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ALERT: Banks Exiting the FHA Refinance Market

The below chart (left panel) shows a shift away from both large and other banks that dwarfs even what has happened with share shift for lender FHA purchase loan share. Said another way, banks in general have largely exited the FHA refinance market, with non-banks accounting for 90% share in February.

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This is a continuation of the three plus year trend of bank withdrawal from FHA lending, a market they dominated just 3-4 years ago.

Contributing to this shift are concerns over:

  • Regulatory risk and legal liability
  • Reputational risk
  • Servicing costs
  • Customer relationships
  • FHA’s extremely high risk profile (right panel above)

The shift away from banks to non-banks has important ramifications, as non-banks are much more willing to originate high risk loans. As the chart below demonstrates, refinance loans are much riskier than purchase loans with the same characteristics and non-banks now control 90% of FHA finance securitizations using Ginnie Mae:

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To view the entire National Housing Risk Index and other Risk Measures briefing click here.

Study shows seismic shift in lending away from large banks to non-banks

Study shows seismic shift in lending away from large banks to non-banks continued in February By Stephen D. Oliner, Edward J. Pinto and Brian C. Marein.

A new study released by the AEI International Center on Housing Risk found that the seismic shift in home purchase loan originations away from large banks to non-banks continued in February.  Since November 2012, the large bank share has dropped from 61 percent to 33 percent (see the report below).  The share shift was unabated in February as the large bank share dropped 1.2 percentage points from  previous month.  The dramatic decline in the large bank lending share has been met point-for-point by an increase in the non-bank share, which has risen from 24 percent to 51 percent.  Large non-banks and other non-banks each have accounted for about half of the 27 point increase in share.

This shift is due to the fact that non-banks compared to large banks are more thinly capitalized and more lightly regulated, generally face less reputational and litigation risk, and tend to have a shorter term outlook. Additionally, their primary business is generally just mortgage banking as compared to the more diversified business lines of large banks.  Therefore they have a more limited ability to stay on the sidelines.

Key Takeaways:

  • The dramatic decline in agency market share for large banks continued unabated in February, offset by an equally dramatic increase in the non-bank share.
  • Since November 2012, the large bank share has dropped from 61% to 33%, a move of 28 points, including a 1.2 point drop in February, a dramatic decline that has been met point-for-point by a 27 point increase in the non-bank share from 24% to 51%. Large non-banks and other non-banks have participated equally in the increase, accounting for 14 points and 13 points respectively.
  • Large banks have reduced the riskiness of their agency mortgage originations over the past few years. Non-banks, in contrast, have shifted toward riskier loans as they have increased their market share.
  • Loans originated through the retail channel are less risky than loans originated through the broker and correspondent channels. This is true both for large banks and for non-banks. But retail channel loans from non-banks are substantially riskier than such loans from large banks.
  • The bottom line is that large banks attempting to regain market share would have to move well out the risk curve.

Sending Money Home: Technology or Bureaucracy? by Iain Murray

Remittances are helping poor people globally, but regulators loom.

Some of the world’s poorest people depend on the money they receive from relatives working in developed countries. In fact, this money dwarfs the world’s official foreign aid budget, and the gap is increasing.

In 2011, total private flows of aid totaled $680 billion—almost five times the $138 billion official figure. As I noted in 2005, “the future of aid to developing countries is private.”

This increase in private aid is great news for all concerned. Except, perhaps, for bureaucrats, who are loath to let good deeds go unpunished. World Bank and United Nations bean counters are denouncing remittance transfer fees as exploitative. The U.S. Consumer Financial Protection Bureau (CFPB) has issued a rule to crack down on supposed fraud and exploitation affecting the existing remittance-transfer infrastructure. Its most important provision is the right to cancel a money transfer within 30 minutes of its being initiated. Proposals to cap the fee charged by remittance firms have also been agreed to internationally.

Critics claim that high transfer fees are the result of a so-called market failure. Yet, markets in remittances are frequently overregulated. Many African governments have exclusive deals with money transfer companies, which operate as national monopolies, free from competitive discipline. And there are other regulatory pitfalls that drive up prices. A Western Union spokesman told The Guardian

Our pricing varies between countries depending on a number of factors, such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility and other market efficiencies. These factors can impact the fees and foreign exchange rates offered by corridor and service type.

All this suggests the remittance market needs less regulation. Proper competition, lower taxes, less restrictive “consumer protection” measures (which quickly become outdated), and less red tape in general would all likely increase the flow of funds between individuals.

Such a solution would be inconceivable for global bureaucrats. Indeed, their house organ, The New York Times, last week recommended that the industry should be not only nationalized, but internationalized, with the World Bank taking on the role of remittance service provider, a role the Times actually described as “critical”:

The World Bank could pool deposits from banks and nonbank money transfer agents and parcel them to recipient banks, using its formidable certification protocols to verify that the money is coming from and going to legitimate parties. Such pooling could also reduce exchange fees, a big cost to migrants. Equally important, the World Bank could use its relationships with regulators around the world to enhance the remittance system’s integrity.

Technology is already solving many of the problems faced by the money transfer industry, making the industry obsolete in the process. For example, in the central Asian republic Kyrgyzstan, which relies heavily on remittances—accounting for 31 percent of its GDP, mostly from within the former Soviet Union—an Italian entrepreneur named Emanuele Costa is able to promote bitcoin as an alternative to the expensive, heavily regulated money transfer firms. 

Costa can do this because Kyrgyzstan is notably less oppressive and more free-market-oriented than its neighbors, and it has much less regulation than is typical in the area. He regularly hosts meetups to explain the currency to potential recipients and has installed a bitcoin ATM at a pizzeria (which, as Eurasianet notes, has been “bombarded with calls” since it publicized its existence).

In Kenya, meanwhile, a bitcoin startup called BitPesa offers money transfers “twice as fast and 75% cheaper” than traditional competitors. Kenya is an especially interesting place for this innovation to happen, as it was the scene of a “cell phone revolution” that allowed its telecommunications market to work around a serious case of government failure. As a result, most Kenyans now use a form of mobile wallet on their cell phones.

The potential for bitcoin to revolutionize the global remittance industry is hard to overstate. It largely cuts out the middleman, reducing the fees and charges some view as exploitative. Converting to local currency would be the most significant charge for most users. Bitcoin facilitates the establishment of trust through its “blockchain” public ledger, potentially reducing fraudulent transfers to near zero (although there is always the chance of someone stealing a wallet key). Taxes, at the moment, are minimal. 

For these reasons, bitcoin represents the best hope to ensure that all of the $680 billion in remittances goes to the people who need it. That might be why in America, bitcoin is most popular among Hispanics, who send more money abroad than any other group.

Yet, roadblocks remain. If Kyrgyzstan joins Moscow’s customs union as expected, bitcoin’s days may be numbered there, as Russian officials have taken a dim view of anonymous payment vehicles. Meanwhile, in the UK, where many Kenyan remittance senders live and work, banks are wary of taking bitcoin businesses on as clients. As BitPesa’s founder told The Guardian:

Most UK banks won’t let Bitcoin businesses open bank accounts. These businesses want to be licensed, but UK banks shy away, just like Barclays cut Somalia off the map. 

British banks are highly regulated and probably fearful of what regulators might do to them if they did business with companies that present “reputational risk”—as defined by regulators, of course.

In the United States, the CFPB rule mentioned above could threaten to make bitcoin illegal for remittance purposes. The average time for a Bitcoin transaction to go through is around eight minutes, and reversing a transaction is impossible unless an escrow service is used. It is possible that the rule may not apply to a decentralized network like bitcoin, but in its short existence, the CFPB has not become known for reading its powers narrowly.

Regulators could wind up killing off the solution to problems created by, well, regulators. If they are serious about reducing costs and decreasing the potential for fraud in remittances, they will stand aside and let bitcoin develop in this role. If the choice is between a distributed, autonomous cryptocurrency network approved by the people who need the remittances most, or a combination of policies approved by The New York Times, the World Bank, and international regulators, Public Choice economics suggests that the technological option faces a long struggle ahead.

ABOUT IAIN MURRAY

Iain Murray is vice president at the Competitive Enterprise Institute.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Are US banks enabling manipulation on a vast scale?

Geo Intelligence states, “Top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the [US] economy.”

On June 27, 2013 Representatives Alan Grayson (D-FL), Raul Grijalva (D-AZ), John Conyers (D-MI) and Keith Ellison (D-MN) sent a letter to Federal Reserve Chairman Ben Bernanke. The letter states, “We write in regards to the expansion of large banks into what had traditionally been non-financial commercial spheres. Specifically, we are concerned about how large banks have recently expanded their businesses into such fields as electric power production, oil refining and distribution, owning and operating of public assets such as ports and airports, and even uranium mining. [Isn’t that a national security issue?]”

Grayson, et. al. note, “Here are a few examples. Morgan Stanley imported 4 million barrels of oil and petroleum products into the United States in June, 2012. Goldman Sachs stores aluminum in vast warehouses in Detroit as well as serving as a commodities derivatives dealer. This ‘bank’ is also expanding into the ownership and operation of airports, toll roads, and ports. JP Morgan markets electricity in California.”

Grayson, et. al write, “According to legal scholar Saule Omarova, over the past five years, there has been a ‘quiet transformation of U.S. financial holding companies.’ These financial services companies have become global merchants that seek to extract rent from any commercial or financial business activity within their reach.  They have used legal authority in Graham-Leach-Bliley to subvert the ‘foundational principle of separation of banking from commerce’. This shift has many consequences for our economy, and for bank regulators. We wonder how the Federal Reserve is responding to this shift.” Read more.

ProPublica is tracking where taxpayer money has gone in the ongoing bailout of the financial system. The ProPublica database accounts for both the broader $700 billion stimulus bill and the separate bailout of Fannie Mae and Freddie Mac. According to their data: 927 banks received  $606B of which $366B has been returned. The banks revenues are $116B showing a total net to date of a minus $124B.

Following is the ProPublica list of Florida banks/mortgage servicers that were bailed out (those in RED failed to repay the government and resulted in a loss):

1st United Bancorp  
Alarion Financial Services  
Allstate Mortgage Loans & Investments, Inc.  
Bank United  
Bayview Loan Servicing, LLC  
Biscayne Bancshares, Inc.  
Capital International Financial, Inc.  
CenterState Banks of Florida, Inc.  
Central Florida Educators Federal Credit Union  
Coastal Banking Company  
Community Bancshares Of Mississippi, Inc. (Community Holding Company Of Florida, Inc.)  
Community Credit Union of Florida  
First Community Bank Corp of America  
First Federal Bank of Florida  
First Southern Bancorp  
Florida Bank Group, Inc.  
Florida Business BancGroup  
Florida Housing Finance Corporation  
FPB Bancorp  
GulfSouth Private Bank  
Gulfstream Bancshares  
Highlands Independent Bancshares  
Iberiabank  
IBM Southeast Employees’ Federal Credit Union  
Marine Bank & Trust Company  
Naples Bancorp  
Ocwen Financial Corporation, Inc.  
Pinnacle Bank Holding Company  
Premier Bank Holding Company  
Q Lending, Inc.  
Quantum Servicing Corporation  
Regent Bancorp  
Seacoast Banking Corp  
Seaside National Bank & Trust  
TIB Financial Corp  
U.S. Century Bank

 

For the full list of banking institution in the United States that received taxpayer bailouts click here.