Risk Retention and its Disassembling Consequence

With the idiosyncrasy and instability in financial economic markets, the long-awaited proposal of the Dodd-Frank Act’s risk retention requirement was released on March 29^th with the SEC acting on it on March 30^th. This proposal pays attention to the mortgage securitization and exempted classes of loans referred to as the “Qualified Residential Mortgages” or QRMs.

The proposal states that for a loan to qualify for GSE backing the borrower must make at least a 20% down payment or at least 25% of the mortgage is to be refinance or 30% if it’s a cash-out refinance. The big change with the proposal is that loans with a federal guarantee such as from FHA, Fannie or Freddie backing are exempt from risk retention during their conservatorship.

So what does this mean? Down the future it could make it more difficult for private securitization of competitors thus impacting the ability of prospective borrowers to get approved and most importantly making the road longer and challenging to unwind the federal support of the GSEs housing finance support. Here is the proposal link:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110329a1.pdf

What’s all the probing about?

On March 15^th a London’s Financial Times report came out that regulators in the U.S, U.K, and Japan suspected that big banks have conspired to manipulate the LIBOR benchmark rates between 2006 and 2008. One of the suspected banks involved, UBS has received a subpoena from the U.S. SEC, the CFTC, and the US Department of Justice. The investigation went as further to say that a breach in the “Chinese wall” rules privacy could be at fault. Chinese wall in this instance is the information barrier within a firm to separate and isolate persons who make investment decisions from person who are privy to undisclosed material information which can influence those decisions.

This breach questions Barclays Bank improper influence on its daily submissions to the daily Libor survey. These daily rate surveys are submitted by 16 of the most powerful banks in the world and account for $10 Trillion of loans and $350 Trillion of interest-rate derivatives globally. So if improper actions are to found this could cause a mess of legal disputes between lenders and borrowers in the future. In the mean time here are the rates of Libor from 2006.

http://www.marketwatch.com/story/barclays-reportedly-a-focus-of-libor-probe-2011-03-25?link=kiosk

Is another financial crisis in the works?

A well respected bank CEO Robert Wilmers of M&T Bank Corp. stated to that “there are powerful combination factors that have significant risks to the long-term health of the American economy.” Occurring to the interview Robert blamed much of his position on how regulators and lawmakers have failed to determine risky trading and size distinguishing between large and small banks. My favorite quote of the interview was his statement of categorizing bank sizes and risk “as the same species as traditional commercial banks is akin to describing dinosaurs as simple reptiles.” So with these higher costs being pushed down to customers eventually taking the burn of the past financial crisis and the bail- out cost will Americans be restricted to the overall capitalistic consequences of poor and slow lawmakers and regulators. Who knows but in the mean time read more about the Garp article with Mr. Wilmers here: http://www.garp.org/news-and-publications/overview/story.aspx?newsId=25855

This week in Treasuries and Tsunamis

With the stock market increase within the past six months I originally thought equanimity was coming to the financial markets however with the recent March 11th 9.0 magnitude Japanese earthquake and tsunamis we have word that the G-7 intervened to halt the extraordinary rise in the yen. In wondered how our Treasuries would behave to the news. Below I grabbed a screen shot from yahoo finance of the 10 year T-Note and things weren’t looking great starting the week.

Then, I took an excerpt from Barry Ritholtz’s blog (http://www.ritholtz.com/blog/) whom I visit every day and noticed he posted a note about how the largest Bond manager Bill Gross dumped some a lot of his treasury holdings and asked my who has actually bought the treasuries as of recently. Well take a look for yourself:

Banking Agencies to Vote on Risk Retention & Service Standards

On FDIC’s March 15^th meeting one of the items to be voted on is the risk-retention standards for future qualifying residential mortgage loans. The agreement, details an approval to require potentially new homeowners to place 20 percent or more of a down payment as well as full documented income and restriction on how much payments could adjust by. The agreement also calls for a requirement for a lender to describe how they would handle second mortgage delinquency. Servicers would also be require to offer loss mitigation when a borrower’s home value equity is worth more than its foreclosure value. I’ll be attentive to the results and detail its effect for future residential mortgage lending.

http://www.aba.com/news/WP3#top