Is Privacy Dead in Lending?; Fed Study on Affiliated Relationships

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You know that amazing feeling when you go to bed knowing you've finished all your work for the day? Yeah, neither do I. Subprime or jumbo lenders are never finished either. "Wall Street Finds New Subprime with Brokers Pitching 125% Loans." And here's an article in the Wall Street Journal about trends in retail jumbo lending.

I remember when a neighbor found a Playboy magazine. Wanting our privacy, we scrambled into his basement to flip through the pages with the amazing, uh, articles. I think I was about 32 years old. Seriously, privacy is important, or at least until now. Forget about drones, or about Google taking pictures of our houses for street views or our backyards for Google Satellite, banks have very serious privacy laws. Lenders do as well, and in sending out bid tapes, for example, we were always careful to delete any identifiable information such as social security numbers. But what has turned industry heads is the expansion of the "National Mortgage Database Program" to include personally identifiable information.  

Industry observers were quick to point out that almost every other Rule has a 60-day comment period, whereas this one only offered 30 days. The information in the database would be available without an individual's permission or warrant or probable cause, to search and algorithm search on an ongoing basis by any government agency or 'empowered' person. Here is one newspaper's take on the program: WashingtonPost. "As many as 227 million Americans may be compelled to disclose intimate details of their families and financial lives -- including their Social Security numbers -- in a new national database being assembled by two federal agencies. Critics also warn the new database will be vulnerable to cyber-attacks that could put private information about millions of consumers at risk. They also question the agency's authority to collect such information.  

"Earlier this year, Cordray tried to assuage concerned lawmakers during a Jan. 28 hearing of Hensarling's panel, saying repeatedly the database will only contain 'aggregate' information with no personal identifiers. But under the April register notice, the database expansion means it will include a host of data points, including a mortgage owner's name, address, Social Security number, all credit card and other loan information and account balances. The database will also encompass a mortgage holder's entire credit history, including delinquent payments, late payments, minimum payments, high account balances and credit scores, according to the notice. The two agencies will also assemble 'household demographic data,' including racial and ethnic data, gender, marital status, religion, education, employment history, military status, household composition, the number of wage earners and a family's total wealth and assets." 

Anyone concerned with this should review the Federal Registry entry in April for the proposal. "Records in the system may include without limitation: (1) Borrower/co-borrower information (name, address, zip code, telephone numbers, date of birth, race/ethnicity, gender, language, religion, social security number, education records, military status/records, employment status/records); (2) Financial Information (account number, financial events in the last few years, life events in the last few years, other assets/wealth); (3) Mortgage Information (current balance, current monthly payment, delinquency grid, monthly payment, refinanced amount, bankruptcy information); (4) Credit card/other loan information (account type, credit amount, account balance amount, account past due amount, account minimum payment amount, account actual payment amount, account high balance amount, account charge off amount, second mortgage); (5) Household composition (single male, single female, etc., presence of children by various age categories, number of wage earners in household, household income, credit score(s) of borrower/co-borrower at origination (Vantage Score), deceased indicator, marital status); (6) Property Attributes (property type, number of bedrooms and bathrooms, square footage, lot size, year built/age of structure, units in structure, most recent assessed value (per tax roll), year of most recent assessed value, effective age of structure, assessor's parcel number, neighborhood name, and project name); (7) Real Estate Transaction Attributes

(sales price, down payment, occupancy status (own, rent), new versus existing home, county, census tract/block, latitude/longitude and date purchased); etc., etc., etc.

 

Maybe they'll put the NSA in charge of fending off hackers, or the folks who were in charge of Target's IT system... 

There is a lot of industry banter about preferred lenders (mostly by non-preferred lenders) and affiliated relationships (mostly by those not in an affiliated relationship). Those parties should be very interested in a study on affiliated relationships by the Federal Reserve. "The authors' findings indicate that homebuilder financing affiliates do make loans to observably riskier borrowers, but the loans made by homebuilders have lower delinquency rates than those made by unaffiliated lenders, even when loan and borrower characteristics are held constant. Read more." 

In the "lending space", over in Washington Metropolitan Mortgage has announced that it has joined Absolute Mortgage. But depository bank M&A also continues unabated as weaker banks find stronger partners, and cost efficiencies are sought. Simmons First National Corporation announced that it has entered into a definitive agreement and plan of merger with Liberty Bancshares, Inc. headquartered in Springfield, Missouri, including its wholly-owned bank subsidiary Liberty Bank. According to the terms of the Agreement, Simmons First National Corporation ("Company") will acquire all of the outstanding common stock of Liberty in an all-stock transaction valued at approximately $206.9 million, subject to potential adjustments. First Business Bank ($1.2B, WI) will acquire Alterra Bank ($211mm, KS) for $30.1mm in cash (45%) and equity (55%) or about 1.57x tangible book. In Illinois Pan American Bank ($222mm) will acquire Bank of Palatine ($52mm) for an undisclosed sum. Transportation Alliance Bank ($627mm, UT) will acquire Anchor Funding Services LLC, which provides factoring services to small businesses, for an undisclosed sum. In Minnesota ("The star of the North") Eagle Bank is buying a branch from AmericanWest Bank ($3.9B, WA). Eastern Virginia Bankshares, Inc., the bank holding company for EVB, and Virginia Company Bank announced that EVBS, EVB and Virginia Company Bank have entered into a definitive agreement and Plan of Reorganization (the "Agreement") under which Virginia Company Bank will merge into EVB, with EVB being the surviving bank, in a mixed-consideration transaction with an aggregate deal value of approximately $9.6 million.

The Office of the Comptroller of the Currency is proposing to raise its assessment rates on banks and savings associations with more than $40 billion in assets. Last month the OCC published a proposed rule that would increase assessments on national banks and federal savings associations with total assets over $40 billion. The OCC 's proposal is such: to increase the marginal assessment rate for such institutions by 14.5% beginning September 30, 2014; specific assessments would range from 0.32% to 14%, depending on the total assets of the institution as reflected on its June 30, 2014 call report. The average increase in assessments for covered institutions would be 12%. The OCC attributes the increased assessments to new supervisory and regulatory initiatives that require additional resources, with most of those resources allotted for large bank supervision and regulation. The OCC notes it did not raise marginal rates on the assets of these institutions between 1995 and 2013, and lowered marginal rates for these institutions in 2008 when it added a new asset bracket for assets in excess of $250 billion. Comments on the proposed rule are due June 12, 2014. 

So how are depository institutions doing so far this year? Not as good as they have been in years prior. According to the FDIC, ccommercial banks and savings institutions reported aggregate net income of $37.2 billion in the first quarter of 2014, down $3.1 billion (7.6%) from earnings of $40.3 billion the industry reported a year earlier. The decline in earnings was mainly attributable to a 10.7% decline in noninterest income. Despite an overall growth in loan and lease balances, income from mortgage-related activity remained well below the level of a year earlier. Noninterest income from the sale, securitization and servicing of mortgages was $4.0 billion (53.6%) lower than a year ago. One- to four-family residential real estate loans originated and intended for sale were $323.6 billion (70.6%) lower than in the first quarter of 2013, as rising interest rates in the second quarter of 2013 reduced the demand for mortgage refinancing.  

The Federal Deposit Insurance Corporation released April's list of orders of administrative enforcement actions taken against banks and individuals. The FDIC issued a total of 31 orders and one notice in April; the orders included: two consent orders; two prompt corrective action directives; eight removal and prohibition orders; three section 19 orders; one civil money penalty; one order amending order to pay; 14 orders terminating consent orders and cease and desist orders; and one notice.

 

Turning to the markets, although we have a decent amount of market-moving news this week, let's not forget last week's. U.S. April personal income rose 0.3%, core PCE, the Fed's favorite measure of inflation, increased by 0.2% month-over-month in April (or 1.4% year-over-year), the Chicago Purchasing Manager's Index rose to 65.5 in May from 63.0 in April. And the University of Michigan's Consumer Confidence final May reading came in at 81.9, down from 84.1 the month before. 

But in spite of the strong news on Friday, economic data last week showed that this year was off to a much weaker start than many anticipated - mostly due to the contraction of the 1^st quarter's GDP. The good news is that more recent economic data continue to suggest a more robust pace of GDP growth in the second quarter. And we have a lot of news this week. Today is the ISM Manufacturing Index and Construction Spending. Tomorrow the 3^rd is Factory Orders, Wednesday is the ADP Employment Change and International Trade numbers (providing insights on trends here and abroad), along with Nonfarm Productivity and Unit Labor Costs, and the release of the Fed's Beige Book.  Thursday is Initial Jobless Claims. But on Friday is the "Big Daddy" in the form of all the employment data (the unemployment rate, nonfarm payroll, hourly earnings).

For numbers, we saw a 2.46% close on the 10-year yield on Friday. This morning we're up to 2.50%, and agency MBS prices are worse about .125. (The Ginnie 3% coupon, which is how 3.50% FHA & VA mortgages are priced, has a par handle - meaning it is above 100.00. But we have those darned mortgage insurance premiums, loan level price adjustments, and margins due to increased overhead, all serving to push borrower costs higher.)

 

This Week’s Rate Market Calendar:
        Monday,
           10:00 am May ISM manufacturing index (estimate 55.6 frm 54.9; as released 53.2)
                         April construction spending (estimate +0.7%, as reported +0.2%)
       Tuesday,
           10:00 am April factory orders (+0.5%)
            No time May auto and truck sales (total sales 12.8 mil frm 16.0 mil in April)
       Wednesday,
            7:00 am weekly MBA mortgage applications
            8:15 am May ADP private jobs report (+210K)
            8:30 am Q1 productivity (-2.9%)
                         Q1 unit labor costs (+5.2%)
           10:00 am May ISM services index (55.3 frm 55.2)
            2:00 pm Fed Beige Book
       Thursday,
            8:30 am weekly jobless claims (310K frm 300K)
            Approx. 9:30 am ECB policy statement ( ECB expected to lower rates and announce bond buying)
       Friday,
            8:30 am May employment data ( unemployment 6.3% frm 6.4%; non-farm payrolls +213K, private jobs +215K; hourly earnings +0.2%)
            3:00 pm April consumer credit ($15.0B frm $17.5B in March)

 

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