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Secret Fed Loans Gave Banks $13 Billion

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The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

‘Change Their Votes’

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”

The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort — and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.

$7.77 Trillion

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

‘Motivate Others’

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.

Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment.

The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

‘Core Function’

“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”

The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.

The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.

The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

Big Six

The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.

The six — JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.

Bank Supervision

While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001. The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says.

Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”

On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.

‘Need Transparency’

Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup.

“I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,” says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee.

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.

“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.

“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”

Disclose Lending

Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.

It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank.

“The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.”

The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.

Protecting TARP

TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.

“Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says.

Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.

No Clue

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible.

Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs.

Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Moral Hazard

Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.

If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.

Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.

“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.

Getting Bigger

Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.

Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.

For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.”

Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.

‘Wanted to Pretend’

“The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”

Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.

Prevent Collapse

Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase.

“These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” says Ancel Martinez, a spokesman for Wells Fargo.

JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time. The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.

‘Regulatory Discretion’

“Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion,” says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. “The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia.”

The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms.

“When a few banks have advantages, the little guys get squeezed,” Brown says. “That, to me, is not what capitalism should be.”

Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.

‘Can We Survive?’

“The amount of pain that people, through no fault of their own, had to endure — and the prospect of putting them through it again — is appalling,” Kaufman says. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?”

Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up — a gain of 33 percent, according to OpenSecrets.org, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, OpenSecrets.org reported.

Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause “long-term damage to the U.S. economy,” according to a Nov. 13, 2009, letter to members of Congress from the FSF.

The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.

‘Serious Burden’

In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks.

“The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” Williamson says. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.”

Dearie says his group didn’t mean to imply that Williamson endorsed big banks.

Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.

Geithner, Kaufman

On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.

At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.

Anthony Coley, a spokesman for Geithner, declined to comment.

‘Punishing Success’

Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says.

The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble.

Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner.

“Dodd-Frank does not solve the problem of too big to fail,” says Shelby, the Alabama Republican. “Moral hazard and taxpayer exposure still very much exist.”

Below Market

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.”

The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.

The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.

Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.

Added Income

The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.

The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion.

“The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia.

While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out.

Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because “in all likelihood, such funds were likely invested in very short-term investments,” which typically bring lower returns.

Standing Access

Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed.

“Banks don’t give lines of credit to corporations for free,” he says. “Why should all these government guarantees and liquidity facilities be for free?”

In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, “unemployment would rise — to 8 or 9 percent from the prevailing 6.1 percent,” Paulson wrote in “On the Brink” (Business Plus, 2010).

Occupy Wall Street

The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California.

The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor.

“The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”

In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries.

They take full effect in 2019.

Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”

 

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November 29, 2011 at 9:46 pm

MetLife Provides $725 Million in Financing for Manhattan Office Buildings

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Emily Philips via MetLife

NEW YORK, Oct 31, 2011 (BUSINESS WIRE) — MetLife, Inc. MetLife announced today that it provided, through its real estate investments department, a $350 million, five year, fixed rate mortgage for the office condominium unit at the Bertelsmann Building, located at 1540 Broadway in Manhattan. MetLife, which provides loans on office, multi-family, industrial and retail properties, has a $40 billion* commercial mortgage portfolio.

"We are pleased to be providing financing for such a high quality asset as 1540 Broadway," said Robert Merck, senior managing director and head of real estate investments for MetLife. "We originate, underwrite and manage each investment with a long-term view, and we are well positioned to identify and complete attractive financing opportunities in top-tier markets such as New York."

The Bertelsmann Building is a 44-story, 907,000 square foot, Class A office building located in Times Square. The building is leased to several high quality tenants, including Viacom, Pillsbury Winthrop Shaw Pittman LLP, Duane Morris LLP, and Yahoo!. The borrower is a joint venture between affiliates of Edge Fund Advisors and HSBC Alternative Investments.

In addition to providing financing for 1540 Broadway, MetLife was the lead lender on a $725 million loan for Boston Properties’ 59-story, 1.6 million square foot, Class A office tower and retail property located at 601 Lexington Avenue in Manhattan. MetLife provided $375 million of the total $725 million loan, joining with Prudential Mortgage Capital Co. and New York Life.

Through its real estate investments department, MetLife oversees a well diversified real estate portfolio of approximately $60 billion*, which is one of the largest in the U.S. and consists of real estate equities, commercial mortgages and agricultural mortgages. MetLife is a global leader in real estate investment and real estate asset management, with a vast network of regional offices that keep in close contact with major real estate markets. For more information, visit http://www.metlife.com/realestate .

MetLife, Inc. is a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 50 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, visit http://www.metlife.com .

This press release may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.

Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of MetLife, Inc., its subsidiaries and affiliates. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Risks, uncertainties, and other factors that might cause such differences include the risks, uncertainties and other factors identified in MetLife, Inc.’s most recent Annual Report on Form 10-K (the "Annual Report") filed with the U.S. Securities and Exchange Commission (the "SEC") and Quarterly Reports on Form 10-Q filed by MetLife, Inc. with the SEC after the date of the Annual Report under the captions "Note Regarding Forward-Looking Statements" and "Risk Factors", MetLife, Inc.’s Current Report on Form 8-K dated March 1, 2011 and other filings MetLife, Inc. makes with the SEC. MetLife, Inc. does not undertake any obligation to publicly correct or update any forward-looking statement if we later become aware that such statement is not likely to be achieved. Please consult any further disclosures MetLife, Inc. makes on related subjects in reports to the SEC.

 

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November 1, 2011 at 2:39 pm

FDIC Expects Fewer Bank Losses than Originally Estimated

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Appraiser News Online

The Federal Deposit Insurance Corporation lowered its projections on estimated bank-failure losses in the coming years, the FDIC announced Oct. 11. Bank failures are now estimated to cost the Deposit Insurance Fund $19 billion through 2015 compared to the estimated $23 billion in losses in 2010 alone.

Acting FDIC Chairman Martin J. Gruenberg said the fund is on track to recover and will meet the goals established by Congress, including a requirement that the fund reserve ratio reach 1.35 percent by Sept. 30, 2020.

The Deposit Insurance Fund’s balance has climbed for six consecutive quarters following seven previous quarterly declines, reaching a balance of $3.9 billion in the second quarter of 2011. That’s an increase of nearly $25 billion from its negative balance of $20.9 billion at the close of 2009.

Responding to the FDIC’s announcement, Jim Chessen, chief economist at the American Bankers Association, noted in American Banker Oct. 16 that the data “reaffirms the fact that the banking industry is rapidly returning to health and the losses once expected were overstated.” Chessen reported that the FDIC had set aside $17.7 billion for bank-failure losses in 2011, twice what is estimated to actually be needed for the year.

The American Bankers Association reported that banks pay $13.5 billion in annual premiums to the FDIC, which is well above the yearly costs the agency expected over the next few years and showed that the fund is rebuilding much faster than anticipated.

 

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October 20, 2011 at 1:35 pm

Wells Fargo Makes Billions

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Wells Fargo, More than $1 Billion Per Day; State Examiner Guides Could Be Useful; MERS Training; Conference Talk

Rob Chrisman, Mortgage News Daily

"Buy real estate – they’re not making any more of it." Most of the time that is true, but here is a somewhat interesting 50 seconds of the entire side of a cliff disappearing – England has a new beach.

For a mortgage bank, what is your warehouse cost of funds versus the average mortgage rate for your originations? If your mortgages are at 4%, and your warehouse is at 3%, you’re earning a 1% spread. For Wells Fargo, its net interest margin, the difference between what it pays to borrow and what it earns on loans and securities, was 3.84% last quarter. But no matter, as…

Stocks dropped yesterday after Citigroup and Wells Fargo said quarterly revenue "dropped amid economic weakness and market turmoil linked to Europe." (Wells’ stock dropped over 7% in one day, while Citi was "only" down about 1%.) Looking at mortgage banking, Wells Fargo saw $89 billion in new residential loans go through its system during the third quarter of 2011. Not accounting for weekends, that is about $1 billion per day per my HP-12C. It did not help, however, that Wells increased its mortgage repurchase provision by 61%. Citi reported a 50% jump in residential mortgage originations in the third quarter but also with a large write down related to mortgage servicing rights. Wells took it on the chin with a 6% slump in revenue from a year earlier although third-quarter profit rose 22% percent to $4.06 billion. Citigroup’s net income jumped 74% to $3.77 billion.

Bank of America reported $6.2 billion of net income for the third quarter, up from a $7.3 billion loss one year ago. The worst performer in the DOW 30 stock index this year, the bank extended $33 billion in mortgages during the quarter, with more than half being refinances. And Goldman Sachs (see questionable letter at bottom of commentary) reported a loss for the 3rd quarter, which is only the second reported loss since 1999! The numbers are worse than expected, and Goldman’s share prices are down as a result.

Here’s a note I received yesterday, if anyone has thoughts: "With the coming demise of Bank of America correspondent, we are at a loss for a source which will purchase our few remaining test cases as we move toward getting our DE approval. Any suggestions?"

"Information is power," as they say.  With LQI, and NMLS, a vendor or investor that controls that loan’s data occupies a very important place. I received a note asking, "I have a friend who is fond of the no cash out, no closing cost refinance. He applied, locked, and funded when rates were at 4.375% covering his costs. Now he’s already begun refinancing with another broker for a slightly lower rate, his point being that is a no cost loan. And by doing back-to-back refi’s, there is no harm to the borrower. He can’t be the only one out there like that. When do you think investors will get to the level where they’re checking prepayment speeds on individual borrowers, or originators, using NMLS numbers? Are they already doing that?" First off, and this is common knowledge, investors have had early pay-off penalties in place for several years. Borrowers are required to make X number of payments, X depending on the investor, since each investor assumes that it will have the loan on their books for a certain period of time. In my opinion, if investors or vendors are not looking at property, borrower, or loan agent level refinance & delinquency information yet, it is just a short period of time.
For regulators out there, and those who are subject to regulators, "The Multistate Mortgage Committee (MMC) of the CSBS/AARMR has recently issued two separate guides intended for use by state examiners. While the MMC’s focus is on national lenders with operations in 10 or more states, the guides may prove useful tools for all mortgage companies now that everyone is subject to examination. The first item is a 263 page Mortgage Examination Manual which provides guidance about the process and objectives of the examinations as well as information that may be useful to examinees in preparation for examinations. The second item, released on October 7, 2011 is a 42 page guide for examiners to use when reviewing compliance by non-depository mortgage companies with the FRB’s final loan originator compensation rule. The guide does provide mortgage company management some insights about the "map" the state examiners may be using to determine compliance. Copies of both the Mortgage Examination Manual and the LO Comp Rule Compliance Guides are available as links on the home page of the IMMAAG website: http://immaag.com/.

Yes, MERS does things that don’t make the headlines, like give training. This next one is November 8th, and for $75 you’ll hear all about, "New compliance requirements, Reconciliations and quality assurance topics, The Corporate Resolution Management System, and Upcoming system releases." (The $75 includes Danish!) Don’t be the last to register: http://www.mersinc.org/events/details.aspx?eid=287.

Last week I received this interesting note. "I was at the MBA conference, and I loved it b/c it was fascinating to see the different perspectives you get from Mortgage Bankers versus those you get from the Realtors or Mortgage Brokers (the people who frequent the conferences I usually attend). I very much enjoyed the panel discussions because the information was not stale to me. Here is my biggest take-away: The current crop of seasoned managers and owners has been out of the trenches too long to see what is really going on in today’s lending environment. And this results in two big flaws in judgment/assessment. 1. They are too "accepting" of new regulatory constraints. Too many seem to embrace or grudgingly accept the new rules either already here or coming our way, no matter how destructive or irrational. HVCC guidelines, comp rules, and disclosure requirements are often ridiculous, costly and harmful for the consumer because they cause us to lose locks and/or preclude us from crediting fees.  But, unless one is "in the trenches," this is often not fully absorbed.  Everyone should be "fighting mad". And (2) loan officers and most industry professionals "of yore" are simply too "dumb" (for lack of a better word) to close loans in today’s environment. We let all of our less than brilliant people go years ago, and we now only hire college grads with 3.5 GPAs or better. We test them before we hire them too.  And we are rolling.  A company can market and originate all it wants, but more business is worthless if nobody is capable of closing the many the tough deals that surface today. The ONLY firm I saw at the conference that was aware of the above facts was Academy Mortgage.  Others are so far behind the curve it was shocking." So wrote Jay Voorhees with JVM Lending in California.

The markets out there are nervous. Aren’t "markets" always nervous? Analysts note that transitions to foreclosure have started to increase, which will probably prompt some action from the government. And while they are at it, the government will probably soon announce their long-awaited updates to HARP, which will spook the herd on its impact on prepayments. Agency mortgages are doing pretty well, but no so for non-agency production, which saw an index (PrimeX – more on this tomorrow) take a tumble. And over in the commercial sector, the CMBS market showed some life with synthetic prices moved modestly higher.

For economic news, yesterday the Federal Reserve Empire State Manufacturing general business conditions index remained negative and was nearly unchanged. We also learned that Industrial Production rose by 0.2% in September and Capacity Utilization rose to 77.4%, but neither moved rates. Generally news like this pales in comparison to what is happening in Europe, and a spokesman for German Chancellor Angela Merkel warned not to expect all issues to be resolved by the Oct. 23 meeting, calling it an "impossible dream." Bonds "caught some wind," the 10-yr yield dropped to 2.16%, and many investors had price improvements.

This morning rates have improved again, and the 10-yr is down to 2.09% ahead of the PPI number at 8:30AM EST. Agency mortgage securities are along for the ride to some extent, with early MBS prices better by .125-.250 depending on coupon.

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October 18, 2011 at 8:31 pm

Fed gives OK for large banks to boost dividends, restart stock buybacks

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Housingwire.com

Some of the largest banks in the country may boost dividends and restart stock repurchase plans now that theFederal Reserve has completed its comprehensive capital analysis and review.

About two years ago, the central bank advised financial institutions "that safety and soundness considerations required that dividends be substantially reduced or eliminated."

On Friday, the Fed plans to discuss its review with banks that requested a capital action, and all 19 firms that were subject to the stress tests will get "more detailed assessments of their capital planning processes next month."

The mandates to boost capital levels included in Basel 3 and the new requirements in the sweeping Dodd-Frank financial reforms have "substantially clarified the regulatory environment in which these firms will be operating," the Fed said.

From the end of 2008 through 2010, common equity increased by more than $300 billion at the 19 largest U.S. bank holding companies, the Fed said. Allowing these banks to return capital to shareholders improves the entire sector and helps promote the firms long-term access to capital, according to the central bank. The Fed has advised firms to keep dividends to 30% or less of earnings in 2011.

Washington thinktank MF Global anticipates some large firms to act immediately on the Fed decision.

"We would expect most of those banks to make announcements in the coming hours and days," analysts at the Washington-based commodities and derivatives brokerage said.

Under the Fed’s stress tests, banks had to show the ability to maintain at least a 5% Tier 1 common ratio. The most-recent test wasn’t "as standardized" as the Supervisory Capital Assessment Program undertook in early 2009, and doesn’t appear to be as transparent.

"We hear many initial complaints about the black box nature of this stress test," MF Global said. "It is true that the Federal Reserve has provided less detail than in the 2009 test. Yet the Fed did disclose the key economic assumptions. So we believe there is more here than the first impression indicates."

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March 18, 2011 at 7:43 pm