I had a longer commute than usual into work today (if I wanted to spend an hour and a half in the car on a Monday morning I would live in Long Island and not in suburban Albany, thank you), but it helped me decide what I should do my blog on this morning. Actually, the latest commercial from upstate’s ubiquitous car dealer bragging about how he once got credit for a dead person clinched it for me.
As I pointed out in a previous blog, there has been increasing concern that subprime auto lending is the next mortgage crisis in waiting. The argument goes that with larger banks increasingly securitizing auto loans, dealerships and banks, credit unions and financers they work with have a huge incentive to qualify even the most irresponsible borrowers.
Is the perception reality? An analysis performed by the Federal Reserve Bank of New York answers the question with a qualified yes. Looking at data from the Fed’s Quarterly Report on Household Debt and Credit, researchers point out that there has actually been a smaller percentage of auto loans being originated for borrowers with credit scores below 620. Currently, these borrowers represent 23% of all originated car loans, which is actually lower than the 25% to 30% witnessed in the years prior to 2007. So, is the conventional wisdom wrong? Not really. According to the researchers “the dollar value of originations to people with credit scores below 660 has roughly doubled since 2009.” What’s more, this gain in origination value reflects an increase in the average size of loans being made to these borrowers. In other words, larger loans are being made to people with bad credit and financial institutions are more than willing to spread out the length of repayments.
However, it’s important to differentiate between banks and credit unions — which the analysis groups together — and auto finance companies. Since the recession “ended” in 2009, finance companies have been the ones most aggressively catering to subprime borrowers while banks and credit unions have been lending to these borrowers at rates lower than historical trends. Interestingly, the report indicates that the auto loan 30-day delinquency rate for banks and credit unions has been about 1% in recent years, but about 2.5% for finance companies. Two take-aways from this report: one, it underscores the fact that Dodd-Frank missed the mark when it tied the hands of the CFPB to regulate car buying activity to the same extent it can regulate other consumer lending. It also serves as a warning that examiners should not let media reports about a new subprime lending bubble drive them into placing more scrutiny on credit union car lending than is actually justified by the numbers.
NY’s Homestead Exemption has been around since1850 but wasn’t big enough to provide much of a concern to creditors until the last decade. This exemption, like others across the country, shields equity in a principal dwelling up to a statutorily prescribed dollar amount from application of a judgment lien. A recent decision by the Court of Appeals for the Second Circuit that retroactively applied homestead exemption increases further puts creditors on notice that they may not have as much equity to go after as they thought.
Just how much has NY’s homestead exemption increased? It was increased from $10,000 in 1977 to $50,000 in 2005 and now stands at a baseline of $75,000 in 2010 with regional differentials that make it as high as $150,000 in certain counties.
So, you all should take note of a decision by the Court of Appeals for the Second Circuit which answered the following question: Does the 2005 Amendment’s increased homestead exemption apply to judgment liens perfected prior to the amendment’s effective date? The answer is yes.
When Tanya Calloway filed for Chapter 7 bankruptcy in 2009, her house was valued at $110,000 with $85,000 remaining on her mortgage. If the pre-2005 homestead exemption applied then there was still money the creditors could go after but if the $50,000 exemption applied then the creditors were out of luck. 1256 Hertel Ave. Associates, LLC v. Calloway, 12-1603-BK, 2014 WL 3765864.
Deciding the issue for the first time, the Court concluded that “[a]lthough the Legislature made no specific pronouncement as to the 2005 Amendment’s effect on pre-enactment debts, the statute’s legislative history reflects a clear sense of urgency that the homestead exemption limit be immediately adjusted to bring it in line with modern home values.”
This ruling just applied to the retroactively of the Legislature’s 2005 homestead exemptions; however, I would work on the assumption that if you have a judgment lien on someone’s principal dwelling, the court will apply the exemption in effect at the time you move to enforce the judgment. Given how high NY’s homestead exemption is now, your liens may not be worth the paper they are printed on.
European News Impacts Your Search For Yield
News out of Europe this morning that Germany’s GDP shrank and that Europe’s nascent economic recovery ground to a halt will further complicate the search for yield. Here’s why.
First, the yield on the German 10-year bond has actually fallen below 1% for the first time in history. At first blush, this makes no sense. Since interest rates and bond prices have an inverse relationship, why should the cost of buying a German bond increase? Because, like U.S. Treasuries in the dark days of 2008, when the economy is bleakest, investors ultimately want to put their money in the economy where it is safest. This is kind of interesting, Henry, you may be musing, but how does it affect me?
Because, as explained in this article, “low yields in Europe remind us that the current 2.4% yield on the 10-year [U.S.] Treasury Note is actually relatively high.” In other words, if there is no lack of demand for U.S. debt at current rates, then don’t expect that to change in the near future.
Yesterday the FHFA, which has oversight over Fannie Mae and Freddie Mac took another tentative step in what passes for housing reform in politically paralyzed Washington. It announced a Request for Comment on a proposal to begin offering a mortgage-backed security issued jointly by Fannie and Freddie Mac. This is both more important than you might think and less impressive than it sounds here is why.
Credit unions need a secondary market –somewhere they can sell their mortgages to. It makes their loans cheaper, it manages risk and it ultimately allows our smaller industry to provide more mortgages to our members. Since Fannie and Freddie imploded credit unions have had a huge stake in insuring that whatever mechanism replaces them provides a cost effectively venue to sell their mortgages. Some people argue that the government is too involved in the mortgage market and shouldn’t be in the business of buying selling and guaranteeing mortgages. Others concede that Fannie and Freddie need to be reined in but wouldn’t mind seeing most of the current system kept intact.
With Washington in the grips of political paralysis increasingly it appears that the advocates of more moderate reform may win by default. Fannie and Freddie are back making gobs of money buying your mortgages and packaging them into Mortgage backed securities and the Senate was unable to reach a consensus on housing reform legislation meaning that the only entity that can really bring about any changes is the FHFA which is the conservator of the GSEs.
Currently Fannie Mae and Freddie operate independently of each other. They buy mortgages, bundle them together and sell them (Freddie Mac technically sells participation certificates instead of securities but they work in much the same way as MBS’s). With yesterday’s announcement the FHFA is putting more meat on the bones of its plans to combine the operations of the two GSEs.
It is proposing to offer a security with standard characteristics. As envisioned by the FHFA, there would still be no commingling of Fannie and Freddie mortgages in these pools and either Fannie of Freddie-but not both-would guarantee the securities. What you would have is a security with standard characteristic such as general loan requirements such as first lien position, good title, and non-delinquent status and a payment delay of 55 days.
Done the road the FHFA envisions it being easy to swap these mortgages with existing GSE securities. Remember FHFA wants to create a single GSE marketplace and that’s kind of hard to do when there are $4.2 trillion in Fannie and Freddie securities outstanding. So another goal FHFA is working towards is to create a unique standard GSE security s not so unique that can be traded with existing GSE securities.
Housing reform is one of the great pieces of unfinished business for Washington and the country. The FHFA is doing what it can to make changes around the edges but the country needs the type of big debate and big changes that only Washington can bring about. In the meantime this request for comment is worth keeping an eye on. Here is a link
In his first State-of-the State address, Governor Cuomo criticized lax state oversight of the banking industry as one of the reasons for the recklessness that led to the Mortgage Meltdown. He proposed to combine the State’s Insurance and Banking Departments into a Department of Financial Services and put one of his top aides, a former federal prosecutor, in charge of running the new department. I would argue that there has been no area of public policy where the Governor has been better able to translate his vision into reality. A look at this morning’s news provides further proof for my case.
Yesterday, CFPB director Richard Cordray unveiled a consumer warning about virtual currencies. The CFPB isn’t telling people not to use bitcoins and other types of virtual currencies but … “Virtual currencies are not backed by any government or central bank, and at this point consumers are stepping into the Wild West when they engage in the market.” Oh boy, sign me up!
What’s the New York tie in? In a blog last week, I mentioned how New York’s DFS unveiled bitcoin regulations making it the first regulator in the country to propose a framework for the licensing of bitcoin activity. As surmised by this morning’s BankingLaw 360:
With the Consumer Financial Protection Bureau accepting complaints on bitcoin businesses and intimating that new rules for virtual currencies may be on the way, companies should expect increased federal scrutiny that will complement and strengthen regulations being developed in New York State. . .
Another Payday lending crackdown: Manhattan DA Cyrus Vance became the latest NY law enforcement official to crack down on payday lending. I haven’t seen a copy of the indictment, but media reports indicate that a Tennessee businessman is accused of establishing a network of companies with the ultimate goal of charging interest on loans in violation of the state’s usury laws at 25%. Both the AG and the DFS have already taken action against payday lenders, most notably companies associated with Indian tribes, which they accuse of violating New York Law.
BSA violations and foreign banks. If you look at the track record of BSA enforcement it seems clear that when it comes to the largest banks, the acronym is one letter too long. For years, behemoth banks have been able to ignore the BSA. In those rare instances where they got caught, they paid a fine large enough to get headlines without anything to prevent them from violating it again.
The DFS is changing this cycle by inserting itself into BSA investigations and threatening banks with the loss of their authority to conduct business in New York. The latest example that this aggressive approach is paying dividends comes from this article, which is reporting that the British bank Standard Chartered, which has already paid $670 million to state and federal regulators, is reviewing millions of transactions to insure it is not violating Bank Secrecy Act regulations yet again. A monitor installed by the DFS as part of the earlier settlement has apparently raised some red flags about some of the bank’s compliance practices.
As a result of the latest problem, Standard Chartered is once again under scrutiny from the DFS, the bank disclosed when announcing its earnings last week. A penalty of more than $100 million and an extension of the monitorship is possible beyond its anticipated end in early 2015.
The news that Robin Williams, my favorite comedian, committed suicide yesterday got me thinking about some of the funniest appearances I ever saw on TV. Williams often teamed up with Johnathan Winters on either Johnny Carson’s or David Letterman’s late night shows. Here’s a sample from YouTube of one such appearance.
For those of you who think that golf is about as exciting as going to knitting class with your grandmother, you obviously didn’t watch the final round of the PGA Championship in Valhalla, Kentucky yesterday. In a scene worthy of Bill Murray in Caddyshack, the tournament wasn’t decided until 25 year old Rory McIlroy from Northern Ireland two-putted against the backdrop of a wrath-of-God sky that made seeing the ball impossible. In fact, the announcers all suggested that the smart play was for McIlroy to finish the game this morning. But when you’re 25, two putting in the dark to beat out a generational icon by the name of Phil Mickelson is no big deal.
So what does this have to do with credit unions? Plenty. As anyone who reads this blog knows, I’m in the change or die school when it comes to the future of the credit union movement. Technology and demographics are fundamentally changing the way financial services are provided and the way consumers approach financial institutions, including credit unions. You can take false comfort in the fact that credit unions now have approximately 100 million members, that your relatively old membership base isn’t clamoring for the newest technology and that succession planning isn’t all that important since it’s all but impossible to attract volunteers to serve on credit union boards anyway.
The problem with this thinking is that by the time your credit union realizes how misguided it is, it will be too late. The example I keep thinking about is Kodak. It can be forgiven for not recognizing that the smart phone was going to put it out of business, but ten years from now those credit unions that don’t recognize that Apple and Amazon are going to change the way financial services are provided will be guilty of a fundamental lack of foresight.
Which brings us back to Rory. With his fourth major and more to come, Rory is already one of the all time greats of the game worthy of being mentioned with Jack Nicklaus and Tiger Woods. But remember, this past April his golf game was so bad, he was actually beaten in one round at the Masters by an amateur whose job it was to round out the field. In fact, it looked as if a generational shift away from Tiger and Phil might not come after all. This morning, such speculation is foolish.
I hope that your credit union is changing to meet changing times before it is too late.
Incidentally, here is a great article from the Harvard Business Review about the impact that the pace of change is having on corporate decision making.
FDIC Provides NYS Snapshot
On Friday, the FDIC released a state-by-state snapshot of banking activity. The report provides a useful baseline for comparison for credit unions in the tri-state area.
Keeping in mind that you have an obligation to monitor potential red flags of identity theft and mitigate evolving risks, here is some news worth reaching out to your IT vendor about. The NY Times reported earlier this week that “A Russian crime ring has amassed the largest known collection of stolen Internet credentials, including 1.2 billion user name and password combinations and more than 500 million email addresses. . .” What’s more, according to the security firm that uncovered the scheme, since the goal of the hackers was to steal password credentials as opposed to stealing from the compromised companies the hackers were targeting businesses of all shapes and sizes. Given the scope of the operation, you can bet a credit union or two or three is among the institutions that are being informed their websites have been compromised. As usual, an excellent source of additional information is this post from Krebs on Security.
First, on a purely practical note, this news showed me why it’s so dumb to use the same password for everything. The only reason this treasure trove of lifted passwords is valuable is because they can be used to access multiple online accounts and services.
The more I think about this news the angrier I am at our government. It may be ideologically edifying for some of our elected representatives to stand in the way of any government action, but there are some things that only the government can do. Cybersecurity should be a top national priority right now. In fact, Preet Bharara has correctly argued that cyber-attacks are this century’s Pearl Harbor. But our government is unable and or unwilling to pass meaningful legislation and make the investment necessary to have a truly robust defense against cyber-attacks.
What we are left with is a bunch of well-meaning but ultimately impotent attempts by regulators to do their part to help protect consumers. For example, earlier this year the FFEIC highlighted the need for smaller institutions to guard against cyber-attacks. As part of this effort, it’s conducting pilot cyber assessments and has held a Webinar geared towards community banks and credit unions. I just reviewed the slides and it has some good advice such as suggesting depository institutions ask themselves:
How is my organization identifying and monitoring cyber-threats and attacks both to my institution and to the sector as a whole? How is this information used to inform my risk assessment process?
Such well-meaning advice is tantamount to reminding kids not to play with guns in the middle of a war zone. Without a concerted national commitment, all but the largest businesses in America will find it increasingly impossible to offer cost effective cyber services. You are all being subject to a virtual shakedown and the only institution with the resources to effectively do anything about it is the federal government. Unfortunately, this is the same government that can’t pass meaningful cyber reforms such as imposing risk assessment obligations on merchants.
In the meantime, the nation is furious that the Government isn’t doing more to stop kids who are rushing to the nation’s borders for a better life. Why isn’t it furious that foreign criminals are making billions by ripping off businesses and consumers?
On that note, have a nice day.
Just how big a deal is the announcement late yesterday afternoon that the Federal Reserve Board and the FDIC have rejected the so-called “living wills” drawn up by the nation’s 11 largest financial institutions as inadequate to ensure that they can be liquidated in a cost effective manner? Depending on what happens next it could be like Vladimir Putin saying “I’m sorry” to the Ukrainians and giving them back Crimea, Tiger Woods suddenly getting healthy and winning the next five majors, or Congress actually passing meaningful legislation.
Dodd-Frank required systemically important banks to submit bankruptcy plans that explain to the Federal Reserve and the FDIC how their liquidation can be executed in bankruptcy court in the event they fail. Previous submissions have been accepted by regulators without amendment. But, yesterday, the Fed and FDIC told the 11 largest banks, each with more than $250 billion in assets, to go back to the drawing board and credibly demonstrate how they can fail without putting the American taxpayer on the hook.
The ostensible Dodd-Frank logic is that these plans will prevent the American public from extending an implicit guarantee to the behemoths that they are too big to fail. The statute provides that, in the event these plans are deficient, regulators can order these institutions to sell some of their assets and adhere to higher capital standards. But, as this recent exchange between Fed Chairman Yellen and Massachusetts Senator Warren demonstrates, it didn’t seem that regulators was taking these living wills seriously. Now they are or at least pretending like they are. The real test will be when the adjusted plans are resubmitted. If they don’t include asset divestitures than they aren’t serious proposals. But, the banks involved may be willing to gamble that, despite yesterday’s announcement, regulators will never force them to restructure their monstrosities. Time will tell.
Why does it matter? Because if credit unions have to comply with Dodd-Frank it isn’t asking too much for a financial system to be put in place that prevents the banking system from getting sucked down another sinkhole anytime soon and taking credit unions down with it.
The eight largest banks hold assets equal to 65% of the nation’s GDP. In addition, these banks are given a competitive advantage by virtue of the fact that the Government has to bail them out, or so it believes. As I said before – and I know this is hardly an original thought – Dodd-Frank does too little to reign in the biggest banks. After all, next week’s crisis may not be triggered by mortgages but as long as a handful of institutions are allowed to suck up a disproportionate amount of the nations’ economy something bad is bound to happen, right? Maybe, just maybe, the Fed will prove me wrong.
What is so fascinating about the Fed’s announcement is that it is ordering the behemoths not to simply write up better contingency plans, but to restructure their operations to accommodate a liquidation. In its own words, by July 2015 they all must:
- Establish a rational and less complex legal structure that would take into account the best alignment of legal entities and business lines to improve the firm’s resolvability;
- Develop a holding company structure that supports resolvability;
- Amend, on an industry-wide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings;
- Ensure the continuity of shared services that support critical operations and core business lines throughout the resolution process; and
- Demonstrate operational capabilities for resolution preparedness, such as the ability to produce reliable information in a timely manner.
In addition, look at the language used by the members of the FDIC, and it’s clear that there are regulators annoyed that too little has been done to prevent another disaster. For instance, in supporting yesterday’s decision FDIC board member Jeremiah O. Norton argued that “achieving a credible and workable framework for resolving large and complex financial institutions would be the pinnacle accomplishment in the wake of the 2008 financial crisis.“
And Vice Chairman Thomas M. Hoenig, who has long been a vocal critic of too big to fail banks, pointed out that the economy today is more, not less dependent on these institutions which are still highly leveraged and noted:
“Some parties nurture the view that bankruptcy for the largest firms is impractical because current bankruptcy laws won’t work given the issues just noted. This view contends that rather than require that these most complicated firms make themselves bankruptcy compliant, the Government should rely on other means to resolve systemically important firms that fail. This view serves us poorly by delaying changes needed to assert market discipline and reduce systemic risk, and it undermines bankruptcy as a viable option for resolving these firms. These alternative approaches only perpetuate “too big to fail.”
Maybe real banking reform isn’t just a blogger’s pipe dream after all.