Friday, January 10, 2014

This Week in Bank Failures

Janet Yellen is taking some pains to dispel the assumption that the Fed is a branch of Wall Street. After “Helicopter Ben,” it may take a couple of years before Wall Street accepts the sobering thought that the Fed will not come galloping to its rescue after its next misadventure.

New mortgage rules that go into effect today are meant to ban the most common forms of high-risk home mortgage loans. Bank underwriters are required to find that a borrower will have the earning ability to make all the payments required by a home mortgage. This includes any possible interest rate increases and balloon payments, details that were often overlooked when underwriting mortgage loans before 2008. Underwriters are now required to document an applicant’s earning ability and credit history. There are also rules about mortgage disclosures and marketing practices. Loan officers, for example, can no longer receive bonuses for steering borrowers toward high-risk loans. None of these new rules should have any obvious impact, as they are not so tight as mortgage underwriting has become since 2009. However, under the ability-to-pay rules, some real estate speculators might find financing harder to come by. The one new rule that might have an immediate impact is a limitation on closing costs and points which now cannot exceed 3 percent of the loan’s original principal. This limit will affect refinancing more than it affects home purchases. If upfront fees and costs for a $50,000 loan are limited to $1,500, that may make banks a little less eager to make those loans.

U.S. unemployment has been falling as more workers drop out of the job market, but unemployment has stayed near record highs in Europe, with new records for unemployment set in Greece and in the eurozone.

Banks will be filing new financial reports in the coming weeks to cover the fourth quarter of 2013, and we can watch for bank closings among those banks whose new balance sheets show a deterioration in asset quality and liquidity. However, with so much private capital flowing into banking, the pace of bank failures is likely to continue to decline.