Posts filed under ‘Economy’
For those of you responsible for anticipating the direction of interest rates, yesterday’s speech by Federal Reserve Board Chairwoman Janet Yellen is a must read. In refreshingly blunt and relatively unequivocal terms, she made it quite clear that the Fed will move to nudge up short-term interest rates by the end of the year.
After laying out the case that the slack in the labor market is gradually decreasing and likely to continue to do so and that core inflation is likely to rise over the next few years, she noted “. . .most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.”
Even as she did everything but announce a rate increase, Yellen conceded that this policy shift is not without risk and used the speech to explain to skeptics why now is the best time to raise interest rates.
Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.
Yellen’s speech provides the latest evidence that even as interest rates rise we are unlikely to see the type of dramatic increase in interest rates that regulators have been warning against for the last decade. A second take-away is that you should look to see what happens to bond yields today. A sharp increase in yield and maybe even a drop in the Dow Jones would demonstrate that the wizards of Wall Street have gotten Yellen’s message that this unprecedented era of easy money is coming to a close, albeit a very gradual one.
While guessing when the FED will begin raising short-term interest rates is a fun parlor game, a more technical but almost as important question is just how the FED will accomplish this goal. This question was raised in a recent article in the New York Times.
Raising interest rates is not as easy or mechanical as it once was. It seems to me that credit unions would be well advised to understand precisely how the FED plans to raise interest rates under these somewhat unprecedented circumstances.
Why are these conditions unprecedented? Because, since 2008, Congress has given the Federal Reserve the authority to pay interest to financial institutions holding excess reserves in Federal Reserve Banks. Regardless of whether or not you think this was a good move, the result has been that the Federal Reserve is now sitting on more than a $1 trillion in bank reserves. This huge amount of reserve held by the FED greatly complicates the mechanisms it will have to use when it finally decides it is time to raise interest rates.
For instance, the FED used to be able to have a decisive impact on short-term interest rates by simply raising the interest rate it charged for financial institutions wishing to borrow funds overnight. It would do this primarily by selling treasury securities that were purchased by banks. This decreased the amount of excess money financial institution had to lend to each other and nudged the interest rate they charged to lend to one another upward. Today it would be virtually impossible for the FED to jettison the huge amount of securities it would have to sell in order to put upward pressure on interest rates. In addition, non-bank financial intermediaries, that don’t have direct access to interbank loans, are beginning to have a large impact on lending.
So how exactly does the FED plan to raise interest rates? Most importantly, in addition to its more conventional techniques, it is going to effectively borrow money from banks and non-banks at interest rates higher than they could get making traditional bank-to-bank loans. As Simon Potter, the Federal Reserve Bank of New York official in charge of executing this policy explained in a speech in 2014, the FED assumes that these higher interest borrowings will effectively set the floor at which other loans will be made by and to financial institutions. The thinking is that the financial intermediaries will not be willing to lend money at rates lower than they can get from the FED.
We will have to wait and see if he is right and hope that the FED’s unchartered financial manipulation doesn’t have intended negative consequences for smaller lenders. In the meantime, I provided you with some background information that you can further delve into if you choose.
The late Met announcer Ralph Kiner used to say that a team is never as good as it looks when it’s winning and is never as bad as it looks when it’s losing. The same could be said of a stock market.
With apologies for those of you recalibrating your retirement plans with every 100 point drop in the market, this rout is not as bad as it looks.
What does the investing class know today that it didn’t know yesterday morning? We already knew that the economies of developing countries were weakening. Brazil is in the midst of a major government corruption scandal, Russia is busy trying to restart the Cold War, India needs to further decentralize its economy and the Chinese economic engine had to slow down at some point. All of this has been going on for months. Since March 2014 an estimated $1 trillion has been pulled out of emerging markets by investors. (http://money.cnn.com/2015/08/24/investing/emerging-markets-capital-outflows/index.html)
Was there surprising news about the state of the Western economies? No. In July, the Word Bank downgraded its economic growth forecast in response to an “unexpected output contraction in the United States, with attendant spillovers to Canada and Mexico.” As for Europe, growth in the EU declined from 0.4 to 0.3% in the second quarter.
What we also knew yesterday morning was that the world economy could only take off if the American consumer started spending again. As explained in that same IMF forecast, ”[t]he underlying drivers for acceleration in consumption and investment in the United States—wage growth, labor market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market—remain intact.” http://www.imf.org/external/pubs/ft/weo/2015/update/02/. I could take issue with each one of these conclusions, but I’ll just point out that anyone who thinks the American consumer is feeling flush with higher wages is wrong. Wages are barely budging and took a beating over the last five years,
So what really happened yesterday? Nothing more or less than an overdue correction to an overheated market. The best piece of analysis I have read comes from Mohamed El-Erian, the chief economic adviser at Allianz SE and a columnist for Bloomberg News who writes: “Some commentators have rushed to describe the recent global stock market turmoil as “historic” and “unprecedented,” yet its evolution has been quite traditional so far.” The markets are adjusting to the reality that central banks can’t quickly stabilize asset prices. Quantitative easing is over.
What all this means is that markets are trending towards reality, which is exactly what markets should do. Expect bond yields to remain low and the Fed to put off raising short-term rates especially now that China has moved to cut its own rates. The economy has never been as strong as some people thought it was. Wall Street is just waking up to this reality.
If at First You Don’t Succeed. . .
Visa and Target announced a settlement intended to compensate card issuers for the high profile data breach of the Minnesota retailer that compromised an estimated 40 million debit and credit cards. The price tag is reportedly $67 million. The agreement comes months after issuers, including credit unions, scuttled a proposed $19 million settlement with MasterCard. NAFCU’s Carrie Hunt is quoted in the WSJ: “This settlement is a step in the right direction, but it still may not make credit unions whole.”
Stay tuned. This will be an interesting issue to keep an eye on in the coming weeks as the specific terms are analyzed.
Foreclosures in New York: Alive and Well
NY’s foreclosure problems are far from resolved, especially in NYC’s suburban communities according to State Comptroller Thomas Dinapoli, who has the numbers to back it up. Between 2006 and 2009, the number of new foreclosure filings jumped 78%. They leveled off in 2011, hitting a low of 16,655, but shot up again. Filings climbed to 46,696 by 2013 before edging back to 43,868 in 2014, still well above pre-recession levels, according to the report.
By the end of 2015, there were over 91,000 pending foreclosures with Long Island and the Mid-Hudson accounting for a disproportionate share. The four counties with the highest foreclosure rates are all located downstate: Suffolk (2.82 percent, or one in every 35 housing units), Nassau (2.47 percent, or one in every 40 housing units), Rockland (2.26 percent, or one in every 44 housing units), and Putnam (2.10 percent, or one in every 48 housing units). Counties in Western New York and the Finger Lakes regions, in contrast, tended to have lower pending foreclosure rates and decreasing caseloads.
The good news is that these numbers most likely represent a backlog of delinquencies rather than a further deterioration of economic conditions. The Comptroller reports that there are fewer foreclosures at the beginning of the process while activity at the end of the process (notices of sale, notification that the property has been scheduled for public auction) is accelerating.
The backlog of foreclosures reflects not only the aftershocks of the Great Recession but also the inevitable result of a foreclosure process that is hopelessly byzantine and invites delay. Maybe there will be a grand bargain in which state policymakers take steps to expedite foreclosures in return for lenders having to comply with one of the nation’s most onerous and lengthy foreclosure processes. In the meantime, I’m curious if the trends persisting in New York began to spread nationally thanks to the adoption of New York style regulations on the national level. Here is a link to the report.
Time Extended for Two-Cents on Online Lenders
You have more time to sound off about the extent to which online marketplace lenders should be regulated if you are so inclined. The Treasury has extended until September 30th the deadline for responding to its Request for Information on the proper regulation of online lenders. The RFI asks a series of questions related to companies operating in three general categories of online lending: (1) balance sheet lenders that retain credit risk in their own portfolios and are typically funded by venture capital, hedge fund, or family office investments; (2) online platforms (formerly known as “peer-to-peer”) that, through the sale of securities such as member-dependent notes, obtain the financing to enable third parties to fund borrowers; and (3) bank-affiliated online lenders that are funded by a commercial bank, often a regional or community bank, originate loans and directly assume the credit risk.
Are these flash-in-the-pan industries that will fold with the next economic downturn or innovative disruptors of the banking model? If they are the later they may hit credit unions particularly hard. According to the Treasury, small businesses are already more likely than their larger peers to go online for their products and services. Online lending may provide them with a means to quickly access the cash that traditional lenders are reluctant to provide them during economic downturns.
The American consumer is still cautious about taking on more debt, but the spending they are doing is making credit unions an even more attractive option.
On what am I basing this pronouncement? The New York Federal Reserve released its quarterly report on consumer spending on August 13th. It indicates that auto loan origination reached a ten-year high at $119 billion. America’s aggregate auto loan balance now stands at $1 trillion. Credit unions have seen a surge in auto loans over the last year and these statistics would seem to indicate that the surge is continuing.
Another bright spot for credit unions has to do with mortgage loan originations. According to a survey, credit unions share of mortgage originations increased from 7% to 11% comparing the first quarter of 2013 with that of 2015. What interests me about this statistic is that the surge in credit union home lending is occurring even as banks continue to impose tougher lending standards on home loan applicants.
According to the consumer report, less than 8% of new mortgage originations were given to borrowers with credit scores below 660. The TransUnion survey speculates that credit unions, having lent more prudently during the recession, are now better positioned than their banking counterparts to make mortgage loans.
Are EMV Cards Being Skimmed
Krebs on Security is reporting that hackers have come up with a creative way of skimming information from EMV Chip cards. The ever reliable Krebs reports that Mexican authorities have discovered an ATM skimming device that is inserted into an ATM and is capable of recording the data that is transmitted between an EMV chip and the ATM. This is further evidence that anyone who thinks of chip-based technology as a silver bullet to prevent card fraud is sadly mistaken.
What Concerns me most about the integrated disclosure requirements that take effect in October isn’t the new disclosures or the timeline for providing them, as troublesome as they are. No, what concerns me most about TRID is encapsulated nicely in a headline in this morning’s American Banker:” Realty Agents, Builders Clueless about New Mortgage Disclosures.”
Why does this concern me? Because to correctly and cost effectively implement TRID your credit union must establish a new framework for dealing with third parties ranging from real-estate agents to mortgage brokers all of whom must understand that the mortgage world has fundamentally changed. If they understand why new procedures are being put in place you can get on with mortgage lending. If you don’t get their buy-in than you can bet that they will blame you for every inevitable bump along the mortgage road and your credit union’s reputation will unfairly suffer.
For example, I’m sure many of you know that TRID generally requires a closing disclosure to be received three business days before a mortgage loan is consummated. What happens if your member’s real estate agent doesn’t know this or doesn’t care? The first time one of her clients has a closing delayed she will start looking for other lenders to whom she can refer clients.
What about the erstwhile closing attorney who you have used for years? You have always strived to accommodate his schedule. His last second rushes to get closing disclosures to you is office legend. At the end of the day his closings take place and we all live happily ever after.
In the post-TRID world the attorney can no longer drive the ship. If he doesn’t get the closing material to you on time the closing can’t take place. This means that you have to reassess what can and should be done by the credit union’s staff. In addition, you should not assume that your closing attorney has had the time to dissect TRID and fully understands its practical implications. Amendments to your retainer agreements may even be in order so that the attorney is on the hook for the cost of closing delays caused by his tardiness.
What about the appraiser and title agent your credit union always recommends? The new early disclosures have even stricter rules about when and by how much the price of a service disclosed on the Loan Estimate can vary from the amount ultimately charged the member in the Closing Disclosure depending on how closely you work with your third-party service providers. For instance, if you require members to use a specific appraiser than the amounts disclosed on the initial loan Estimate and the amount charged on the Final Disclosure can’t vary. There is a bit more disclosure flexibility provided to lenders who permit your mortgage applicants to shop for settlement services (§ 1026.19(e)(1)(vi)).
But no matter what approach you take the onus is on you to put your providers on notice that the days of increased charges for unexpected glitches are over As the Bureau recognized in the TRID preamble a “creditor originating a loan in a geographical area with which it is unfamiliar may have less familiarity with the mortgage market in that area, but the Bureau believes that the creditor nonetheless has better access to information than the consumer about settlement service providers in the geographical area.”
Here are just three examples of how simply educating your lending staff about TRID does not go far enough. Real estate agents don’t care about compliance as much as they do about closing the deal; they are going to recommend the originator that can close the quickest. Vendors want to be paid for the work they perform and lawyers don’t like to be told how to do their job. By explaining how the new rules impact your credit union’s obligations you may avoid a race to the bottom in which third parties give their business to the mortgage lender must willing to bend the rules.
Happy Days Are Here again?
As an unabashed member of the “Glass is Half Empty Club” when it comes to the economy I’m not all that surprised by the latest economic news as summarized by the WSJ “Personal spending, which measures what consumers spend on everything from doughnuts to dishwashers, rose 0.2% from a month earlier, the smallest gain since February, the Commerce Department said Monday. In May, spending rose a revised 0.7%” In addition personal income grew a less than inspiring 0.4%. (http://www.wsj.com/articles/u-s-consumer-spending-up-0-2-in-june-1438605172)