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VADHER docTRANSCRIPT
AN
ASSIGNMENT
ON
SUB PRIME CRISIS IN USA OF BANKING SECTOR
SUBMITTED TO:
SHAKTI DODIYA
FACULTY MEMBER
S.K.SCHOOL OF BUSINESS MANAGEMENT (M.COM)
[HNGU, PATAN]
SUBMITTED BY:
VADHER ANSUYA {57}
MCOM : (SEM- II)
1. WHAT IS SUBPRIME CRISIS ON BANKING IN U.S.A
Definition
A situation starting in 2008 affecting the mortgage industry due to borrowers being
approved for loans they could not afford. As a result, a significant rise in
foreclosures led to the collapse of many lending institutions and hedge funds. The
financial crisis in the mortgage industry also affected the global credit market
resulting in higher interest rates and reduced availability of credit.
The U.S. subprime mortgage crisis was a nationwide banking emergency that
coincided with the U.S. recession of December 2007 – June 2009. It was triggered
by a large decline in home prices, leading to mortgage delinquencies and
foreclosures and the devaluation of housing-related securities. Declines in
residential investment preceded the recession and were followed by reductions in
household spending and then business investment. Spending reductions were more
significant in areas with a combination of high household debt and larger housing
price declines.
The expansion of household debt was financed with mortgage-backed securities
(MBS) and collateralized debt obligations (CDO), which initially offered attractive
rates of return due to the higher interest rates on the mortgages; however, the lower
credit quality ultimately caused massive defaults . While elements of the crisis first
became more visible during 2007, several major financial institutions collapsed in
September 2008, with significant disruption in the flow of credit to businesses and
consumers and the onset of a severe global recession.
There were many causes of the crisis, with commentators assigning different levels
of blame to financial institutions, regulators, credit agencies, government housing
policies, and consumers, among others. A proximate cause was the rise in
subprime lending. The percentage of lower-quality subprime mortgages originated
during a given year rose from the historical 8% or lower range to approximately
20% from 2004 to 2006, with much higher ratios in some parts of the U.S.A high
percentage of these subprime mortgages, over 90% in 2006 for example, were
mortgages. These two changes were part of a broader trend of lowered lending
standards and higher-risk mortgage products. Further, U.S. households had become
increasingly indebted, with the ratio of debt to disposable personal income rising
from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-
related.
When U.S. home prices declined steeply after peaking in mid-2006, it became
more difficult for borrowers to refinance their loans. As adjustable-rate mortgages
began to reset at higher interest rates (causing higher monthly payments), mortgage
delinquencies soared. Securities backed with mortgages, including subprime
mortgages, widely held by financial firms globally, lost most of their value. Global
investors also drastically reduced purchases of mortgage-backed debt and other
securities as part of a decline in the capacity and willingness of the private
financial system to support lending. Concerns about the soundness of U.S. credit
and financial markets led to tightening credit around the world and slowing
economic growth in the U.S. and Europe.
The crisis had severe, long-lasting consequences for the U.S. and European
economies. The U.S. entered a deep recession, with nearly 9 million jobs lost
during 2008 and 2009, roughly 6% of the workforce. One estimate of lost output
from the crisis comes to "at least 40% of 2007 gross domestic product". U.S.
housing prices fell nearly 30% on average and the U.S. stock market fell
approximately 50% by early 2009. As of early 2013, the U.S. stock market had.
2. WHAT IS BANKING IN U.S.A?
Definition:
Banking is one of the key drivers of the U.S. economy. Why? It provides the
liquidity needed for families and businesses to invest for the future. Bank loans and
credit means families don't have to save up before going to college or buying a
house, and companies can start hiring immediately to build for future demand and
expansion. Credit has gotten a bad name, thanks to the 2008 financial crisis, but
that's only because it was unregulated, used for consumption instead of investment,
and allowed to create a bubble.
Here's how banking works. Banks provides a safe place to save excess cash, known
as deposits. That's because deposits are insured by the Federal Deposit Insurance
Corporation. Instead of sitting uselessly under the mattress, banks can turn every
one of those dollars into ten. That's because they only have to keep 10% of your
deposit on hand. They lend the other 90% out. Banks primarily make money by
charging higher interest rates on their loans than they pay for deposits.
What are the Top Banks in America?
Several top banks in the U.S. received over $135 billion in combined funds from
the Treasury Department's Troubled Asset Relief Program (TARP) and even more
emergency funds from the Federal Reserve. Even after the huge government
bailout, the top banks in America still manage to do well in investment banking
and trading. In 2010 the top five U.S. banks made a combined profit of over $60.4
billion.
Bank of America
Headquartered in Charlotte, North Carolina, Bank of America has about $2.8
trillion in assets. BofA received $5 billion from TARP as well as an additional
$118 billion for troubled Merrill Lynch, acquired in 2008. They also own
Countrywide Financial Corp., formerly the nation's largest housing finance bank.
Bank of America may require additional funding from TARP in the coming years.
JPMorgan Chase
A major U.S. bank with over $2.1 trillion in total assets, JPMorgan Chase received
$25 billion from TARP. An international bank with large investment banking
operations, Chase bought Bear Stearns and Washington Mutual in 2008 with the
help of the federal government. Shareholders got paid a quarterly dividend of 38
cents per share in 2008.
Citigroup
The third-largest bank in the U.S., Citigroup has about $1.9 trillion in assets.
Citigroup also received $45 billion from the U.S. Treasury in TARP money, with
an additional $301 billion in guarantees of assets. Finally forced to sell off its
controlling interest in the failing Smith Barney brokerage firm to Morgan Stanley,
the bank reduced dividend to just a penny per share. A large and diverse company,
Citigroup remains strong and has a number of good assets in spite of financial
troubles.
Wells Fargo
This small bank based in San Francisco has assets of about $1.3 billion and took
$25 billion in TARP funds. When Wells Fargo acquired Wachovia Corp. late in
2007, they became a major player among U.S. banks even though they had to soak
up an $11 billion loss. However, Wachovia's acquisition of Golden West Financial
in 2006, a California mortgage bank, places Wells Fargo at risk. This bank posted a
net loss in the fourth quarter of 2008 of nearly $2.5 billion. However, this bank
seems solid and has no need for any additional funding.
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3. THE SUBPRIME CRISIS AND THE EFFECTS ON THE U.S. BANKING INDUSTRY
Over the last 30 years the U.S. retail and investment banking systems
Have become enormous. The largest banks in the U.S. have a hand in almost
All financial transactions. This has made the recent credit crunch a worldwide
Contagion. Individuals and institutions have found it harder than ever to finance
Purchases or projects. In order to understand how we got to this point,
One must understand: the development of the housing bubble, the parties involved
In the creation of it, and the misaligned incentives that exasperated
The problem. These parties include: mortgage lenders, investment banks, and
Credit rating agencies. A series of misaligned incentives existed throughout
the network which linked these three parties. These incentives encouraged
the development of a housing bubble, whose pop prompted a worldwide financial
Crisis.
According to experts, credit is the lifeblood of an economy. Both firms
And individuals find it hard to make large purchases without the use of credit.
Credit is simply defined as: “Money loaned” by Forbes Magazines web site
(“Credit”, 2009). In the United States, much of this money is loaned by the
U.S. banking system.
Traditional banks make their money by holding savings for individual or
institutional
Clients and then either investing this money or loaning it to other clients.
In investment banks the process is more complicated but the concept is
Consistent: banks borrow money at one interest rate and then lend or hope to
Invest it at a higher interest rate. When markets are rising and delinquencies
on loans are low, banking is a very prosperous business. When markets are
Falling and delinquencies are high, banks begin to lose money and therefore
Become more reluctant to loan the money they still have. The second scenario
Is very similar to the circumstances facing banks right now.
During the 1990s, a new type of mortgage loan originated: the subprime
Mortgage (O’Quinn, 2008). Subprime mortgages are extended to customers
With less than favorable credit scores or customers with income levels below
The approved income requirement. They are intended to get potential home
Buyers into homes that they cannot currently afford but should be able to afford
in the future. Subprime mortgages are not inherently evil, if the lenders
are prudent about whom they extend credit to. Without prudence, subprime
Mortgages can be very risky. Subprime borrowers are understandably more
prone to default on their loans, as large numbers of them have done over the
Subprime Crisis and The Effects on the U.S. Banking Industry last two years. The
crisis had a significant and long-lasting impact on U.S. employment. During the
Great Recession, 8.5 million jobs were lost from the peak employment in early
2008 of approximately 138 million to the trough in February 2010 of 129 million,
roughly 6% of the workforce. From February 2010 to September 2012,
approximately 4.3 million jobs were added, offsetting roughly half the losses.
In spring, 2011 there were about a million homes in foreclosure in the United
States, several million more in the pipeline, and 872,000 previously foreclosed
homes in the hands of banks. Sales were slow; economists estimated that it would
take three years to clear the backlogged inventory. According to Mark Zandt, of
Moody’s Analytics, home prices were falling and could be expected to fall further
during 2011. However, the rate of new borrowers falling behind in mortgage
payments had begun to decrease.
The NYT reported in January 2015 that: "About 17% of all homeowners are still
'upside down' on their mortgages...That’s down from 21% in the third quarter of
2013, and the 2012 peak of 31%." Foreclosures as of October 2014 were down
26% from the prior year, at 41,000 completed foreclosures. That was 65% below
the peak in September 2010 (roughly 117,000), but still above the pre-crisis (2000-
2006) average of 21,000 per month.
Research indicates recovery from financial crisis can be protracted, with lengthy
periods of high unemployment and substandard economic growth. Economist
Carmen Reinhart stated in August 2011: "Debt de-leveraging [reduction] takes
about seven years...And in the decade following severe financial crises, you tend to
grow by 1 to 1.5 percentage points less than in the decade before, because the
decade before was fueled by a boom in private borrowing, and not all of that
growth was real. The unemployment figures in advanced economies after falls are
also very dark. Unemployment remains anchored about five percentage points
above what it was in the decade before.
4. WHAT HAPPENED STOCK PRICES?
Stock represents a piece of ownership of a particular company. When you purchase
a stock of a company you immediately become one of its owners. As a result you
have right over the profits the company makes and some voting rights depending
on the type of the stock. So, if you consider the stock profitable and beneficial you
should strive to purchase as much shares of it as possible.
The price of the stock is set following certain rules. Generally, stocks are traded on
the stock market, which tends to determine the value of the company on daily
basis.
The major factor that determines the value of a stock is its earnings. They are
mostly in the focus of attention. Every company makes a report of the profits it has
made every quarter. These numbers are of great interest to most investors, since
they tend to base their investment decisions on them. Investors use earnings per
share as an indicator of the current state of the company and its future position.
A positive attitude is awarded to companies that report quick growth in their
earnings as well as earnings growth that is stable. Many investors target companies
that don't experience positive earnings, but are predicted to shift their losing
position into a winning one in the near future. What is not looked at with a good
eye is if the company sustains losses for which no good reasons are provided.
Additionally, the market will not accept companies that have a declining earnings
trade.
Stocks are generally characterized as experiencing an upward trend over the long
term. However, this is not guaranteed in whatsoever way especially when we
consider individual stocks. You will enjoy profits from stocks only if their price
increases.
You should keep in mind that no company is insured against going bankrupt. If the
company of which you own shares does go bankrupt you will lose your
investment. Fortunately, this doesn't happen every day. The company may
experience short term problems, but if its management is effective enough it will
manage to overcome them and put its price back to balance.
As you can see, stock investing carries a certain degree of risk. However, there are
ways in which you can control the level of risk to which you are exposed. The key
is in diversification. This means that you should strive to include in your portfolio
different types of stocks. If a fall of one stock is experienced it will be
compensated by an increase in another. Additionally, you should try to get the best
out of compounding.
When you purchase a stock of a company, you are assigned the right to vote on
different issues concerning the company. A Board of Directors is elected, which
tends to supervise the management of the business. The major goal of the
company's management is to increase the value of the equity the company possesses. If the
management fails to accomplish this goal, the shareholders are in their right to
remove it.
Being an individual investor you should not think that you will be able to
accumulate enough stock to govern the company. Instead the major influence is in
the hands of institutional shareholders or a group of company's insiders. So, when
you select companies you should include management examination as
part of your analysis
The so called subprime mortgage crisis - the crisis that brought the global financial
system down - how did it happen? How did we let it happen - me, you, the Wall
Street people and the people who are now on the verge of losing their homes?
Let's get back to the time when the crisis was still just a big "ordinary" speculative
housing bubble. Back then, and for the most of the history of banking, banks would
refuse to lend money to people with poor credit history or no income. The
qualification guidelines to get a mortgage were pretty tight
.
The Excess Capital
At that same time, back in the early 2000's, there was an excess capital globally.
The world did not even imagine there would be a global financial crisis and all
investment managers were concerned about was where to invest their capital in
order to make it grow. Generally, the demand was for low risk investments that
paid some nice return.
However, such investment options were not easy to find. This pushed a great
amount of money straight into the US mortgage market thanks to the unique and
wonderful (on principle) vehicle - securitization.
Here is the big picture and how it works:
An individual gets a mortgage loan from a broker. Then the broker sells the
mortgage to a bank, which in its turn again sells the mortgage but this time to an
investment firm on Wall Street. Such firms collect thousands of mortgages in one
big pile. This in fact represents thousands of mortgage checks coming every
month, a monthly income that was supposed to continue for the life of the
mortgages. And of course, the firm in its turn sells shares of that income to
investors who are willing to buy.
Mortgage backed securities seemed like the perfect solution to the great demand of assets. After
all, in the beginning they were wonderful, safe investments - built out of mortgages with big
down payments, proven steady income and money in the bank.
And investors loved them - and not only US investors but investors from all over the world.
The Heavy Demand for More Mortgage Backed Securities
The demand for those great, safe mortgage backed securities was really high. In
fact, so high, that there was a point somewhere in 2003 when everyone who
qualified for a mortgage got one, and still the global pool of money wanted more.
Thus, things needed to change. And they did. The mortgage qualification
guidelines did.
At first, the stated income, verified assets (SIVA) loans came out. People didn't
have to prove their income any more. They just needed to "state" it and show that
they had money in the bank.
Then, the no income, verified assets (NIVA) loans came out. The lender was no
longer interested in what you do for a living. People just needed to show some
money in their bank accounts.
This wasn't enough to satisfy the huge appetite of global investors. The
qualification guidelines kept going looser in order to produce more mortgages,
more securities.
This leads us to NINA. Have you heard of NINA?
NINA is an abbreviation of No Income No Assets. Basically, NINA loans are
official loan products and let you borrow money without having to prove or even
state anything. All you needed to have in order to get a mortgage was a credit
score.
Why would a bank loosen its criteria for lending money so much? Well, banks
didn't keep these mortgages. They didn't care whether they are risky and the
borrower will ever pay them back simply because they sold the mortgages to Wall
Street. The Wall Street then sold them to global investors ... as low risk
investments.
The Risk
Why would any investor consider mortgage backed securities low risk
investments?
Well, investors use a special system to assess risk. Credit rating agencies, such as
Standard & Poor's, Moody's, and Fitch, give ratings to every type of bond
according to its risk. Letter grades mark the safety of the investments - triple A is
given to the safest ones, for example US government bonds.
And in this case, the credit rating agencies blessed most of the mortgage backed
securities with AAA rating.
The problem with this high rating is that agencies used the wrong data to estimate
the risk. Looking back historically, what they saw was a very low rate of
defaulting, a very low foreclosure rate. However, the current situation was
different - with new qualification requirements, new mortgages given to people
who would never have gotten them before, and of course, a big speculative housing
bubble that was eventually going to pop.
The Housing Bubble
Up to 2006, the housing market in the US was flourishing.
It was easy to get a home loan, so more people wanted to buy a house. The
increased housing demand increased in return the prices. The increased prices
attracted investors who were looking to buy houses as an investment, only to sell it
later for more. This further created more demand and further increased the prices -
a classic speculative housing bubble.
And because of the rising prices, the consequences from all the "bad" loans given
to people who could not afford them were delayed. Whenever people experienced
difficulties making their mortgage payments, they could easily take another loan
against the value of their house, simply because now it was worth more.
Basically, they went into more debt in order to pay off their debts. Thus, the
housing bubble made home equity loans and home equity lines of credit extremely
popular.
The Breaking Point which Turned the Problem into a Crisis
However, in contrast to the rising house prices, the average household income
didn't increase. Thus, despite all the incentives and exotic mortgage products,
people just couldn't afford those high prices and it was only a matter of time for the
problem to come out.
And it did. The big housing bubble burst, the property values stopped increasing
and the whole thing came to a point when the mortgage lending industry started
witnessing something new - many people defaulted on their very first mortgage
payment.
What happened was a chain of reactions very similar to those in the housing
bubble but only in the opposite direction. The number of people who defaulted on
their mortgages increased more and more which in return increased the number of
houses on the market. The oversupply of houses and lack of buyers pushed the
house prices down till they really plunged in late 2006 and early 2007.
That was the point when people on Wall Street started to panic. They no longer
wanted to buy risky mortgages. Mortgage companies, which used to sell risky
loans, experienced the devastating consequences of going out of business.
Unfortunately it was already too late for everybody.
The market has already absorbed enormous amounts of these securities. All kinds
of investors from all over the world - individuals and big financial institutions -
basically have bought these AAA rated mortgage securities thinking that it was
almost as safe as putting money in a savings account. Now that the complexity and
the real risk of these securities came out, most of them are already worth less than
half their initial value and all those investors lost a great deal of money.
Moreover, foreclosures keep springing up. In the past mortgages were held in the
books of financial institutions such as banks, who had real interest in working with
their borrowers and making sure that everything possible is done to pay back the
loans. However, in the current situation, mortgages have been sold and resold and
pooled together into securities and sold to investors in the financial market. It is
really really hard to even find who the actual current owner of mortgage is. And it
is just as hard to prevent foreclosures.
5. BANKRUPT OF SUB PRIME CRISIS IN USA
last year's edition of "The Year in Bankruptcy," we referred to a "looming specter
of recession" in the U.S. near the end of 2007 triggered by the subprime-mortgage
meltdown and resulting credit crunch. The recession arrived in 2008. What's more,
it proved to be global rather than American. Anyone brave enough to follow the
positively depressing financial and economic news stories of 2008 received a crash
course on subprime loans, mortgage-backed securities, naked short selling, Poznan
schemes, and the $62 trillion (yes, trillion) global credit default swaps market, as
well as frightening insight into the intricacies of executive compensation and the
financial condition of U.S. automobile and parts manufacturers, banks, brokerage
houses, homebuilders, airlines, and retailers, to name just a few. More than 1
million U.S. homes have been lost to foreclosure since the housing crisis began in
August 2007, according to RealtyTrac, an online marketer of foreclosure
properties. At year-end, the (nonfarm) unemployment rate in the U.S. spiked to 7.2
percent, the highest since 1992, with 3.6 million U.S. jobs lost in 2008.
A record $7.3 trillion of stock market value was obliterated in 2008, under the
Dow Jones Wilshire 5000 index, the broadest measure of U.S. equity performance.
Commodity prices both soared and crashed during 2008, spurring outrage directed
at unscrupulous speculators accused of driving up prices. The price of light, sweet
crude oil peaked at $147 a barrel on July 11 and plummeted to $34 a barrel on
December 21. The average price of a gallon of regular unleaded gasoline in the
U.S. reached $4.11 on July 17 (the highest ever), only to finish the year at
approximately $1.67. The price of copper struck its highest-ever peak March 6 at
$4.02 per pound, surpassing the previous record set on May 12, 2006. Globally,
food prices continued to soar during 2008. From the beginning of 2006 through the
end of 2008, the average world prices for rice, wheat, corn, and soybeans all rose
well over 100 percent.
2008 was also the year in the U.S. of the "economic stimulus" package and
government bailouts of financial services companies, banks, at least one major
insurance company, and the beleaguered U.S. auto industry. On a worldwide basis,
relief packages consumed more than $2 trillion in taxpayer assets as of the end of
2008, with little prospect of abating any time soon.
By any account, 2008 was a banner year for commercial bankruptcies and bank
and brokerage-house failures; 136 public companies filed for bankruptcy
protection, a 74 percent increase from 2007, when there were 78 public-company
filings. Private companies, particularly private equity companies, fared equally
poorly, with no fewer than 49 leveraged buyout-backed bankruptcies in 2008,
according to a January 5, 2009, report posted by peHUB, a web-based public
forum for private equity. Hardest hit among private equity-backed companies in
2008 were the automotive and retail sectors (each with eleven chapter 11 filings),
airlines (six chapter 11 filings), media properties and consumer products vendors
(three chapter 11 filings), and restaurants (two filings). All told, there were 64,318
business bankruptcy filings in calendar year 2008, compared to 28,322 in calendar
year 2007, according to figures provided by Jupiter resources, LLC's Automated
Access to Court Electronic Records. In 2008, 10,084 chapter 11 cases were filed,
compared to only 6,200 in 2007, representing a 62.6 percent increase. Fiscal-year
statistics released by the Administrative Office of the U.S. Courts on December 15
reflect that for the 12-month period from October 1, 2007, through September 30,
2008, there were 38,651 business bankruptcy filings in the U.S., up 49 percent
from the business filings reported for the 12-month period ending September 30,
2007. Chapter 11 filings during fiscal year 2008 numbered 8,799, also a 49 percent
increase from the previous year.
No fewer than 25 federally insured U.S. banks failed in 2008, pushing the Federal
Deposit Insurance Corporation to the wall to cover $373.6 billion in insured
deposits by inducing healthier institutions to step in when other banks foundered
due to extensive holdings in subprime assets. The Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"), which own or guarantee nearly half of the U.S.'s $12 trillion
mortgage market and which back nearly $5.2 trillion of debt securities held by
investors worldwide, were essentially nationalized by the U.S. government due to
liquidity concerns related to the subprime crisis when they were placed into
conservatorship by the Federal Housing Finance Agency in 2008. Failures of other
U.S. financial giants were averted in 2008 only because the government
the companies on the Top 10 List for 2008 were involved in the banking or financial services
business—all direct casualties of the subprime-mortgage and credit crises.
6. REVIVAL OF SUBPRIME CRISIS IN USA
WASHINGTON — Two housing advocates who raised some of the earliest
warnings in 2005 about the impending housing crisis are calling for a return to
subprime lending.
Bob Gnaizda and John Hope Bryant realize it's a bit of a head-scratcher.
Nevertheless, they are making the rounds in Washington and on Wall Street to
promote their prototype for a responsible, alternative mortgage for less-than-prime
borrowers.
"Talking about 'subprime' today is like talking about the devil," Bryant, the chief
executive of Operation HOPE who serves on the president's advisory council on
financial capability, said in an interview. "Nobody wants to use the word subprime,
but frankly, we think that's the future."
Bryant and Gnaizda, the general counsel for the Black Economic Council, the
Latino Business Chamber of Greater Los Angeles and the National Asian
American Coalition, say the pendulum has swung too far in the other direction in
the wake of the subprime crisis. Enhanced regulatory scrutiny has made lenders
reluctant to offer loans to borrowers without pristine credit histories and hefty
down-payments. That has had the unintended effect of redlining low- and
moderate-income — and often black and Hispanic — borrowers.
Borrowers with lower incomes and those receiving smaller loans were more likely
to receive higher-priced loans in 2011, according to a Federal Reserve analysis of
Home Mortgage Disclosure Act data. Black and Hispanic borrowers also faced
notably higher denial rates than Asian or white borrowers, the data showed.
Gnaizda and Bryant are proposing what they call the Dignity Mortgage, a loan that
could be made to non-prime borrowers with built-in protections and incentives for
both borrowers and lenders.
Under the proposal, Dignity Mortgages would only be available to people who
complete certain financial literacy training, who have an income of 120% or less
than the regional poverty level, and who are buying homes at 95% or less than the
median price in the region.
In order to adjust for risks, lenders would be able to charge 1.25% above the lowest
prime rate for a 30-year fixed-rate mortgage. If, however, the borrower makes
timely payments for the next five years, the rate would be lowered to the lowest
fixed-rate at the time, and the 1.25% premium would be applied to reduce the
homeowner's principal.
In addition, a borrower could take advantage of a "reset clause" that would allow
him to suspend payments temporarily during an emergency — such as job loss or
the death of a spouse — provided he has made timely payments for a certain period
of time.
And the kicker: if the loan met all of the above terms, Fannie Mae and Freddie
Mac would be required to purchase the loan with limited or no recourse against the
bank.
Bryant and Gnaizda suggest that the loans could represent only 20% of the market
for the first three years, and should be treated as the equivalent of qualified
mortgages for the purpose of calculating capital requirements.
Gnaizda, the former general counsel for the Greenlining Institute, said lenders
should also be able to get credit for the loans under the Community Reinvestment
Act, not only for lending but for service and investment.
eMarco] wants to do."
Still, Stewart said, there are investors looking for lenders who can originate
subprime mortgage loans "Ultimately, the Dignity Mortgage could be a benefit to
both borrowers and lenders, Bryant said.
"You get your dignity back, (and) you get a chance in a capitalist society to reset
your life without being called a bum or being pursued financially, or your credit
ruined," Bryant said. "And the lender gets to not have Wall Street cite a bad credit
and have the regulators call for more capital.
"Maybe, just maybe, if we bake that in, you can actually sell that into the
secondary markets and the GSEs and create a new norm," he said.
Gnaizda and Bryant, along with National Asian American Coalition President and
CEO Faith Bautista, said they've been meeting with high-level officials at the
banking agencies, and may appeal to lawmakers or the White House for support.
Bryant insists such loans wouldn't require legislative action, just a change to
current regulations.
They also need banks on board — large institutions — that would be willing to
pilot test the program. Gnaizda said they have shared the proposal and received
feedback from eight financial institutions, ranging from $1 billion of assets to $300
billion, including Wells Fargo & Co. (WFC), Regions Financial Corp. (RF), U.S.
Bancorp (USB) and Union Bank N.A.
The challenge, Bautista said, is that both sides are waiting for the other to make the
first move. Banks don't want to wade into this area without assurances that
regulators are on board with the loans, and regulators often are reluctant to weigh
in on an untested product.
"When you talk to the regulators, they're waiting for the banks to do it, and when
you talk to the banks, they're waiting for the regulators to give them a green
signal," Bautista said.
Gnaizda said many of the bankers they've spoken with are positive about the
concept and don't believe that the problem of lower lending rates for African-
American and Hispanic borrowers lies with them.
"They don't want to redline and we agree with them that we don't think they do, but
they said there are unintended consequences of many federal rules and
regulations," he said.
One banker, who reviewed the proposal but asked not to be identified because his
company is not affiliated with the program, said he agreed with Gnaizda and
Bryant's hypothesis — the cost of managing risks makes lending to borrowers with
checkered financial histories next to impossible right now.
"How do you insulate from problems? Big down payments and bullet-proof
FICOs," he said. "It's the end consequence of everyone trying to drive the banking
industry to no mistakes, no losses, nothing."
He said he would need "very clear bright lines" that would prevent Fannie and
Freddie putbacks if the loan met certain criteria.
Jason Stewart, the director of research at Compass Point Trading & Research, said
the loans would have to be guaranteed by the government for the program to be
feasible.
"Otherwise, under Basel III or any other regulatory capital scheme it's going to be
very punitive," he said. "If you remove the government guarantee, there's no
chance it happens."
But a government guarantee comes with its own problems, including who pays if
the mortgage becomes delinquent.
"This is completely at odds with what the market has been saying about
introducing private capital and reducing government support," Stewart said. "It just
doesn't seem to fit in with what [Federal Housing Finance Agency Chairman Ed
Dat a risk-adjusted rate that makes sense."
"This is a great business right now," he added. "It's not a dirty word if it's done properly."
Bryant said he knows the proposal will meet resistance, but it's just a starting point for a
conversation.
"What nobody can say is that this is a stupid idea," he said. "We vetted it with the regulators —
nobody said this is crazy. There's no piece of this that's a poison pill that absolutely just can't be
done
7. GOVERNMENT AIDS ON SUB PRIME CRISIS IN USA
Results at Bank of America, Citigroup hammered by global financial crisis.
Citigroup unveils reorganization; Merrill’s buyer gets more government aid.
NEW YORK — Shares of Citigroup Inc. and Bank of America Corp. fell more
than 8% on Friday after the giant banks reported big fourth-quarter losses and took
more drastic steps to try to stay afloat.
City unveiled further plans Friday to dismantle its financial-services empire and
Bank of America got billions of dollars in new government support. Citigroup
posts loss, splits up the bank.
Bank of America cut its quarterly dividend to a penny a share.
“The economy and subsequently the credit markets literally hit a wall, starting in
September and culminating late in December, with the greatest impact of my
almost 40 years in banking,” Bank of America Chief Executive Ken Lewis said
during a conference call to discuss the latest results. “As you have seen in earnings
reports so far, nobody operating in the capital markets or lending to the consumer
has been immune.”
Although the company managed to turn a $4 billion profit in 2008, it experienced
more than $10 billion in capital market losses and $27 billion in credit costs.
“The economy is experiencing a severe recession. Receding home prices, rising
unemployment and bankruptcies make it difficult to predict the timing of an
economic rebound,” Lewis added. “We believe the economy will continue to be a
challenge throughout 2009, with some potential early signs of stabilization during
the second half of the year.”
Bank of America’s credit-card business took a hit in the fourth quarter as losses
rose to more than 7%.
“Clearly, it was a brutal quarter for the company with the main culprit being
further and significant asset-valuation write-downs and trading losses attributable
to severe capital-markets disruptions that were heightened in the fourth quarter
even from previously poor levels,” Stifle Nicolas analysts wrote in a note.
“Summing the equity investment losses, trading losses and all other capital-
markets related losses during the quarter would equate to approximately $7.8
billion,” they estimated.
More TARP money
The U.S. government earlier announced a plan to inject $20 billion into Bank of
America and to guarantee another $118 billion of losses. See full story.
Bank of America is struggling to digest the acquisition of Merrill Lynch, where
losses have been higher than expected.
The new guarantee at B. of A. is similar to the one City got late last year. In that
transaction, the government agreed to guarantee most of a $306 billion pool of
troubled assets if losses exceed $29 billion.
Soon after that, City Chief Executive Vikram Pandit decided the company’s
financial-supermarket business model should be changed drastically. End of Story
Alistair Barr is a reporter for Market Watch in San Francisco.
Greg Moorcroft is Market Watch’s financial editor in New York.
The following are just comments, not from the author of this article. Please leave
your views afterwards:
FOR SALE: One slightly used money press, plates are slightly wet as they just
completed printing 1.8Trillion ones. Five and Ten plates are also available for sale.
.
8. Conclusion
There is still a great deal of uncertainty concerning the U.S. financial system.
Because banks have begun to slow lending, the contagion has spread
Into the economy as well. Both individuals and institutions have lost large
Sums of money in financial markets over the last two years or so. This loss of
Wealth coupled with the loss of availability of credit has caused many households
to cut back on spending. With consumers slow to spend, even the businesses
With capital to spare are slow to produce and invest in innovation.
Lawmakers are attacking the problem on two fronts. One goal is to
Reinstate confidence among consumers and businesses. The governments
Remedy for this problem is the economic stimulus package passed in February.
The other problem is shoring up the U.S. banking system. This may be
a more complex problem because the financial system is so opaque. The
Federal Reserve has exhausted all of its traditional measures, and anything
Done within the banking system from here is new territory for Americans. All
Americans can do is hope that government officials and banking executives
Will act responsibly to free up lending, so that the credit markets can return to
Normalcy.