Bank Numbers Steadily Declining; Chase & the jumbo biz; It’s all about Fair Lending

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Interested in running a call center? Dot your i's and cross your t's. An online operation in the business of finding potential borrowers for mortgage companies will pay a $225,000 civil penalty to settle Federal Trade Commission charges that it deceived consumers about the terms of the mortgages. Oops.

There are a lot of bank and mortgage company mergers and acquisitions. A story from the WSJ in December observed that, "The number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression, as a sluggish economy, stubbornly low interest rates and heightened regulation take their toll on the sector. The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp." Well, since then, there are even fewer due to some being closed but more being merged. If you need some information on the number of commercial banks, here is a pretty nifty site that will graph the numbers for you. The decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011. More than 10,000 banks left the industry during that period as a result of mergers, consolidations or failures, FDIC data show. About 17% of the banks collapsed.

No banks were sent packing by the FDIC on Friday, but plenty are being bought by larger institutions, and the bank announcements have become a regular part of the commentary. In Texas Green Bank ($1.7B) will acquire SharePlus Bank ($304mm) for about $46.2mm in cash. UMB Bank ($16.6B, MO) will acquire the corporate trust business of RBC Bank ($2.9B, GA) for an undisclosed sum. Publicly held Simmons First National Corporation (which already is the holding company for seven banks and has assets of $4.4 billion headquartered in Arkansas) announced that it has entered into a definitive agreement and plan of merger with Tennessee's Community First Bancshares, Inc. (including its wholly-owned bank subsidiary First State Bank - $1.9B) for about $234.4mm. Out in California First National Bank of Southern California ($141mm) will acquire First Mountain Bank ($134mm) for about $14.1mm in cash. In Pennsylvania (motto: Virtue, Liberty, and Independence) the Bryn Mawr Trust Co. ($2.0B) will acquire Continental Bank ($658mm) for about $109mm in cash and stock. Lastly, First American Bank ($3.4B, IL) will acquire Bank of Coral Gables ($103mm, FL).

While we're on banks, Barclays is returning to its roots in retail banking and reducing investment-banking activity. The bank plans to eliminate 19,000 jobs during the next three years including 7,000 at the investment bank. "We will refocus and resize our investment bank to bring balance to Barclays," CEO Antony Jenkins said. "As currently constituted, it is an unacceptable drag". How would you like to be called an "unacceptable drag?" Sounds like a bad dating situation.

Lastly, and then I'll drop the banking news vein, J.P. Morgan is getting into the jumbo business. LOs have become accustomed to jumbo rates being lower than conventional rates (due to the high price of gfees and loan level price adjustments, and the demand by banks for great portfolio product - a way to leverage the private client business, which makes sense). I have heard rumors that at BNY high net worth clients can obtain 100% financing by pledging investment assets as collateral, and lock in for 90 days.

There were several comments as a follow up to lead paragraph regarding Fair Lending. ("Under the current rules, would it be illegal for a company to offer a mortgage program that had discounted mortgage rates for people with college degrees and even greater discounts for PhDs? I'm guessing it would violate Fair Housings disparate treatment, what do you think? How do major institutions make discounted or preferential loans to teachers, police, or union members? If we were to make the assessment that college graduates have better loan performance and fewer delinquencies, shouldn't that be where the discounts lie, and not to the politically-connected unions?")  

Shawn writes, "My impression of the rule is that the compensation plan has to be the same with ALL borrowers which means that offering a 'discount' to a select group is not allowed.  If you are able to obtain a firm answer on this, please share with me." J.S. pens, "A lender can have any kind of lending program they want, provided the lender does not violate Fair Housing/Fair Lending laws.  A corporation exists for one reason: To make money for its shareholders. Everyone remembers that part of Milton Friedman's theory but they forget the second half of the sentence: To make money for its shareholders within the bounds of the law. Fair Housing/Lending and ECOA are two of those laws. The lender would need to consider not the good intentions of the policy (discounts for college grads and a bonus discount for a Ph.D.) but the EFFECT of the loan program.  If the effect of the loan program would either: 1) create more segregated neighborhoods and, or; 2) treat one class of borrowers different from another class, then the policy would likely not comport with Fair Housing/Lending and ECOA. Education stats can be found here. There already are special lending programs for college graduates: all of them."

Doug conjectures, "Playing at the nexus of statistics and public policy is a dangerous endeavor. The college degree thing has the added challenge of a slippery slope inside the subject. Suppose it was okay to offer lower rates to those with BAs?  Is a second-tier state school BA more risky than a top-ranked university?  How would the due diligence folk keep up with diploma mills?  What is the value of a degree from a university in Warsaw?  How do we explain to the 'gifted' that went to Amherst College that their diplomas aren't worth the paper upon which they're printed?”

Donna Beinfeld shares, "I agree about the difference in mortgage rates based on an individual's level of education, you cannot discriminate from buyer-to-buyer. Fair Housing lists several unacceptable discriminatory factors, (familial, marital, handicap status, etc.,) but education level, or degree, is not one of the factors. As for Teachers:  HUD has a program for Police and Teachers called "Good Neighbor Next Door". The program is for revitalization areas, and the properties must be listed exclusively for sale through the Good Neighbor Next Door Sales Program. It has tough standards including a 3-year occupancy requirement and the buyer must execute an annual certification for those three years that they are occupying the subject property. Failure (just once) sets the loan up for investigation. The listing price is discounted 50% for members purchasing in the Good Neighbor Next Door Program, and they execute a security agreement and note (0% interest) which is forgiven after three years.  The secured loan is for 50% of the listing price, which is the discount for qualified buyers who purchase homes in the Good Neighbor Next Door Program." 

Lastly, Bill Kidwell with IMMAAG notes, "From a HUD press release announcing its final rule on formalizing standards on discriminatory effects in housing, (February 8, 2013): (Note - the final rule can be found at 78 FR 11460 - 11482, February 15, 2013)) 'HUD is statutorily charged with the authority and responsibility for interpreting and enforcing the Fair Housing Act and has long interpreted the Act to prohibit housing practices with an unjustified discriminatory effect, if those acts actually or predictably result in a disparate impact on a group of persons, or create, increase, reinforce, or perpetuate segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.' Further, the rule cites at 78FR 11461: 12 See, e.g., HUD v. Twinbrook Village Apts., No. 02-00025600-0256-8, 2001 WL 1632533, at *17 (HUD ALJ Nov. 9, 2001) (''A violation of the [Act] may be premised on a theory of disparate impact.''); HUD v. Carlson, No. 08-91-0077-1, 1995 WL 365009 (HUD ALJ June 12, 1995) ('A policy or practice that is neutral on its face may be found to be violative of the Act if the record establishes a prima facie case that the policy or practice has a disparate impact on members of a protected class, and the Respondent cannot prove that the policy is justified by business necessity.')..."

Bill's note continued. "It is a common misconception that disparate treatment and disparate impact as theories apply to everyone. They simply don't. Levels of education and employment types are not in and of themselves protected classes and therefore the 'violations' referenced in the question posed about the legality of a company offering special discount programs simply are not violations of rules about discrimination. Yes, I suppose an aggressive civil rights attorney or self-professed consumer advocate could argue that the ability for a person to become part of a particular group with a certain level of education or to be employed in a particular field could somehow be negatively affected by being a member of a protected class; that seems to be a spurious argument at best and the only argument that could provide the nexus necessary for plaintiff to prevail with an action. And, of course, anyone may sue anyone. However the same HUD final rule also established a 'three part burden shifting test' for such issues. Plaintiff must prove that the practices result in discrimination against a protected class. And only then does respondent have to prove how its practice is necessary as a prudent business practice. Anyone in lending should acquaint themselves with the governing laws and determining that just because recent media attention may make my observations appear naïve, they are no less valid. It is time that we all circle the wagons around what the laws actually say and fight the fight to return control of sensible lending to lenders, not the government." 

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Interest rates edging higher this morning with the stock market opening better and no serious turmoil in Ukraine with the referendum on secession. Eastern Ukrainians voted overwhelmingly for the referendum, there were reports of dome voter fraud and a few skirmishes but nothing that investors are concerned with. Even with Putin suggesting delaying the referendum (wink-wink) it went on as scheduled and precedes the May 25th presidential election. Russia indicated it “respects” the results of two disputed referendums in eastern Ukraine that separatists said backed autonomy as the European Union imposed sanctions on companies in Crimea for the first time.

Last week we didn’t have a lot of economic data; this week a number of key reports, most of which will be later in the week; (see calendar). Not much today on scheduled data, this afternoon Treasury will report it had a surplus of $114B in April because of tax receipts. Last Friday the DJIA made another new all-time high and is starting today adding to it; at 9:30 the DJIA opened 61, NASDAQ +25, S&P +9; 10 yr note 2.64% +2 bp and 30 yr MBS price at 9:30 -11 bps from Friday’s close.

There is a lot of news coming out of Europe this week; important to keep focused on Europe as an economy in the global world. The European Union’s statistics office in Luxembourg is due to release the GDP data at 11 a.m. on May 15. Germany, France, Italy, Austria and the Netherlands will release their national figures earlier in the day. Q1 GDP probably climbed 0.4% in the three months through March, which would be double the previous quarter. ECB’s Mario Draghi is intent on lowering rates; the ECB increasingly more concerned that deflation could de-rail the slow growth and turn the EU back into recession. Draghi said after April’s rate decision that his “biggest fear” is a protracted stagnation that leads to high unemployment becoming structural.

Since the first of May the 10 yr note has not been able to break the 2.58% level on a close; most of the support recently has been on the Ukraine/Russia situation; that is waning a little now---not over but somewhat less concerns at the moment that the region will erupt into civil war. It cannot be completely ignored but equally it isn’t the fear that has prevailed over the last month. With economic news and expectation from Europe and investors increasingly looking at China’s equity markets, the fundamental outlook this week is likely to put pressure on the bond markets.  Chinese premier said the nation’s “relatively large” currency reserves have become a “big burden” because they can cause inflation, based on a report May 10 from Hong Kong.  Here in the US data this month have shown gains in employment, consumption and manufacturing. This week April PPI and CPI will provide a more current look at US inflation. Federal Reserve Chair Janet Yellen is due to speak May 15 after using comments last week to temper speculation an improving economy will accelerate an increase in interest rates.

The 10 yr note yield has increased to be testing its 20 day average this morning. The recent bullishness and decline in rates is stalling now. We advise not to press the market now, we still have positive technical readings on most of our work but the intensity has lessened over the last week as rates have been unable to continue their declines. Stepping back; although we have had a bullish bias over the last few weeks, we as well as about everyone else in the markets fully believes rates will increase by the end of the year, although we have floated most of the last two weeks, we will not be as aggressive now.

This Week’s Economic Calendar:
        Monday,
           2:00 PM April Treasury Budget (+$114B)
        Tuesday,
           8:30 am April retail sales (+0.4%, ex auto sales +0.7%)
                        April import prices (+0.4%); export prices (+0.2%)
           10:00 am March business inventories (+0.5%)
       Wednesday,
            7:00 am weekly MBA mortgage applications
            8:30 am April PPI (+0.2%, ex food and energy +0.2%)
            10:00 am NABB May housing mkt index ( 49 from 47 in April)
       Thursday,
            8:30 am weekly jobless claims (-2K to 317K)
                         April CPI (+0.3%, ex food and energy +0.1%)
                         May NY Fed Empire State manufacturing index (5.0 from 1.3 in April)
            9:15 am April industrial production (0.0% from +0.7% in Mach)
                         April Capacity utilization (79.2% unch from March)
            10:00 am May Philly Fed Business index (14.3 from 16.6 in April)
            No Time (Janet Yellen speaks)
       Friday,
             8:30 am April housing starts and permits (starts +3.5% to 980K; permits +3.0% to 1020K)
             9:55 am U. of Michigan mid-month consumer sentiment index (84.5 from 84.1 at the end of April

 

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