The invisible hand slaps the slow trader. Then, when its done, it slaps the regular guy on Main Street.

We live in an era when trades are excecuted in six one-hundredths of a second. So why do we live in an era when a direct deposit clears in twenty-four hours?

It comes down to arbitrage – the business of making money on transactions. Banks are worried about being the victim of someone else’s arbitrage, but they’re interested in finding ways to do it themselves.

I was able to glean a lot about international currency markets from my securities trading friends this weekend. There are all kinds of gems:

• “No one trades rupees!”
• “We can trade in six milliseconds, which is good. Unfortunately, there are some guys out there that are beating us all the time.”

The endeavors of my friends in the IT departments at these major securities firms say a lot about technology can make a lot of money for a company. It also says a lot for how banks are sticking it to you and me.  They have taken a career trajectory that probably wouldn’t have been feasible twenty years ago. They were (more…)

The Big Banks have suddenly decided to move traditionally underserved borrowers into loans guaranteed by the Federal Housing Adminsitration (FHA).

For years, FHA lending made up only a small fraction of mortgage loans. One source quotes a Wells Fargo representative who says that FHA lending made up only three percent just a few years ago.

The main difference between FHA loans and conventional products is that there is a lower down payment requirement. FHA asks for a downpayment of at least 3.5 percent. Conventional loan terms fluctuate, but in the past year most borrowers have had to put up at least 20 percent in order to buy a home. For investors the number has been much higher.

FHA counters the risked posed by higher LTVs by requiring borrowers to purchase mortgage insurance at the outset of the loan, and to pay a premium for new insurance for as long at the LTV remains at a certain level. The result is that FHA loans, while bearing the same interest rate, will usually have a much higher APR.

There are other appeals for an FHA loan. Third parties (home builders, relatives, employers, non-profits) can contribute to the down payment. On the other side, sellers are allowed to contribute to closing costs.

Things have changed dramatically since the credit crisis. One of the interesting things is that there has been an improvement in the kinds of borrowers that use FHA. According to HUD, the average credit score for an FHA loan  went up from 621 in early 2008 to 692 by the middle of 2009. Do the math: that is a gain of more than 70 points!

Some lenders appear to have made a strategic decision to make loans to underserved groups through FHA. The table that follows lists twenty banks from the S&P 900, along with the share of loans that they originated through FHA. There are four segments: minority borrowers, low-income borrowers, low-income neighborhoods, and rural loans.  

The Big Banks are Making their Loans through FHA

The Big Banks are leading the charge. These top ten are most of the largest banks in the country. Citigroup is an absence, but they have pulled back in mortgage lending.

This analysis includes both FHA and conventional loans on site-built homes. Only loans by owner-occupants are included. There are no home equity loans here – only purchase and refinance loans.

Other observations:

Some banks rely on FHA in rural areas. Fifth Third scored high on this list because they are so dependent upon FHA outside of the cities. It is the same story with M&T Bank. Astoria Financial has a high score, but it can be discounted due to sampling size.  Almost all of AF’s loans are made in the New York metro area.

The big bank that isn’t relying on FHA? BB&T. The Best Bank in Town makes plenty of loans, but they’re not going after the FHA borrowers. For a long time, BB&T has insisted that they are happy to walk away from loans. Maybe their thinking is that they don’t want to let a guarantee push them into making a loan that they otherwise wouldn’t originate.  

A few banks are making almost all of the FHA loans. When the numbers show that JP Morgan, Bank of America, and Wells Fargo are active in FHA than are other banks, then it follows that their share of the market is very large.  These three banks accounted for 79 percent of FHA loans to minority borrowers.  Throw in SunTrust and Fifth Third, and five banks make 90.3 percent of FHA loans to minorities. For low-income borrowers and loans made in low-income neighborhoods, the top five’s share is nearly as dominant – 85.7 percent and 83.5 percent.

This leads into another issue. Rural lending is not the province of small town banks. There are about 60 lenders in this analysis. The big five had 73 percent of all FHA in rural areas, and 55.6 percent of all conventional loans.

President Obama says that he will nominate Joseph Smith, the current North Carolina Commissioner of Banks to become the new leader of the Federal Housing Finance Administration.

It is one more instance of how the progressive leadership in North Carolina is moving to Washington to take on the big banks.  Smith’s understudy, Mark Pearce, was recently named to a new position at the FDIC, where he will supervise consumer protections at the 8,000 financial institutions under the regulatory purview of the FDIC.  Eric Stein, formerly an attorney at the Center for Responsible Lending, has been working as the Deputy Assistant Secretary of Consumer Protections at the Department of the Treasury for more than a year.In that time, he has been the champion of the Consumer Financial Protection Bureau.

Smith will have an opportunity to shape reform of the GSEs.

While most of the press about the deficit reduction committee has consisted of vitriol from organized labor and delicate sidestepping from the “new right,” the news about the EITC has flown under the radar.

The Bowles-Simpson report emphasizes that tax expenditures will be a big part of new cuts to the budget. A tax expenditure is a catch-all term for any kind of give back made by the IRS for a deduction or a tax credit. Our tax code is so complex because there are so many different tax expenditures.

Those tax expenditures include the Earned Income Tax Credit. The EITC subsidizes paychecks for lower-income households. In 2009, EITC tax expenditures delivered $57.7 billion to 25 million American tax (more…)

H&R Block says that it has entered into talks with HSBC USA to smooth over their impasse on their contested tax settlement contract.

Block didn’t offer details and they didn’t submit a filing to the Securities and Exchange Commission. The latter would only be necessary if there was news that had a “material, definitive” impact on the company’s financials.

Block and HSBC amended their tax settlement products (refund anticipation loans and refund anticipation checks) in the spring of 2010. Block makes about forty percent of refund loans every year. With news that other tax preparers were struggling to secure funding, Block seemed poised to have a competitive advantage of sorts.

This may be information masquerading as news. The parties have a hearing next Monday. Time is running out. Block can’t wait until December 15th to get a RAL agreement in place. They have to have prices from HSBC. They have to develop software. They need to train staff on the new means for a RAL application in the post-debt indicator marketplace.