Risk News at-a-Glance

Week of June 22, 2009

Whenever available, links to the full article are provided at the end of each abstract. In some cases, content may not be available online, or may require an individual subscription to access.

Risk News Archive

Credit Risk
Battle Is Brewing Over Watchdogs
U.S. Gets TARP Payback from 10 Banks
Obama to Limit Fed Lending Power, Grant Systemic Role
Lending Declines at Bailed-Out Banks
Regulatory Revamp Targets Securities at Heart of Crisis
Geithner Says U.S. Goal Will Be 'More Boring' Financial System
More Commercial Loans Going Sour
Ailing Banks Caught Between Regulators' Competing Visions
Commercial Real Estate Market Has Space for Small Investors
Fed Chooses Collateral Monitor For Commercial Mortgage Bonds
Banks May Need New Stress Tests, Panel Says

Market Risk
Bernanke Must Reassure 'Confused' Market About Rate Strategy
Assured of SEC's Survival, Schapiro Now Fights to Keep Regulatory Teeth
Rate Rise Clouds Recovery
Recession's Grip Eases in Parts of Nation

Enterprise Risk
Agencies Issue Frequently Asked Questions on Identity Theft Rules
Heartland Gets Religion on Security
Carlile Report Warns Banks Not Doing Enough to Stop Terrorism

Securities Lending
Lenders Scramble to Rebuild Confidence

Consumer Lending
Mortgage Foreclosures Heading Through the Roof
Changes Urged to Rules on Condo Loans
HUD Talk on Eligibility Rules Spooks Reverse Lenders
New Consumer Agency Would Revamp Mortgage Oversight
Obama to Form Consumer Protection Agency, Strip Some Fed Powers
Mortgage Renegotiations Encouraged by Fla. Courts
Fed's Duke Calls for Better Consumer Protection to Boost Confidence

Credit Risk

Battle Is Brewing Over Watchdogs
New York Times (06/22/09); Beales, Richard

Following the White House's unveiling of the financial regulatory reform proposal, lawmakers are gearing up to debate the provision of additional oversight powers to the U.S. Federal Reserve and the creation of a council of regulators. Critics expect the battle for which agencies have a say in systemic risk to be the most heated, but other elements of the proposal are likely to see opposition as well. For instance, the ways in which financial firms are reclassified and regulated could stir up debate. Classifying certain firms as "too big to fail" will shift those firms into more restrictive capital and regulatory requirements, and some critics are concerned the classification will cause firms to shop around for "friendlier" regulators. Meanwhile, industrial loan corporations are likely to see greater regulation because they resemble banks. Critics are concerned that some of the reforms proposed could lead to market distortion if they are not balanced properly. The plan also does not spell out how Fannie Mae and Freddie Mac's regulations would be modified nor which agency will be responsible for overseeing privately traded derivatives.
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U.S. Gets TARP Payback from 10 Banks
Wall Street Journal (06/18/09) P. C1; Sidel, Robin

Following approval from the U.S. Treasury Department, 10 banks participating in the Troubled Asset Relief Program (TARP) returned $68 billion to the government on June 17 to escape restrictions on executive compensation and other decisions. Among those repaying the government were J.P. Morgan Chase and Goldman Sachs. Even though these banks are now on their own financially to deal with the economic recession, they will still face regulatory changes, if the Obama Administration's recent regulatory reform proposal is passed. Some of the recommended changes include increases to capital holdings and regulations to better align compensation with long-term shareholder value, as well as rules to reduce excessive risk taking. Citigroup, Bank of America, and Wells Fargo have not been given permission to return TARP funds as of yet. Meanwhile, Standard & Poor's reports, "Operating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles and tighter regulatory supervision," which prompted the ratings firm to downgrade 18 U.S. banks.
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Obama to Limit Fed Lending Power, Grant Systemic Role
Bloomberg (06/17/09); Schmidt, Robert; Westbrook, Jesse

Under President Barack Obama's financial overhaul proposal, the U.S. Federal Reserve could lose its emergency lending powers, but gain new authority to oversee systemic risks. The central bank could only lend to troubled firms with approval from the U.S. Treasury Department. The proposal also calls for an examination of the Fed's governance structure, and the Treasury would have the authority to make changes to that structure to "improve [the central bank's] accountability and its capacity to achieve its statutory responsibilities." The proposal also outlines a national insurance office for the Treasury, which would gather information on the sector and help the Fed identify gaps in regulation and determine which insurance carriers need federal oversight because of their systemic importance. Additional insurance regulation could be considered as well. Moreover, the proposals call for a consumer protection agency to oversee consumer financial products, such as mortgages and credit cards. Finally, the proposal will bring hedge funds and other sectors of the market under a regulatory umbrella, some of them for the first time.
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Lending Declines at Bailed-Out Banks
Washington Post (06/16/09) P. A14

A recent Treasury Department report shows a 0.8-percent decline in average loan balances at the 21 biggest banks that received financial aid from the government to $4.34 trillion in April from the prior month, marking the fifth decrease over a six-month period. It also reveals a 1-percent decline in first-lien mortgages, home equity lines of credit, credit card loans, and other consumer finance products.
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Regulatory Revamp Targets Securities at Heart of Crisis
Washington Post (06/16/09) P. A12; Appelbaum, Binyamin

The Obama Administration on June 17 released plans to revamp the financial regulatory system, primarily through actions in the securitization market. Under the proposal, lenders must hold 5 percent or more of the risk on asset-backed securities, loan originators would receive gradual payments that would decline in the event of default, and ratings agencies would have to inform investors that securities carry more risk than corporate bonds. The proposal also would establish an agency to dismantle troubled firms, create another body to offer consumer protections with regard to mortgages and credit cards, give the Federal Reserve more power over the risks assumed by big financial companies, and allow the U.S. Securities and Exchange Commission to include asset-backed securities in its database of corporate bond issues.
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Geithner Says U.S. Goal Will Be 'More Boring' Financial System
Bloomberg (06/15/09); McKee, Michael

The goal of the Obama Administration financial regulatory reform plan, according to U.S. Treasury Secretary Timothy Geithner, is to fill in oversight gaps and fix the "accountability problem" among regulators to foster a more stable financial system. "We're going to try to eliminate gaps in the basic structure. We want to have a more boring system, a little less exciting, a little less drama," says Geithner. Among some of the changes in the plan will be broader authority for the U.S. Federal Reserve to supervise large, interconnected firms, robust reporting requirements for issuers of asset-backed securities, and regulations requiring issuers to retain a financial interest in their products. A council of regulators is proposed to help coordinate regulation of the entire system, and a resolution mechanism will be created to unwind nonbanking firms.
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More Commercial Loans Going Sour
American Banker (06/16/09)

Fitch Inc. reports that delinquencies on commercial mortgage-backed securities continued to mount in May, partly due to the poor performance of multifamily housing communities and retail properties. The total monthly delinquency rate climbed to 2.07 percent from the previous month, the highest percentage since Fitch started tracking such data eight years ago. The multifamily delinquency rate was 4.55 percent, the highest of all property types, due to declining performance.
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Ailing Banks Caught Between Regulators' Competing Visions
Washington Post (06/11/09); Appelbaum, Binyamin

The banks not repaying government loans—Bank of America and Citigroup—are caught between the competing visions of several regulatory agencies and will be under greater scrutiny regarding executive compensation. Ten companies have been granted permission to repay government loans, but nine other firms are still on the hook for government aid. Bank of America is in the midst of discussions with lawmakers about its acquisition of Merrill Lynch, while Citigroup is under fire to change its senior management profile. Meanwhile, these firms are struggling to clean up their balance sheets and restore stability to their operations. The U.S. Federal Deposit Insurance Corp. has demanded changes from Citigroup more so than its fellow agencies, the U.S. Federal Reserve and the Office of the Comptroller of the Currency.
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Commercial Real Estate Market Has Space for Small Investors
Los Angeles Times (06/14/09); Vincent, Roger

Commercial real estate values have come down from their 2006 peak, while operating costs have frequently increased as tenants of such properties as apartment communities, retail stores and industrial warehouses have either moved out or fallen behind on their rent. Selling property has also been a challenge because so many would-be buyers are having such a hard time obtaining loans. Others are taking a wait-and-see approach as to whether prices will fall further before they will even consider buying. With the market so unsettled, opportunities are abounding for small investors willing to take some risk. Analysts say if a person can afford to buy a home, he or she can afford to purchase commercial real estate. Investors need to keep in mind, though, that being a landlord during a recession can be quite difficult. Economically stressed tenants are having an increasingly hard time making rent each month. Small retailers are especially struggling. Landlord Louise Dedeyne, president of the Studio City Shopping Center Association, says she is giving her six tenants a break by absorbing more than 35 percent of such overhead expenses as parking lot security that she could legally pass along to them. She laments, "I wish I could give them more. I just can't afford to give them a better break."
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Fed Chooses Collateral Monitor For Commercial Mortgage Bonds
NASDAQ (06/16/09); Shrivastava, Anusha

The Federal Reserve has selected Trepp LLC to serve as a collateral monitor for new and existing securities backed by commercial property loans as part of the Fed's TALF program, through which it will offer investors cheap loans to buy such bonds. According to the central bank, Trepp has agreed to "assist the New York Fed by providing valuation, modeling, analytics and reporting" on these commercial mortgage-backed securities. To date, the Fed has been very cautious in picking the bonds for which it will offer non-recourse loans to investors. For instance, bonds must be rated triple-A by at least two of five rating agencies. In addition, they may not be rated lower than that by the other three or even be on watch for downgrade. The Fed also reserves the right to reject bonds based on such other factors as "unacceptable performance of the mortgage loan pool" or "unacceptable concentrations" of borrowers or property types and geographic regions. Trepp will be responsible for monitoring collateral to safeguard the Fed from losses. Its greatest challenge will be in carrying out the central bank's work to "cover the gamut of all the activities the Fed needs done," reports senior vice president Tom Fink.
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Banks May Need New Stress Tests, Panel Says
Washington Post (06/09/09); Paley, Amit R.

The Congressional Oversight Panel, led by Harvard Law School Professor Elizabeth Warren, noted that while the stress tests were helpful, they did not paint a dire enough picture for banks to use when determining capital cushions and other risk management strategies. The panel noted that the stress tests assumed unemployment would reach 8.9 percent in 2009, but in May 2009, unemployment rose to 9.4 percent. The panel suggested that new stress tests for the financial markets be conducted. The panel's report criticized the U.S. Federal Reserve for its lack of transparency about the process for conducting the tests. "Without this information, it is not possible for anyone to replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results. It may fail to capture substantial risks further out on the horizon," noted the report. The report recommends that banks holding large amounts of toxic assets continue to submit to stress tests, and regulators should retain the right to conduct stress tests even beyond the economic crisis.
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Market Risk

Bernanke Must Reassure 'Confused' Market About Rate Strategy
Bloomberg (06/22/09); Miller, Rich; McKee, Michael

Wall Street is concerned that the Federal Reserve's plan to jump-start growth by buying assets and keeping interest rates low could lead to an inflationary bubble. Treasury bond yields are increasing, which has fostered a rise in long-term interest rates; and the jump could make borrowing costs more expensive for both homeowners and buyers and hurt the economic recovery. When central bank officials convene this week for their policymaking session, they may use their post-meeting statement to squash speculation that they are gearing up to raise interest rates this year. In light of that, investors and analysts say it is critical for the Fed to spell out how it will cut its balance sheet and keep inflation from ballooning.
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Assured of SEC's Survival, Schapiro Now Fights to Keep Regulatory Teeth
Wall Street Journal (06/11/09) P. C1; Scannell, Kara

During a meeting with senior U.S. Securities and Exchange Commission (SEC) attorneys, SEC Chair Mary Schapiro told the lawyers that the agency must begin demonstrating its ability to make significant changes as Congress continues to examine the agency's worth. Even though lawmakers and Obama Administration officials have indicated they will maintain the SEC, Schapiro continues to lobby lawmakers regarding the new boundaries of financial regulation. The agency, which was established to protect investors and regulate the markets, continues to speed up the examination and settlement of fraud cases and hopes to create new regulations to prevent stock market manipulation, provide shareholders more say in nominating directors, and improve executive compensation disclosure.
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Rate Rise Clouds Recovery
Wall Street Journal (06/11/09) P. A1; Timiraos, Nick; Simon, Ruth

Rising interest rates are threatening to derail the early stages of a housing rebound that was shaping up to be a major part of the White House's economic recovery efforts. HSH Associates reports that rates on 30-year fixed mortgages soared to 5.79 percent this week from 5 percent just two weeks earlier—a jump that will cut the number of borrowers with an incentive to refinance by as much as 50 percent or more, estimates FTN Financial. Earlier this spring, rates had dipped below the 5-percent mark, resulting in a flurry of refi activity and reviving home sales in some markets. The rise in rates represents a setback for the Obama administration's Home Affordable Refinance Program, which aims to allow millions of homeowners who owe between 80 percent and 105 percent of their residence's current value to take advantage of lower rates.
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Recession's Grip Eases in Parts of Nation
Wall Street Journal (06/11/09) P. A2; Lahart, Justin

The Federal Reserve's "beige book" showed some positive signs for the housing market in April and May, although the overall economy continues to struggle. Realty agents in eight of the Fed's 12 districts said home sales have improved. At the same, several districts also reported that residential construction was beginning to stabilize, although at low levels. However, commercial real estate vacancies are on the increase in many parts of the country. In addition, it has become more difficult for developers to line up project financing.
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Enterprise Risk

Agencies Issue Frequently Asked Questions on Identity Theft Rules
BankInfoSecurity.com (06/11/09); McGlasson, Linda

The Federal Trade Commission (FTC) and a host of other federal banking regulators have issued a list of frequently asked questions to help banks and businesses get in line with the ID Theft Red Flags Rule. Regulators began checking businesses for Red Flag compliance last fall, and the FAQs include common concerns that examiners have addressed. The questions are divided into four categories: the ID Theft Red Flags scope; the definitions of "service provider" and "covered account;" kinds of notices of address discrepancy that fall under the rule; and providing a legitimate address to a consumer reporting group. Betsy Broder of the FTC says the FAQs are regarded as a "living document" and will be amended accordingly as other questions pertaining to the new rules arise.
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Heartland Gets Religion on Security
Wall Street Journal (06/17/09)

Heartland Payment Systems CEO Bob Carr has become a spokesman for tech security after his company announced in January that credit card information for its 100 million monthly transactions had been illegally accessed. In speaking openly about the company's security issues and shortfalls, Carr has also addressed a new security system that Heartland is preparing to release in the third quarter. The company, which processes credit card purchase data for issuing banks, will encrypt credit-card data from the time cards are swiped at a store until the information is delivered to their banks. Although stores will have to buy a $500 processing machine from Heartland to participate in this security system, this should remove many other inconveniences merchants deal with when securing customer data. Carr has said he believes that most information security breaches go unreported, since about 300 companies were victimized by the same hacker as Heartland, and most of them never came forward.
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Carlile Report Warns Banks Not Doing Enough to Stop Terrorism
London Telegraph (06/18/09); Gardham, Duncan

The recently-released Carlile report found that police has seized money and property worth L597,000 from suspected terrorists. That figure, which does not include property confiscated from convicted terrorists, has increased compared to the L543,000 seized in 2008. In light of that increase, the report criticizes banks and credit card companies, maintaining that financial institutions must do more to help anti-terrorism efforts. The report also recommends increasing the amount of time suspected terrorists can be detained before being charged from the current maximum of 28 days. A proposal to extend that limit to 42 days was defeated in the House of Commons in October 2008. Additionally, the report announced plans to replace the high-security Paddington Green police station in West London, where the majority of terrorist suspects are held. According to Metropolitan Police officials a replacement site had been "provisionally identified."
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Securities Lending

Lenders Scramble to Rebuild Confidence
Financial News Online – Investor Services Quarterly (06/15/09); Tripon, Lucie

Though securities lending prospered in 2008, the large custody banks have seen between 10 percent and 20 percent of their securities lending clients move to the sideline in the past year. Nick Rudenstine, global head of securities lending product at JPMorgan, says that fewer beneficial owners are looking into long-duration risk on cash reinvestments in order to make money on loans of less attractive stock. "The focus is very much on lending out the most in-demand securities for the best possible fees," he explained. He adds that JPMorgan has seen greater demand for separate accounts, which allow for greater transparency and control over collateral reinvestment. "We have always been a separate account shop, and that has become more appealing as concerns about risk have come to the fore," Rudenstine says. JPMorgan lends to approximately 20 prime brokers, though the majority of the business is with its top 10 counterparties. "Working with a diversified group of borrowers helps improve price discovery and competition," says Rudenstine.
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Consumer Lending

Mortgage Foreclosures Heading Through the Roof
USA Today (06/19/09); Armour, Stephanie

The White House's $75 billion program to reduce foreclosures has been mired in delays and backlogs, with many at-risk homeowners unable to get phone calls returned and others denied help for reasons unknown. The Treasury Department reports that the plan has resulted in offers of more than 190,000 mortgage modifications with lower monthly payments since its debut earlier this year. However, homeowners who apply for workouts find that banks typically take between 45 and 60 days to respond to inquiries. According to NeighborWorks America, some homeowners who applied for mortgage modifications five months ago still have not received a final answer on whether they will be granted smaller monthly payments. Lenders and economists warn that rushing through approvals could do more harm than good.
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Changes Urged to Rules on Condo Loans
Wall Street Journal (06/22/09) P. A4; Timiraos, Nick

New underwriting standards for mortgages on condominiums have raised concern that developers will not be able to sell units and the housing recovery will be slowed. Fannie Mae said in March that it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of units have been sold or purchase mortgages in buildings where 15 percent of owners are delinquent on condo association dues or where one owner has more than 10 percent of unit. Freddie Mac plans to adopt similar rules in July. Reps. Barney Frank (D-Mass.) and Anthony Weiner (D-N.Y.) have written a letter to the CEOs of Fannie Mae and Freddie Mac, asking them to relax the recently tightened standards for condo loans.
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HUD Talk on Eligibility Rules Spooks Reverse Lenders
American Banker (06/17/09) P. 1; Berry, Kate

Reverse mortgage lenders are concerned that a HUD plan to slow the growth of their niche market at a time when home values are declining by raising insurance premiums or loan-to-value ratios and turning properties whose loan balances exceed their values over to the FHA would hurt the industry. Some observers believe a pullback by the FHA would prompt reverse lenders to offer such loans with private mortgage insurance, though reverse lenders say private mortgage insurers do not offer coverage for reverse loans at this time.
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New Consumer Agency Would Revamp Mortgage Oversight
Wall Street Journal (06/17/09); Holzer, Jessica

As part of his new regulatory plan, designed to divert future financial industry crises, President Obama will seek to set up a consumer protection body for mortgage lending. The entity—independent of the numerous government watchdogs that currently monitor home loans—will be empowered to set rules for the sector and other markets, check financial institutions for compliance with those rules, and levy fines or penalties against violators. The dictates of the new agency are likely to include a requirement that lenders offer loans with simple terms; that borrowers opt out of these mortgages if they are interested in more complicated finance options; that mortgage brokers provide borrowers with the best available products and ensure that they are capable of repaying the debt; and that the industry end the practice of yield spread premiums, which have been cited for encouraging brokers to lock customers into high-cost loans. Its reach would cover all lenders in the business, including banks and nonbanks alike. Consumer advocates are applauding the plan, reasoning that an independent governing body would keep lenders from migrating toward the regulator with the softest touch. "You can't say, 'Who's the easiest teacher? What class can I take so I can get the best grade?'" notes Center for Responsible Lending senior policy counsel Julia Gordon.
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Obama to Form Consumer Protection Agency, Strip Some Fed Powers
Bloomberg (06/17/09); Vekshin, Alison

President Barack Obama wants to establish a new agency that would have the power to set mortgage rules and to supervise and examine mortgage lenders for compliance. The creation of the Consumer Financial Protection Agency, which would be able to ban "unfair terms and practices" and punish companies for violations with fines and penalties, would allow the Federal Reserve to focus more on regulating companies that are too big to fail. Obama also plans to create the National Bank Supervisor, a new agency that would supervise federally chartered banks.
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Mortgage Renegotiations Encouraged by Fla. Courts
Miami Herald (06/15/09); Bender, Michael C.

In Florida, some judges are exploring ways to keep mortgage lenders and borrowers out of an increasingly congested court system. The Treasure Coast Circuit has begun requiring the two sides to meet before their first court appearances, often resulting in settlement. However, action from the state capital has been sporadic at best, even with nearly 11 percent of mortgages statewide in foreclosure—the highest rate in the country, according to the Mortgage Bankers Association. The Center for Responsible Lending, meanwhile, estimates that one in three Florida homeowners on the brink of foreclosure could remain in their residences with mediation.
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Fed's Duke Calls for Better Consumer Protection to Boost Confidence
International Business Times (06/10/09)

Federal Reserve Board Governor Elizabeth Duke, in an address before the Cleveland Fed's 2009 Community Development Policy gathering, warned that economic recovery is only feasible if consumer confidence is restored. The way to achieve this objective, she explained, is to correct the existing front-loaded incentive system that paved the way for abusive lending practices that were far from "consumer-friendly" and that contributed to a deterioration of consumer confidence. "Some lenders, brokers, appraisers, and investment banks were clearly motivated by transaction fees and had little incentive to ensure that borrowers would be able to sustain homeownership," she explained. Loan originators frequently were compensated based on the quantity—rather than the quality—of the loans they produced, which in turn led to consumer abuses. "The effect of these practices, combined with the impact of job cuts and other ramifications of a shrinking economy, have had a significant impact on consumer confidence," Duke noted. Specifically, consumers pulled back on spending at the same time that banks were tightening up on lending and inflating loan prices, creating a negative feedback cycle. To right the economy, Duke is calling for consumer protections that will restore consumer confidence. The Fed already has taken several steps in this direction, she noted, including new disclosure requirements on credit cards and other financial products. "If we have learned nothing else in this crisis," Duke stated, "we have learned that consumer protection is not just good for consumers; it is also necessary to restore investor confidence and promote a strong and stable economy."
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Risk News Archive