Banking

Housing market frenzy continues; minority borrowers face PPP hurdles

Receiving Wide Coverage …

Risks exposed

“Banks have questions to answer” for their role in last week’s debacle at Archegos Capital Management, in which several banks said they stand to lose hundreds of millions of dollars, the Financial Times says. “In a low-interest environment, they were hungry for returns, while fat fees blinded them to dubious decisions — such as the wisdom of extending credit to an entity whose founder was fined over insider-trading.”

“That the banks can nurse such losses but raise no questions about their solvency is a vindication of tougher capital requirements introduced since the financial crisis. But there are worrying lessons from 2008 — weak risk controls and highly leveraged positions — that banks simply have not heeded. If Archegos is an isolated incident this may not matter but the concern is if wider patterns emerge.”

“The losses suffered by a handful of the world’s biggest banks came in their prime brokerage business, a relatively low-risk operation that trades for and lends to hedge funds and other sophisticated investors such as family offices, in the case of Archegos,” The Wall Street Journal said. “But the Archegos mess has exposed one systemic issue with prime brokers: They typically don’t know what their clients are doing with their competitors, leaving them blind to some of the risks they face.”

“That whole affair is indicative of the loose regulatory environment over the last several years,” Wall Street historian Charles Geisst told The New York Times. “Archegos was able to hide its identity from regulators by leveraging through banks in what has to be the best example of shadow trading.”

Wall Street Journal

Hot, hot, hot

The U.S. housing market “has rarely been this competitive, especially for first-time home buyers or those with limited budgets. Bidding wars are common, and new listings don’t last for long. Home values are rising in practically every corner of the U.S., and median sale prices in dozens of metro areas have posted double-digit percentage increases from a year ago.”

“It’s not hard to understand what is driving the frenzy. Mortgage rates sit near historic lows. Millions of millennials are entering their early 30s, the typical age of first-time home buyers. And the pandemic has spurred new demand: Some buyers want more space to work from home while others are willing to move farther from their offices. Supply, meanwhile, has never been tighter.”

Competition for homes is coming from another quarter:“From individuals with smartphones and a few thousand dollars to pensions and private-equity firms with billions, yield-chasing investors are snapping up single-family houses to rent out or flip. They are competing for houses with ordinary Americans, who are armed with the cheapest mortgage financing ever, and driving up home prices.”

“You now have permanent capital competing with a young couple trying to buy a house,” real estate consultant John Burns says. “That’s going to make U.S. housing permanently more expensive.”

“The mortgage market [may be] humming, but getting approved for a home loan is as difficult as it has been in years. Mortgage credit availability, a measure of lenders’ willingness to issue mortgages, is near its lowest level since 2014, according to the Mortgage Bankers Association.”

“The tight lending environment illustrates a growing cleavage in the mortgage market: More home loans are being made than almost ever before, but they are going almost exclusively to borrowers with pristine credit histories and sizable down payments. Borrowers with credit qualifications that fall just outside the stellar category are finding fewer lenders willing to approve their applications. A segment of borrowers who would have qualified for a home loan early last year are now out of luck, deemed too much of a credit risk.”

Uneven

“A greater share of people with low credit scores has been falling behind on their car payments in recent months, a sign of stress among consumers whose finances have been hit hard by the pandemic. The missed payments are increasing in what has otherwise been a period of relatively low consumer delinquencies, with stimulus payments, unemployment benefits and other measures keeping many borrowers afloat. The rising subprime delinquencies point to an uneven economic recovery and a deep divergence between those who can navigate the coronavirus downturn and those who can’t.”

From Fincen to Citi

Kenneth Blanco, the Financial Crimes Enforcement Network’s director since late 2017, is leaving to become Citigroup’s financial crimes chief compliance officer. He will be replaced as acting director by Michael Mosier, a counselor to the Treasury Department’s deputy secretary. “The change comes as FinCEN gears up to write a complex set of regulations enacting an anti-money-laundering reform act.”

Rethinking rewards

Visa, Mastercard and big banks “are revisiting their [credit card] rewards programs to cater to younger customers who want to use their cards to build wealth or get out of debt—not just rack up perks. Fintech upstarts are offering niche rewards to better compete against the established players. Here are five reward offerings you’re likely to see in the coming years, according to card industry executives and fintech firms.”

Payday at PayPal

PayPal awarded CEO Dan Schulman “shares worth $31.3 million last week, a sum that exceeds his annual compensation most years, after the company’s stock price skyrocketed during the coronavirus pandemic. The run-up in the financial-technology company’s stock triggered the pay out of one-third of a special performance-based share package Mr. Schulman was granted in 2018. PayPal was one of the beneficiaries of the acceleration of e-commerce and digital payments last year, with the number of active PayPal accounts increasing 24% to 377 million and the total volume of payments processed on its platform in 2020 expanding 31% to $936 billion.”

Financial Times

Is it worth it?

“Deferred gratification is the worst kind,” an FT columnist argues in his analysis of recent reports that junior investment bankers at Goldman Sachs are working ridiculous hours now in order to reap big benefits later on in their careers.

“The ageing process has convinced me of one thing above all. The deferral of gratification is the easiest life mistake to make. And by definition among the least reversible. A unit of leisure is not worth nearly as much in late or even middle age as it is in one’s twenties. To put it in Goldman-ese, the young should discount the future more sharply than prevailing sentiment suggests.”

New York Times

‘Underserved’ by PPP

The Paycheck Protection Program “has turned into the largest small-business support program in American history, sending $734 billion in forgivable loans to struggling companies. The program helped nearly seven million businesses retain workers. But it has also been plagued by complex, changing rules at every stage of its existence. And one year in, it has become clear that the program’s hasty rollout and design hurt some of the most vulnerable businesses.”

“A New York Times analysis of data and interviews with dozens of small businesses and bankers show that Black- and other minority-owned businesses were disproportionately underserved by the relief effort, often because they lacked the connections to get access to the aid or were rejected because of the program’s rules.”

Quotable

“Limited housing supply, low rates, a global reach for yield, and what we’re calling the institutionalization of real-estate investors has set the stage for another speculative investor-driven home price bubble.” — Real estate consultant John Burns, on why it’s so expensive and difficult to buy a house in today’s market.



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