Bank Lending Practices Bank Lending Practices: Bank Lending Practices
by Mike "Mish" Shedlock
Whiskey & Gunpowder
Not Glacier, USA
November 14, 2005 Mike Shedlock looks at whether Bank Lending Practices have been tightened, like the Fed suggested. Greg's note: Oh Lawdy, Mish is at it again. Now he investigates bank lending practices. The Fed has recently harped for banks to tighten lending standards. Have they? Not surprisingly, Mish says, "No way." So does Mish have any proof? If so, what are the implications? He attempts to answer those questions and more...Please e-mail any responses to your road-weary managing editor: greg@whiskeyandgunpowder.com. THE OCTOBER 2005 Federal Reserve Survey on Bank Lending Practices shows that most banks still haven't altered lending standards for home equity lines of credit, even after the Fed raised concerns about whether lenders were adequately weighing risks. The report shows domestic commercial banks reported a further net easing of lending standards and terms over the past three months: "In response to the special question about changes in terms on mortgage loans to purchase homes, notable net fractions of domestic institutions reported that over the past two years they had eased a number of terms, including the maximum size of primary and second mortgages, spreads of mortgage rates over an appropriate market base rate, and the maximum loan-to-value ratio." Here are some highlights of the survey: · "Nearly 10% of respondents, on net, reported having eased their credit standards on loans to large and middle-market firms" · "About 30% of domestic respondents reported that they had reduced the costs of credit lines in October" · "Almost all domestic banks that reported having eased their lending standards and terms in the October survey cited more aggressive competition from other banks or nonbank lenders as an important reason for doing so" · "Almost 40% of domestic banks, on net, reported that over the past two years they had increased the maximum size of primary mortgages they were willing to provide" · "About 30%, on net, indicated that over the same period they had increased the maximum size of second mortgages."
According to CFC October 2005 Operational Results, it seems that Countrywide Financial is one of the purveyors of the yet still looser bank lending practices that the regulators are talking about. Here are the highlights: · "Adjustable-rate loan fundings for the month were $23 billion, up 42% from October 2004. Year-to-date adjustable-rate fundings totaled $214 billion" · "Nonprime loan fundings totaled $3.9 billion in October, which compares to $3.3 billion for the same period last year. Year-to-date nonprime fundings were $36 billion" · "Pay-option fundings for the month were $8.5 billion, as compared to $3.4 billion in October 2004" · "Interest-only loan volume was $8.9 billion for the month of October 2005, which compares to $5.9 billion for the same period a year ago."
The most amazing of those statistics is the rampant increase of "pay-option loans" smack in the face of flattening or declining home prices and a Fed that seems bound and determined to break the housing bubble by hiking interest rates. ~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~~~~~~~
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Mish, is that what this is all about: greed on behalf of the lender and stupidity on behalf of the borrower? That seems likely, but it really is impossible to say. Perhaps it is more like stupidity on behalf of both the lender and the borrower to be taking risks like this at the pinnacle of this bubble, in the face of repeated Fed warnings. At any rate, please remember the excuse the lemmings gave in the survey before they followed each other off the cliff: "Almost all domestic banks that reported having eased their lending standards and terms in the October survey cited more aggressive competition from other banks or nonbank lenders as an important reason for doing so." What this most assuredly boils down to is: · Fear of losing a deal · Desire to increase market share or "make the numbers," regardless of risk · Plain out-and-out greed · Belief that Greenspan (or Bernanke) will bail them out if anything goes wrong.
Mish, how rampant is this nonsense? That is a good question, and enquiring readers might make note of the fact that in bubble areas such as California, 28% of new mortgages in the first half of 2005 were subprime, versus 5% in 2000. 42% of first-time buyers made no down payment on their home, and over a third devoted at least 33% of their incomes to mortgage payment. ~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~~~~~~
Housing Bubble Update - The Hidden Drop in Home Prices Will Shock Owners...They don't know about it yet, but they'll soon find out! While the sticker price goes up, up, up in most cities, home prices are going down in reality. It's only the beginning. Here's how you can protect yourself from the biggest one-year loss of wealth in world history... http://www.agora-inc.com/reports/DRI/EDRIFB29/ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ It seems like this is starting to matter right now, but even if not, it is going to matter sooner rather than later.
Much sooner in fact, as evidenced by this chart: Bank Lending Practices: Loan Resets Sometime within the next year, 60% of all of the outstanding subprime adjustable loans are going to reset. This is going to be a rude awakening to many who will see monthly mortgage payments skyrocket. Worse yet, given rising inventories and falling or stagnant home prices, it is going to be hard to sell. Right now, it does not seem to matter. That is the way it always is. Nothing matters until it matters, and the corollary is that it never matters until the bitter end. Right now, it seems that the fat lady is singing, but few hear the tune. Mish, Saxon Capital just reported. What did it have to say? That is a good question, so let's take a look ("Saxon Capital Inc. Reports Third-Quarter 2005 Operating Results"): "'During the third quarter, we continued to see the unfavorable market conditions that we discussed in the second quarter,' said Michael L. Sawyer, chief executive officer of Saxon. 'The continued rise in short-term interest rates, and accelerated prepayment speeds, coupled with the extended period of muted market pricing increases, continue to adversely effect our results. We remain committed to prudent management through these times, concentrating on reducing general and administrative expenses, growing our centralized retail origination platform, focusing on capital preservation, and ensuring a strong balance sheet.'"
Well, so much for honesty, as the following chart shows: Is Saxon being punished for honesty while CFC is taking on more risk? Unfortunately, I have no answer to that question other than perhaps CFC's day of reckoning is coming. Mish readers might recall that we previously discussed Saxon Capital in "Are We Headed for a 'Credit Derivatives Event'?" In its last conference call, Saxon was saying: · "At the point in time WHEN the credit event comes, AND IT WILL, we will be very well placed to take advantage of what happens next" · "I am concerned about the level of capital" of our competitors "to service the bonds as those portfolios age."
It seems to me, based on the above chart, that the market is more worried about a "credit event" at Saxon than its competitors. Sign Up for Whiskey & Gunpowder
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Bank Lending Practices: Subprime Lending
In The Economist Global Agenda, Buttonwood is asking "With a Pfffffffft or a Fizzle"?: "What could give this scenario an uglier twist is the sharp increase in funny loans to funny borrowers over the past few years. 'Subprime lending' to people who would not normally be able to make the grade is running at about $500 billion a year. Much of it takes the form of variable-rate, interest-only and negative-amortization loans. Both debtors and creditors are now more exposed to interest-rate changes. "Banks have been happy to lend to marginal debtors, safe in the knowledge that they could unload many of the loans either on one of the quasi-governmental housing agencies (Fannie Mae, Freddie Mac) or to private investors in asset-backed securities. Many of these loans end up in collateralized debt obligations (CDOs, which slice up bundles of referenced loans into tranches of different riskiness for different investors). Japanese and European investors have been especially enthusiastic buyers of this sort of paper, but there are signs of battle fatigue now: Spreads have widened sharply over the past couple of weeks."
Hot potato is the name of the game: Take what you can, when you can, and pass the trash if you can. Bank Lending Practices: Can this go on forever? Not likely, if the following headline is the start of any kind of trend: "Swiss Pension Fund Shifting Away From U.S.": "Switzerland's $15.5 billion state pension fund plans to reduce its investment in U.S. bonds and dollar-denominated debt because of concern that rising U.S. government debt and interest rates may hurt the U.S. economy. "Higher market interest rates could lead to defaults on loans by homeowners and affect mortgage finance companies, including Fannie Mae and Freddie Mac, Eric Breval, managing director of the Swiss pension fund, said during a recent interview in Geneva. Assets will be shifted into euro-denominated bonds, he said. "U.S. government debt stands at a record, and Congress has increased its scrutiny of Fannie Mae and Freddie Mac amid concern that their debt may be too large, posing risks for the economy. Together, the two companies own or guarantee almost half of the $7.6 trillion U.S. mortgage market. "'There is a greater risk in the United States than elsewhere,' Breval said. 'When you see some institutions such as Fannie Mae and Freddie Mac and the time bomb they are sitting on, something may happen there one day, and we want to be less exposed.'"
Fannie Mae is a "time bomb." I couldn't have said that better myself. But the party continues. Right now, money is still flowing into stocks and the market seems bound and determined to have a year-end party. Who am I to argue? All I can say is that it will be one hell of a hangover when the party ends. Regards,
Mike Shedlock ~ "Mish" Greg's note: On Saturday, Pittsburgh's Byron King, his two patient young'uns, Penny Sleuth's James Boric, the Rude Awakening's Joel Bowman and your reckless managing editor toured the bushy backwoods of Titusville, PA. The trio of brash Baltimore based e-letter editors drove nearly all night after work on Friday to reach the birthplace of the oil industry. But we rushed for good reason: a kind Whiskey reader invited us to come see him "shoot a 'stripper' well." Shooting strippers in the Northern PA wilderness with Byron and his kids, eh Greg...What's that mean? Byron will soon tell you the whole story, but basically the idea is to detonate hundreds of pounds of chemical explosive deep into a low-yielding oil well in order to crack the surrounding rock to free up more oil...thus boosting production for a moderate amount of time. Like I said, Byron will fill you in on the nitty details. Saturday night your merry trio of Agora Financial e-letter brigands sped off for Baltimore as we had about 15 hours to catch our train to NYC for the Value Investing Conference. Lined with today's most famous value investing luminaries, this conference cost us a pretty penny to attend. And I must tell you after the first out of 3 days, my head brims over, and I hold no apprehensions about paying dearly to attend. Please don't worry, Whiskey shooter, I will give you a full report as soon as I have time to adequately detail my newfound wisdoms. Until then - your drifting managing editor signs off. How 4 Minutes a Week Can Make You $2.5 Million in Trading Dollars in the Next 3 Years... http://www.agora-inc.com/reports/RTA/ERTAFB30/ | 
