“the agencies’ market risk capital rules for banking organizations with significant trading activities. The amended NPR includes alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules. The proposed creditworthiness standards include the use of country risk classifications published by the Organization for Economic Cooperation and Development for sovereign positions, company-specific financial information and stock market volatility for corporate debt positions, and a supervisory formula for securitization positions.”

Any time one combines Basel III with Dodd-Frank and several government agencies, it can become a little muddled. Here’s the full notice.

Agencies are indeed trying to clarify their supervisory and enforcement responsibilities for Federal Consumer Financial Laws. Remember (who can forget) that Dodd-Frank provides the CFPB with exclusive supervisory and primary enforcement authority over “Large Institutions,” defined as institutions with total assets exceeding $10 billion. The prudential regulators retain supervisory and enforcement authority over their respective institutions falling under that threshold. But the devil is in the details: the Dodd-Frank Act does not specify how or when to calculate total assets for purposes of applying the threshold. Here’s the joint statement.

Doing so would mean writing off at least $5.8 trillion of fantasy “value,” most of the nation’s top 25 banks would fail, then the path will finally be clear for renewed growth with a healthy competitive system of 250 small banks. My bank is small, conservative and healthy so I love the idea of us being able to rise up. But is this OfTwoMinds proposal too far fetched?

In short: yes.

The endgame is intriguing from where I sit as a small banker that could benefit, but this would probably shock markets into worse-than-2008 paralysis.

And it’s just not feasible from a political standpoint.

During the heat of economic meltdown in 2008, Obama’s chief of staff Rahm Emanuel said you never want to let a crisis go to waste because crises are when you can do big things.

Big things were certainly done, not the least of which were TARP and QE, but these things were all triage rather than long-term planning.

Meanwhile, the big banks wrote the Dodd Frank Finreg package while Dodd, Frank and all other politicians were scrambling to understand what the hell was going on.

If you think I’m making this up, consider this: In May 2010, when Michael Lewis’ crisis recap book The Big Short was climbing the charts, I saw him speak at a hedge fund conference. He said that chief of staff for Henry Reid and many other lawmakers were showing up at book signings and asking him for meetings so he could help them understand what was going on in markets.

Not that Lewis isn’t a credible guy, but this is truly scary.

And if you still think Finreg was written by politicians who care about American values like allowing small guys to rise up, consider this: I recently learned that one provision of Finreg for the mortgage industry prevents me from simultaneously owning my branch and originating loans for my clients.

But I don’t blame the politicians for it, they’re just bidders for the lobbies they represent. How could they possibly know all the unintended consequences of ideas they get at book signings and Oval Room lunches?

Enough venting.

The point is this: big banks will always be able to make smarter, faster moves than politicians. So while I love the idea allowing small firms with clean books to rise up, we have to play by the rules that politicians make. And the politicians are just marionettes run by the big firms. So don’t expect any massive overhaul of the Too Big To Fail machine.

And with that I’ll get back to my honest day’s work. One day at a time is the only way to rise up.

You Want To Fix Economy? Here’s A Start (OfTwoMinds via ZeroHedge)

And on an international scale, we have yet another layer of regulation: the Basel accords, which try to ensure banks doing business outside their own countries are playing by the same rules. Since Basel is making headlines again, below I touch on a few key points about why these regulations don’t really make sense.

Before Basel, each nation had its own definition of how to calculate bank capital and what constituted adequate capitalization. There is a Basel I, a Basel II and a soon to be in effect Basel III. In this piece, I am referring to Basel II when I say “Basel.” My criticism of Basel II also pertains to Basel III. The entity which manages the Basel accords is called the Bank for International Settlements more commonly known as BIS.

Basel II requires all well-capitalized banks which operate internationally to hold capital greater than of equal to 8% of their risk weighted assets. Different assets classes have different risk weights: commercial loans are 100% risk, whole mortgages are 50% risk, GSE mortgage backed securities are 20% risk and government debt is zero risk.

The country most affected by the original Basel accords was Japan. Japan was having a real estate bubble just before Basel took effect. The real estate bubble in Japan was much better disguised that it was here. Japanese banks simply made new loans to replace non-performing loans disguising the size of the non-performing portfolio. The fact that the Basel accords kicked in when they did may be part of what Japan has has a stagnant economy for 20 years.

The issue really is this: are we better off with one set of banking regulations for all countries? Or would economies be better off if each nation decides its own standard for risk weighting of asset classes and capital requirements?

Basel has some standards which make little sense to me.

Commercial loans are, per Basel, 100% risk. But not all commercial loans have the same real risk. Worse yet, if Basel makes no distinction between risk for good or bad commercial loans then a bank might choose to lend money to a company with worse credit because it would get a higher interest. Also having commercial loans at 100% risk is a possible way to create an extended recession if banks stop lending money to businesses.

To me, the problem with Basel is that it is static.

It does not recognize that mortgage debt is riskier when there is a real estate bubble. It does not allow a change in risk weight for commercial lending when that lending might be expansionary and per se risk abating. Worse yet, Basel was partially responsible for the mortgage mess because it incorrectly assumed that MBS were less risky than whole mortgages.

Banks sold whole loans which they had made according to their own standards because Basel allowed them to hold MBS with 60% less capital. In effect, Basel more than doubled their losses because it did not allow that those MBS were crap. Banks were making PLMBS (Private Label Mortgage Backed Securities) and selling them to FNMA because FNMA could not generate as many bad loans as HUD demanded.

Basel made the enormously incorrect assumption that the risk of MBS was static. Instead of mitigating risk, Basel encouraged it.

What happened with the mortgage mess was that despite the good intentions of Basel and the good intentions of HUD no one saw the possibility that the result of their well-intended regulation not only failed to prevent a problem but actually helped cause it.

The notion that mortgage securitization minimizes risk makes perfect sense from a theoretical point of view.

The failure was that Basel made no accommodation for the disasters created by government mandated downgrading of the quality of GSE debt or Wall Street and the debt rating firms downgrading the quality other MBS.

Basel makes the incorrect assumptions that risk is static. It is not. Basel is, in a sense, a set of regulations for regulators and it failed to recognize that regulators can be just as wrong as bankers. Both bankers and regulators made cognitive errors. The story being constantly told is that the mortgage mess was due entirely to greedy bankers. While some bank losses were greed induced most of them were due to ignorance rather than greed. Some bank losses resulted from cognitive errors made as banks and regulators made incorrect assumptions about MBS. Failure to realize that the problem is not just greedy bankers or dishonest loan agents minimizes the complexity of the problem. It is imperative that if we want to prevent another such mess we understand what happened.

Basel now has an additional incorrect assumption. Basel treats sovereign debt as zero risk.

That may have been plausible before the Eurozone debt crisis. With Greece, Portugal, Italy and Spain all having debt issues requiring intervention, the zero risk rate assigned to sovereign debt per Basel is absurd. It sways banks to lend money to badly governed nations instead of lending it to companies and individuals who could use those loans to create economic activity. The fact that S&P could have questions the rating of U.S. Treasury debt this week shows just how bad the overall sovereign debt situation is. It is, to me, indefensible at present to suggest that all sovereign debt has no risk. Nations are rather dissimilar. Greece (the first to fall) is a nation with a history of political corruption.

In summary, Basel is built on a set of incorrect assumptions and we may be better off if we scrap the accords and have each nation let its central bank, the banks themselves and the legislated regulators work out what they believe is best for their nation. A competitive set of risks and rewards may be a lot better than the “one size fits none” mandate which result from Basel.

(a) firms are still grappling with compensation issues, tweaking the parameters established over a month ago with rumors of companies trying to cheat the system,

(b) lower expected volumes are gradually becoming a reality, and

(c) there is continued angst over the Dodd Frank mortgage regulations which will increase the compliance headaches and not necessarily help the borrower.

Speaking of lower loan volumes, Ally Bank reported earnings of $146 million in the first quarter compared with $162 million a year earlier when it was known as GMAC Financial Services. Mortgage-wise, the company said it lost $39 million, before taxes, in its portfolio of mortgages made before the financial crisis, compared with an $85 million gain in the same quarter last year. As Ally/GMAC’s book of “legacy mortgages” gets older, more loans are defaulting and more are maturing, leading to higher credit costs and lower interest income. They said: “Total mortgage loan production from the Origination and Servicing segment in the first quarter of 2011 was $12.2 billion consisting primarily of prime conforming loans, compared to $23.8 billion in the fourth quarter of 2010 and $13.3 billion in the first quarter of 2010. Production decreased on a sequential basis due to the refinance market moderating during the quarter.”

Without the Dodd-Frank regulations to rally against, many groups are now left searching for a new objective. In a move that was expected by many, the Mortgage Bankers Association of America is requiring that newspapers and magazines use capitals when describing their members. Brett Benjamin, with the MBA, exclaimed, “Look, if ‘Realtors’ is capitalized, and even has a little fancy trademark thing after it, then Mortgage Bankers deserve the same treatment. Especially if they have to do all that licensing stuff.” Rumors are swirling about making commissions identical to whatever loan agents earn from processing and funding a loan. Teams of expensive attorneys have been brought in by each side in the matter.

With the future of HAMP uncertain, the state of California, in conjunction with the federal program, today is expected to roll out HEMP (Helping Everyone Make Payments), a pilot program that would allow a group of distressed, but very relaxed, homeowners to make mortgage payments through profits from the legalized sale of marijuana. Fortunately the underwriting guidelines includes Foreign Nationals, self-employed borrowers, agricultural and rural land owners, etc. “We feel that this is a neglected segment of our potential borrower population,” noted Chrissie Sollay, with HEMP. Teams of expensive attorneys have been brought in by each side in the matter.

“Handshakes for Homeowners” launched its program to reward on-time mortgage payments. A long-rumored federal Handshakes for Homeowners program is expected to be unveiled today as an incentive for underwater homeowners who avoid mortgage default. The program is expected to extend a hand, quite literally, to as many as 200,000 homeowners within the next 12-18 months. According to insiders, Handshakes for Homeowners will involve the creation of regional centers with a staff of “Handshake Helpers” who will be deployed to area neighborhoods based on need. Staff will reportedly be trained to offer greetings, a certificate, and a sturdy handshake to select homeowners who continue to pay their mortgage on time. Those homeowners who have not missed a payment for the past five years will also allegedly be eligible for an “I pay my mortgage – back off” T-shirt or a name-brand wristwatch etched with the slogan, “I pay on time.” Lenders will reportedly be incentivized to participate in the program with free offers of tickets to sporting events and casino concerts, though participation will be entirely voluntary. “For too long we’ve been hearing from diligent homeowners who’ve asked, ‘Where’s my bailout?’ Well, now it’s time to give them a hand,” said Scott Smurthwrite, the newly appointed administrator for the Treasury Department’s Division of Economic Recovery and Prevention of Future Downturns.

Representatives from One World Finance, a U.S.-based microcredit provider, confirmed that they had initiated foreclosure proceedings on a goat in southern India following a borrower’s repeated failure to make her $2.20 monthly loan payments. “I tried to work with Ms. [Subha] Thangam on this, but once she fell a full $6.10 behind, I had to repossess the goat,” said loan officer Tony Russovitch, who stated that he was just doing his job and that it was “not [his] fault” if certain subsistence farmers were living beyond their means. “I’d love to recoup the entire $22 loan at auction, but given the glut of foreclosed and abandoned goats in the area, I’d be lucky to get even half that.” Russovitch also acknowledged that the owner had left the goat in “pretty bad shape” and had even stripped it of its hair for potential resale on the paintbrush market.

A few months ago GMAC re-entered the wholesale business in an effort to gain market share from brokers. In an unanticipated move, GMAC has hired 3 “plain” wholesale AE’s on a test basis. GMAC SVP John Boles said, “For too long the industry has believed that the success of a wholesale AE was only based on that morning’s rate sheet and the length of their skirt – in the case of gals, that is! (Chortle.) We feel that our AE’s can succeed by actually knowing the business and supporting their broker clients, rather than just look great on customer calls.”

Franklin American announced that it was the #1 lender in the United States. “We have been operating under the radar for far too long,” EVP Lisa Melbee Twittered. “We have managed to increase our market share, unnoticed by other lenders – and by Congress. Through all the double counting that takes place in reporting mortgage production, not only do we originate (in our names) almost half of all broker business, but then sell the production to the larger investors, thus accounting for nearly half of their production also. Don’t ask me how the numbers work out exactly, but by our calculations we now account for 109% of mortgage production in the United States and its territories.”

U.S. Bank Home Mortgage Wholesale Division is contemplating a name change. “The initials USBHMWD are proving cumbersome to our clients to use” said one official. We have decided to change our name to ‘Your Favorite Lender’, and we have a team of expensive attorneys flying to Southern California to negotiate with the current owner of this name.”

Progressive Auto Insurance has recently created an in-car system to monitor the driving habits of its customers. In a similar vein (pun intended), a small credit union in Oklahoma is testing a new system whereby it implants a silicon chip in the necks of its borrowers. Credit information, address changes, marital status, etc., are all updated via a central telecommunications transmission. “It worked real well with the SPCA tracking family pets, so we decided to roll it out to our debtors,” announced Chester Gohder, who runs retail lending for the institution. “We can refi these guys with a wave of our wands – process the paperwork and draw docs before the customer leaves the premises. Just the other day I was at Brownie’s Burgers, and I lowered the cook’s rate by .5% before she could get the fries on the table.” It is rumored that Bank of America will soon be implanting chips into everyone in its servicing portfolio. Teams of expensive attorneys have been brought in by each side in the matter.

In a story that broke late last night, the descendants of William Fargo claim that, “We got reamed 150 years ago…We found proof that our great great-great grandfather was taken advantage of by that ne’er-do-well Henry Wells, and that the name of the company was originally Fargo Wells. Heck, with the stock price wallowing around these levels, all we have is our good name!” Lawyers for Norwest Mortgage, who bought Wells Fargo but kept the name for brand recognition, have refused to comment other than to say that its mortgage rates will be raised to cover the cost of the teams of expensive attorneys who have been brought in by each side in the matter.

Redwood Trust made a sweeping announcement to the hordes of mortgage originators who are trying to sell jumbo loans to them. “Please be advised that Redwood Trust will no longer buy loans in California due to earthquakes, Hawaii due to volcanoes, Florida due to hurricanes, Louisiana due to flooding, Oklahoma, Kansas, or Nebraska due to drought, or in fact the Western Hemisphere due to asteroids.” After the press release Blackrock & PennyMac found their e-mail servers overwhelmed with incoming traffic. Teams of expensive attorneys have been brought in by each side in the matter.

The flood of American liberal mortgage bankers sneaking across the border into Canada, in part to protest the comp rules, has intensified in the past week, sparking calls for increased patrols to stop the illegal immigration. The recent actions of the American Tea Party are prompting an exodus among left-leaning LO’s who fear they’ll soon be required to hunt, pray, and to agree with Bill O’Reilly and Glenn Beck. Canadian border farmers say it’s not uncommon to see dozens of sociology professors, animal-rights activists, administration officials, Bayer employees, and Unitarians joining the loan agents crossing their fields at night. “I went out to milk the cows the other day, and there was a top retail producer huddled in the barn,” said Manitoba farmer Greg Spencing, whose acreage borders North Dakota. The producer was cold, exhausted and hungry. “He asked me if I could spare a latte and some free-range chicken, and asked if we had SIVA in Canada. When I said no, he left before I even got a chance to show him my scenario and credit report.”

Officials are particularly concerned about smugglers who meet liberals near the Canadian border, pack them into Volvo and Mercedes station wagons and drive them across the border where they are simply left to fend for themselves. “A lot of these people are not prepared for our rugged conditions,” an Ontario border patrolman said. “I found one carload in a Mercedes wagon without a single bottle of imported drinking water. They did have a nice little Napa Valley Cabernet, though.” When liberal LO’s are caught, they’re sent back across the border, often wailing loudly that they fear retribution from conservative underwriters. “I really feel sorry for American liberals, but the Canadian economy just can’t support them,” an Ottawa resident said. “How many art-history and English majors does one country need?” Rumors have been circulating about plans being made to build re-education camps where liberals will be forced to drink domestic beer, watch NASCAR races and read the Constitution.

Turning to the markets, some sort of tax cut or earnings or money or something was reported in economic news today, and this week in further evidence that a lot of financial- related things have been going on lately. Something about unemployment, maybe. According to numerous articles and economics segments from major media outlets, experts on banks and such have become increasingly concerned over a new extension or rates or a proposal or compromise that could signal fewer home loans, and dollars, and so on. The experts confirmed that the stimulus, or lack of home buyer tax credit, has played a role. “This is a clear sign of a changing cycle,” some top guy at one of the big banks in New York said of ARM rate compression or possibly rate of return during a recent interview on CNN. “Which isn’t to say that a sustained drop in wages couldn’t still occur, even if the interest paid on reserves is lowered. In short, it’s possible but not probable that mortgage production could pick up with lower rates – maybe” added the mortgage banking guy, who went on to say other money & mortgage stuff, too. “It depends on borrower sentiment.” Greece was also involved with the change in mortgage rates, but no one knows exactly how.

So this installment of bTunes, Westbound Train, is to calm frayed loan agent nerves as we all scramble to understand Friday’s implications. It’s dubbed down funk (with an Al Green tribute) from Will Holland, a British soul, funk, breakbeat, and Latin jazz virtuoso. He mainly goes by Quantic but Flowering Inferno is the band he used to put out Death Of The Revolution, the album this song is from. The entire album [iTunes] will help you think clearly before and after April Fool’s Day, when the Finreg train moves West from DC regardless of the revolution in your mind. So listen up, chill out, and start looking for the smart banks that understand the consumer AND the loan agent.

Interestingly, some mortgage banks are cutting QRM deals now where they’re retaining more like 8% of their holdings, and in some cases, investment banks on the other side of those deals want to share in that first tranche of the mortgage pool—not just because it’s riskier and therefore pays more, but because when investment banks look at the quality of paper certain mortgage banks are originating, they see lower likelihood of default. It’s a good sign that appetite for risk is returning, but as with any investing activity, quality of new securitizations all comes down to quality of the originating lenders and their loans.

Any time there is a change in power, and we’re running a deficit, talk comes up about changing the deductibility of mortgage interest. The United States certainly pushes folks toward borrowing. If you don’t believe it, look at the mortgage deduction that homeowners have. (Interest on credit cards stopped being deductible in 1986.) Companies can write off almost all the interest that they pay on corporate debt (but not dividends, so debt is cheaper than equity). In our business, of course, this helps promote home ownership, since people have to come with less of a down payment. An interesting question to ask a borrower is whether or not they’d buy a home if the tax deduction went away. In countries that don’t offer the tax break, like England, home ownership is about the same as the US, but house prices are much lower. And the argument can always be made that economies are better off when people are making decisions based on economic principals rather than tax considerations, and in fact the current crisis is due in part to increased borrower debt magnifying risk. Many economists feel that any system meant to encourage people to take on more debt is not a great thing.

Below is the ‘One Man Wolf Pack’ speech Alan gives on Caesar’s Palace rooftop before the forgotten period. All you have to do is change “Sin City” to Washington DC, “Doug” to Barney Frank, “you guys” to the rest of the Democrats, “Las Vegas” to America, and “strippers and cocaine” to greedy bankers and fed-up voters. Then darkness falls on Dodd’s day. Cue the cash-soaked angst of Kanye’s Can’t Tell Me Nothing (aka When I Get My Money Right). Media gums flap about toothless reform in mornings to come, yet haggard consumers and lobby-less banks get attacked by the proverbial naked crowbar swinging psychos hidden in the trunks (aka amendments) of this bill. Cheers. Now let the mayhem begin.

“Hello… how bout that ride in? I guess thats why they call it Sin City… ha ha. You guys might not know this but I consider myself a bit of a loner. I tend to think of myself as a one man wolf pack. But when my sister brought Doug home, I knew he was one of my own. And my wolf pack, it grew by one. So there… there was two of us in the wolf pack. I was alone first in the pack and Doug joined in later. And six months ago, when Doug introduced me to you guys I thought “wait a second, could it be?” And now I know for sure, I just added two more guys to my wolf pack. Four of us wolves, running around the desert together in Las Vegas, looking for strippers and cocaine.”

Fed Analysis of How Banks Pay Employees
If you’d like to see cutting edge news on compensation in large banks, you’re in luck. The Federal Reserve completed its first round of in-depth analysis of bank compensation practices, especially at large, complex banking organizations. Apparently many large banks have already put these changes in place, especially to ensure that incentive compensation plans do not encourage excessive risk-taking. The next step, of course, is for our government to study compensation in specific business lines and financial firms – like mortgage companies. I can hardly wait.

What Low Rates Mean For Mortgage Bond Managers
Right now, in the MBS market, every 30-yr security is trading above par. (Put another way, there are no 30-yr Fannie 3.5%’s out there, comprised of 3.75-4.125% mortgages…) What’s an investor to do?! Fortunately for investors, not so fortunate for originators, early pay-offs of higher coupon product has been relatively low – fewer refinances. This has led recent production of 30-yr mortgages in the high 5% range, or even low 6% range, to trade very well, perhaps instilling a little more confidence in the MBS market. As one analyst said, “The refi wave is more of an illusion than reality” for reasons we all know. (If we had no income, no documentation, and no appraisal loans, things would certainly change!)

Market Is Quiet Ahead of Existing Home Sales
Turning to the market, there is really not much going on. Stocks were close to flat yesterday after rallying early in the day on some news from China. 30-yr A-paper mortgages, which started off the day worse by about .250, improved, and some investors sent out some price improvements. But overall, it was pretty quiet. This morning we will have some news on Existing Home Sales, FHFA Home Purchase Index, and the Richmond Fed Index, and then a $40 billion 2-yr auction. Ahead of that we find the 10-yr yield at 3.22% and 30-yr mortgage prices better by .125-.250.

What Low Rates Mean For Mortgage Bond Managers
Right now, in the MBS market, every 30-yr security is trading above par. (Put another way, there are no 30-yr Fannie 3.5%’s out there, comprised of 3.75-4.125% mortgages…) What’s an investor to do?! Fortunately for investors, not so fortunate for originators, early pay-offs of higher coupon product has been relatively low – fewer refinances. This has led recent production of 30-yr mortgages in the high 5% range, or even low 6% range, to trade very well, perhaps instilling a little more confidence in the MBS market. As one analyst said, “The refi wave is more of an illusion than reality” for reasons we all know. (If we had no income, no documentation, and no appraisal loans, things would certainly change!)

Daily Humor
A young lawyer and a senior citizen are sitting next to each other on a long flight. The lawyer is thinking that seniors are so dumb that he could get one over on them easy.

So the lawyer asks if the senior would like to play a fun game. The senior is tired and just wants to take a nap, so he politely declines and tries to catch a few winks.

The lawyer persists, saying that the game is a lot of fun. “I ask you a question, and if you don’t know the answer, you pay me only $5. Then you ask me one, and if I don’t know the answer, I will pay you $500,” he says.

This catches the senior’s attention and to keep the lawyer quiet, he agrees to play the game.

The lawyer asks the first question. “What’s the distance from the Earth to the Moon?”

The senior doesn’t say a word, but reaches into his pocket, pulls out a five-dollar bill, and hands it to the lawyer.

Now it’s the senior’s turn. He asks the lawyer, “What goes up a hill with three legs, and comes down with four?”
The lawyer uses his laptop and searches all references he could find on the Net. He sends e-mails to all the smart friends he knows; all to no avail.

After an hour of searching, he finally gives up. He wakes the senior and hands him $500. The senior pockets the $500 and goes right back to sleep.

The lawyer is going nuts not knowing the answer. He wakes the senior up and asks, “Well, so what goes up a hill with three legs and comes down with four?”

The senior reaches into his pocket, hands the lawyer $5 and goes back to sleep.