student debt, Warren is conflating two hot button issues sure to appeal to her liberal base.  But like almost all demagoguery, it over simplifies  an extremely important issue in this country:  the sky rocketing cost of tuition.

Its like blaming the Titanic on an Iceberg and calling it a day. The legislation is a cheap shot that obscures the real problems facing America’s education system.  By some estimates, the cost of four-year college education has gone up 1,200 percent since 1982.  This makes the rise in health care costs look reasonable in comparison.  It is troubling that we have over $1 trillion in student debt in this country, but it’s troubling primarily because students are finding it more and more difficult to get the jobs that justify an investment in a college degree to begin with.

The CFPB held  a field hearing on student lending last evening   The previous research it has done on this issue indicates that it is concerned with the expanding use of non-government private loans by students who are eligible for government subsidies.  Here’s the problem:    Policy makers are doing nothing but throwing gasoline on the fire.  Without colleges taking a serious look at what it is they are charging their students, cheap student loans do nothing but indirectly subsidize colleges. 

To be sure part of the solution is to take a fresh look at how  student lending is structured in this country. For example, for decades  most credit unions have effectively been shut out of the lending market because of the privileged position given to banks holding government subsidized student loans. Perhaps we would be better off if the system fostered a greater range of financing options with less government interference.   I’m not holding my breath.

FinCEN releases BSA Stats

In the movie, The Lonely Guy, Steve Martin runs down his neighborhood excitedly proclaiming that his name is now in the phone book. 

I’m scared that I am getting too interested in the financial services industry because I actually couldn’t wait to skim through FinCEN’s annual report on SAR filing trends.  I will likely have some thoughts about the report to share in a future blog, but in the meantime for those of you who didn’t get the link, here it is:  http://www.fincen.gov/news_room/rp/files/sar_tti_23.pdf.