Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Stocks Still Correcting - 27th Oct 20
Gold and Crypto: Is This How Charts Look Before A Monetary Collapse? - 27th Oct 20
Silver's Coming Double Trigger Shotgun Price Explosion - 27th Oct 20
The $126 Billion Gold Opportunity in Australia - 27th Oct 20
Tips to Breeze through Your Spanish Classes Online - 27th Oct 20
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Fed Wants Mortgage Lenders to Ease Terms and Delay Foreclosures

Interest-Rates / US Interest Rates Sep 05, 2007 - 12:12 AM GMT

By: Adrian_Ash


Hit to the Head with a Two-by-Four

"...The Fed wants mortgage lenders to ease their terms and delay foreclosures. Yet it's just capped new lending at six state-chartered banks, hoping to restore their 'financial soundness'..."

BUSY DOING NOTHING about asset-price bubbles until after they burst, the Federal Reserve has still been chiding no end of miscreant banks, foreign firms, lenders and brokerages about fraud and money-laundering since the Dot Com Bubble burst.

It just got busy scolding a number of state-chartered banks for poor lending standards and putting too much risk on their balance sheets, too.

Six of them, in fact, so far this year – and five of them since June alone.

All are members of the Federal Reserve System, and five of the Agreements are written "[to recognize a] common goal to restore and maintain the financial soundness" of the banks in question – North Valley, Mid America, Marco Community, Anadarko and now Premier.

Marshall Bankfirst, meantime, has agreed with its subsidiary – Bankfirst of Sioux Falls – to take specific steps "to address weaknesses in asset quality, credit administration, management, and risk management identified by the Federal Reserve Bank of Minneapolis ."

Steps like what? Well, steps like not adding one red cent to Bankfirst's loan book without explicit permission from the Fed. Nor can it originate or underwrite any loan that will be sold or syndicated to a third-party. It must also detail, within 60 days of signing the Agreement on Aug. 8th, new "loan policies and procedures that shall, at a minimum, address, consider, and include underwriting standards that are appropriate for each type of loan product offered."

Sound kinda like banking basics to you? But hey, "it wasn't like we needed to be hit upside the head with a two-by-four," as Kim Culp, newly hired president of BankFirst, told a reporter from "Executives at the bank say they've been working with regulators to resolve the issues for several months," the news service explains, "and many of the changes requested in the order already have been made."

Funny how you'll find no mention of the Written Agreement on either Marshall or Bankfirst's website, however – nor how many of the changes demanded (not requested) by the Minneapolis Fed have already been made.

Premier Bank, the latest target of Fed tutting, also fails to mention its chairman's day out at the Kansas Fed on Aug. 23rd. Now, I've never been offered a loan by Premier Bank of Denver , Colorado . So I really can't say how strong – or lax – the bank's lending standards have been.

But evidently, judging by the "Written Agreement" that its chairman, Eric Wang, signed a fortnight ago, the team at Premier Bank couldn't tell you how strong their lending standards have been, either:

  • Premier must not extend or renew any credit to people whose previous debts to the bank have either been written off as a loss or were identified as "substandard" by the Kansas Fed's investigation;
  • It must "maintain, in accordance with generally accepted accounting principles (GAAP), an adequate valuation reserve for loan and lease losses";
  • The bank has 10 days from Aug. 23rd to either write off or collect those loans that the Kansas Fed's investigation classified as a "loss";
  • It was given 60 days to submit to the Kansas Fed "new underwriting standards that include, at a minimum, documented analysis of the borrower's repayment source, creditworthiness, cash flow, and debt service ability;"
  • The bank must also give written reports to its board of directors showing the number – and value – of outstanding loans that are growing in size (negative amortization), loans for which it holds inadequate proof of ability to pay, and loans which can have payment deferred.

Put another way, Premier will now set aside money to cover bad debts, and it will actually get round to stating just how bad those bad debts have become. It's also going to tell the board of directors – those guys with legal responsibility for the bank's financial soundness – just what in the hell is going on. But if the board is in doubt, it can always read the local paper.

"As at Dec. 31 last, Premier Bank had nearly $8.7 million in what is called 'noncurrent loans and leases'," says David Milstead for the Rocky Mountain News , "representing 8.5% of the bank's assets. By comparison, all Colorado chartered-banks, including Premier, had about 0.5% of their assets nonperforming [on average] at year's end."

Yes, Premier then cut its non-performing loans to $5.3 million by the end of June 2007, "but the number still represented more than half of the bank's capital," Milstead reports. No wonder then that Premier has just agreed to end all new subprime lending, if by "subprime" we mean people who've failed to repay their debts in the past!

The bank will also ask prospective borrowers just how they hope to make their repayments in future – a critical question that seems to have gone missing from home-loan application forms both in the US and throughout the English-speaking world. Suddenly, however, those basic questions that lenders used to ask of potential borrowers are back.

Lenders accounting for one-in-eight British mortgages have now tightened their standards, according to Bloomberg, withdrawing credit and raising interest rates to subprime borrowers. "There are some [British] lenders who have pulled their current product range and not announced any new ones," says Ray Boulger, head of Charcol, the country's largest mortgage broker online.

"Others have put up rates until they get little or no business."

"The same person trying to get a mortgage will find the situation more difficult now than three months ago," says Fionnuala Earley at the Nationwide Building Society, the United Kingdom's fifth-biggest mortgage firm. "Some lenders will reassess how much they want to lend. You're not going to stretch yourself for volume in a market you think is a little risky."

Hence the "clear signs" Nationwide sees that the British housing market is finally slowing after trebling in the last decade and adding another 10% since mid-2006 alone. There's a big drop beneath current prices, in other words. The average UK home now costs £183,898...nearly $370,000.

In the United States, home prices might be falling faster – and starting from slightly less absurd heights – but the sorry faces at US mortgage brokers look just the same. Banks are "jacking up short-term rates to dissuade buyers from choosing riskier mortgages as defaults on subprime loans climb," reckons the Chicago Tribune. "The housing slump will worsen," the paper says, citing truly gloomy forecasts from J.P.Morgan, the Mortgage Bankers Association, and International Strategy & Investment in New York, "as banks restrict the availability of credit and falling real-estate prices prevent owners from tapping home equity for extra spending money."

No surprise then that, across the US as a whole, new mortgage applications fell by 4% in the week-ending Aug. 24th. The interest rate charged on one-year home loans leapt at the same time, up from 5.84% to 6.51% to record the biggest jump since the Mortgage Bankers Association began keeping records more than ten years ago.

How to unblock the plumbing that pipes money to would-be homebuyers? The world and his stockbroker now expect the Bernanke Fed to cut its key lending rate at the Sept. 18th meeting. Interest-rate futures put the chance of a 25-basis points cut at 100%. And just today (Sept. 4th) the Fed and the Treasury asked mortgage lenders who've parceled and sold outstanding home-loans as an investment product to other financial institutions to consider "loss mitigation strategies [including], for example, loan modifications, deferral of payments, or a reduction of principal."

Evidently, the Fed is worried – very worried. The looming wave of non-payment by subprime home-buyers as they face a sharp hike in their adjustable-rate mortgages now threatens a second wave of Bear Stearns-style losses and fire-sale liquidations. "The $197 billion of mortgage resets so far this year is less than we will see in two months [Feb. and March] of next year," as John Mauldin of Millennium Wave Advisors recently noted. "The first six months of next year will see more than the total for 2007, or $521 billion."

There's also the small issue of foreclosures and forced auctions accelerating the rate of deflation in home prices, too. And throwing young families out of their homes never plays well with the electorate, least of all when you're trying to assure everybody that the problem is "contained" and real-estate only ever goes up in the long run.

But for as long as the Fed and its agents continue to chastise state-chartered banks for their lax lending practices – and for as long as Written Agreements, if not cash penalties, prevent the most wayward lenders from lending anew – how can Dr.Bernanke ever hope to prop up the bottom of the US real estate ladder?

And what of the potential homebuyers themselves? "Just because you fly around sprinkling the ground with cash doesn't mean people are going to spend it," as Japanese parliament member Kouhei Ohtsuka, a former member of the Bank of Japan, said in mid-2003.

If Bernanke still thinks he can out-smart deflation in house prices, he might want to check his Japanese history once again.

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules