Friday, October 25, 2013

This Week in Bank Failures

Two mortgage securities cases this week: The JPMorgan settlement with FHFA is the largest securities settlement yet. The bank will pay Fannie Mae and Freddie Mac $4 billion, and an additional $1 billion as a penalty. At issue were $34 billion in securities sold by the bank and two predecessors to Fannie Mae and Freddie Mac, which the government has said did not accurately describe the mortgages involved. In an unrelated case, a court found Bank of America liable for one specific Countrywide mortgage lending program designed to speed paperwork and lower underwriting standards below even the low standards of that era. Significantly, the court also found the executive in charge of the lax lending personally liable. The bank had described the prosecutors’ case as whistling in the dark just days before, and expressed astonishment at being found liable. That outcome, though, may make bank lawyers and executives more eager to settle cases involving sloppy and incomplete mortgage paperwork. There is certainly a lot of that around, with U.S. authorities now investigating nine banks over mortgage-backed securities, according to a list compiled by the Financial Times.

The mortgage business isn’t what it used to be, with the pace of new applications falling by about half since the start of the year. Adjusting to the slowdown, banks will have cut between 30,000 and 40,000 mortgage workers by the end of the year. Relatively few new branch closings have been announced, but that is a trend that will resume if the mortgage business does not recover next year.

U.S. consumer confidence has fallen sharply since August and is now at levels that smell like a recession, though still above the lows of 2011. Consumers responded to the possibility and then the actuality of a government shutdown, and more generally to the economic risks represented in the Republican strategy of legislative nullification. There is anecdotal evidence that consumer confidence increased when the government re-opened, but the survey data so far doesn’t show any such recovery.

That Republican strategy of legislative nullification continues with procedural maneuvers in the Senate to try to delay the confirmation of Janet Yellen as the new Fed chair. Republican senators may not be able to do away with the Fed, but they will see if they can render it leaderless for a time.

U.S. credit unions will not be exempt from stress tests, with the NCUA board this week proposing to stress-test about four very large credit unions, coordinating with the Fed’s stress test schedule.