Tuesday, April 1, 2014

FICO changes coming? ; Bank Stress Test Results….



 On to the non-April Fools' edition.....

 The total number of pages of the Federal Tax Rules, i.e., the IRS explanation of income tax code and regulations, has increased by +34,108 pages (to 74,608) since 1995, an increase of 5 new pages a day, 365 days a year for the last 19 years. I am sure that the promotion of "Sell Two Homes and Your Next Vacation is On Us!" is some type of taxable event. My guess is that Fischer Homes' attorneys took a long hard look at recent CFPB rulemaking to make sure everything was copacetic with no hint of steering or referral kickbacks. 

Although management reports that the problem is now corrected, the many users of Ellie Mae's Encompass received this note yesterday, on the last day of the month, from the company: "As you are probably aware, Ellie Mae is experiencing an issue with Encompass that is affecting a number of our clients. This is resulting in delays in processing loans, or in some cases, the inability for some of our clients to close loans. Ellie Mae realizes the impact that this may have on your business, particularly considering that today is month and quarter end...We are also updating the Ellie Mae Status Center regularly with real-time updates."

Fed watchers over the last few years have had many things to study; on their list of course has been the FOMC's asset purchase program, and while Chairwoman Yellen unwinds the program, she is likely to apply a brand of monetary policy-making known as optimal control, which emphasizes that the target fed funds rate should be tailored to keep unemployment at a healthy level and unemployment close to 2%. Bill Gross of PIMCO, never one to shy away from voicing his opinion on the Fed, commented last week that "the below-target inflation rate, rather than a falling unemployment rate, will guide the Fed's decision to keep rates low for a prolonged period of time." Gross has asserted in prior market commentaries that the central bank is likely to hold the fed funds rate near zero until 2016, which will help short-maturity bonds outperform the rest of the market. It's a good conversation to have, however, an even better one is the one Wells Fargo asks: Is the Fed Funds effective? They write, "Is there a relationship between the federal funds target rate, inflation rate and the unemployment rate? Recently, the Federal Open Market Committee (FOMC) began rolling back its asset purchases program and, at some point in the future, the FOMC will start increasing its target for the fed funds rate. This raises the question, what would be the likely effect of an increase in the interest rate on inflation and the unemployment rates in our post-Great Recession world?"

Just when you get all your icons the way you liked them, with the wallpaper of your dog wearing a Santa Claus hat, someone has to come along and tell you that your Windows 3.1 machine is out of date. In the same vein, what's even better than FICO 8? FICO 9, or course! As almost everyone in the industry knows (maybe the temp worker at the front desk?) FICO is one of the leading predictive analysis firms in America. How leading, you ask? Well, in 2013, lenders purchased a whopping 10 billion FICO scores to determine whether or not certain individuals are eligible for loans. As market dynamics change over time, FICO typically works to create new models that address these shifts and better predict a person's creditworthiness, with FICO Score 9 being the latest in the run of developments. According to FICO's announcement (yes, the name of the corporation is actually FICO....with an original NYSE ticket symbol of: FICO) FICO 9 will be the first release in a suite of updated and new FICO Scores. It will be followed by industry-specific FICO Scores for credit cards, auto loans and mortgages. 

According to the Federal Reserve, U.S. big banks have enough capital buffers to withstand a drastic economic downturn, announcing March 20th that 29 out of 30 major banks met the minimum hurdle in its annual health check. All of the banks except Zions Bancorp stayed above the 5 percent requirement for top-tier capital in the latest round of stress tests (note to self: call Zions tomorrow and lift Blue Star Airlines call-options). Reuters writes, "The tests aim to show how banks would weather a financial collapse similar to the 2007-2009 crises. Banks had to show how they would cope with a halving of the stock market, and the eight largest banks had to weigh the impact of the default of their biggest trading counterparty." As you can imagine in a post '07 world, stress tests are closely watched by the financial markets, and are used as a sign of the industry's health. Ironically, along with Zions, Wells Fargo and Bank of America disagreed with the Feds tests, but for different reasons; Wells and BofA released the results of internal stress tests that showed them performing better than they did under the regulators' tests.

The only news out yesterday was the 2nd tier Chicago Purchasing Manager's Survey. It fell to its lowest level in 8 months, prompting analysts to wonder about the strength of the US economic "rebound". Certainly housing values are up versus a year ago, but other indicators are not running on all cylinders... CPMI Chief Economist said: "March saw a significant weakening in activity following a five month spell of firm growth. It's too early to tell, though, if this is the start of a sustained slowdown or just a blip. 

The only news out this morning is the ISM Manufacturing Index (from purchasing managers of 300 manufacturing firms about general trends) and Construction Spending. Overall, rates were pretty quiet yesterday, and overnight. The benchmark 10-yr T-note closed Monday with a yield of 2.72%, and this morning it is about where it began Monday - at 2.74% - and MBS prices are worse a shade - but about where we were yesterday morning.  Yawn.
  

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