Biden To Punish Good-Credit Homebuyers To Subsidize High-Risk Mortgages
A new rule from the Biden administration will force homebuyers with good credit scores to pay higher mortgage ratesin order to subsidize loans to those with riskier borrowing profiles, the Washington Times reports.
The fee, which will apply to those buying or refinancing houses after May 1, will affect homebuyers with credit scores of 680 or higher, will amount to roughly $40 per month on a home loan of $400,000, or nearly $500 per year. Homebuyers who make down payments of 15% – 20% will be hit with the largest fees.
According to those in the industry, the changes will frustrate homebuyers with high credit scores, as well as those looking to refinance, as they’re being punished for having strong financial positions.
“The changes do not make sense. Penalizing borrowers with larger down payments and credit scores will not go over well,” said Ian Wright, a senior loan officer at Bay Equity Home Loans in the San Francisco Bay Area, in a statement to the Washington Times via email. “It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing.”
Wright also says that the rule will “cause customer-service issues for lenders and individual loan officers when a consumer won’t understand why their interest rate and fees suddenly changed.”
“I am all for the first-time buyer having a chance to get into the market, but it’s clear these decisions aren’t being made by folks that understand the entire mortgage process,” he continued.
The new fees “will create extreme confusion as we enter the traditional spring home purchase season,” said David Stevens, a former head of the Mortgage Bankers Association who served as commissioner of the Federal Housing Administration during the Obama administration.
“This confusing approach won’t work and more importantly couldn’t come at a worse time for an industry struggling to get back on its feet after these past 12 months,” Mr. Stevens wrote in a recent social media post. “To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders.”
The housing market has been hit hard by a series of Federal Reserve interest rate hikes that have driven mortgage rates above 6%, roughly double the level from early 2022. The Fed has raised rates rapidly to bring down inflation, which hit a four-decade high of 9.1% last summer. -Washington Times
Under the new Biden rules, those with lower credit scores and smaller down payments will qualify for better mortgage rates and discounted fees thanks to the surcharge on those with good scores.
“In the wake of a 3-percentage-point increase in mortgage rates, now is not the time to raise fees on homebuyers,” said NAR president, Kenny Parcell, during testimony to the Federal Housing Finance Agency earlier this year.
Biden appointed FHA Director Santra Thompson, meanwhile, said that the fee changes will “increase pricing support for purchase borrowers limited by income or by wealth,” and the agency considers the fee changes “minimal.”
In short, the fee changes will subsidize higher-risk borrowers by imposing “an intentional disruption to traditional risk-based pricing,” according to Stevens.
“Why was this done? The answer is simple, it was to try to narrow the gap in access to credit especially for minority home buyers who often have lower down payments and lower credit scores,” he wrote on LinkedIn. “The gap in homeownership opportunity is real. America is facing a severe shortage of affordable homes for sales combined with excessive demand causing an imbalance. But convoluting pricing and credit is not the way to solve this problem.”This post was originally published at Zero Hedge
Jamie Dimon Warns QT Will Lead To More Bank Failures
At the start of May we explained that it’s not just the Fed’s rate hikes that are behind the nascent regional bank crisis(because with Fed Funds rate at 5.25% and both T-Bills and money market funds offering similar yields, there is no way small banks can compete with these returns, prompting a bank jog (which periodically turns to a sprint) and deposit flight from both checking and saving accounts).
We said that the Fed’s ongoing QT is a just as pernicious threat to the viability of small/regional banks because with every dollar drained from the system as part of the Fed’s quantitative tightening, a matching deposit dollar is also destroyed, to wit:
Under an ample reserves framework, virtually all deposits are created by the Fed.
That’s why banks were forced to load up on low-yielding securities during 2000-2001 and are now getting crushed as yields soar and fixed income/loan prices plunge.
It also means that under QT as Fed reserves shrink, deposits must follow: as such deposits are either forced to shift into Bills/TSYs or are destroyed (bank failures).
Thus, the bank crisis is an inevitable side effect of Fed tightening.
Now, by now everyone knows that when it comes to banks failing (and capitalizing on it) few are as experienced as JP Morgan, aka JP Mega…
… aka JP More-gain, which now has more than 13% of the nation’s deposits and 21% of all credit card spending: in other words, there has never been a bank that is more systematically important than JPMore-gain… and with every small bank failure, Jamie Dimon’s goliath is only getting bigger. Which is why we found it curious that none other than Jamie Dimon confirmed what we said three weeks ago during JPM’s Investor Day on Monday.
This is what the billionaire CEO said:
We haven’t been through Quantitative Tightening. So we really don’t know what’s going to happen to deposits at all [ZH; actually we do: deposits will shrink dollar for dollar alongside reserves]. And that’s why I’ve been quite concerned about that. I’m probably more concerned about quantitative tightening with anybody in this room.
We’ve never had QT before. It just started, okay? And you see huge distortions in the marketplace already. We’ve never had the Fed in the market like this with that RRP program that Jeremy mentioned ever. They have $2.3 trillion basically lent out to money funds. And I don’t know the full effect of that. And obviously, that’s a direct deduction from deposits are rolling out it made sense to do.
So I think people should build into their mindset that they may have to move deposit beta more than they think and manage that. So I mean, if I was any bank or any company, I’d be saying, can you handle higher interest rates and surprise in deposits, etc?
And this is how JPM itself shows the impact of the shrinking Fed balance sheet and TGA/RRP liquidity drains soak up commercial bank deposits.
By the way, “deposit beta”, as Jamie calls it, for those unfamilliar is a polite way of saying bank run, which is a less polite way of saying bank failure. As for Dimon’s rhetorical last question, the answer is a resounding no, or so JPM’s shareholders would like because for the second time in a month, JPM hiked its Net Interest Margin forecast, this time courtesy of the bank’s FDIC/taxpayer-funded gift in the form of First Republic Bank.
According to a slide in the bank’s Investor Day presentation, JPMorgan will gain an even bigger benefit from rising interest rates because of its “purchase” of First Republic Bank. We put purchase in quotes because in reality it was a gift by the FDIC, which gave JPM all the good parts of the collapsed California bank, while taxpayers were left holding the nuclear waste.
The biggest US bank raised its guidance for net interest income this year to $84 billion up from a previous forecast of $81 billion, according to an Investor Day presentation. The reason: the failure of First Republic which directly boosted JPM’s top line by billions!
In other words, as other banks fail, JPM prospers: here is a history of JPM’s Net Interest Income courtesy of Bloomberg. It will only keep rising…
… as more banks fail.
It is no surprise then that it is Jamie’s sincerest wish for rates to keep rising…
… after all that’s the surest way for John Pierpont’s bank – which still pays 0.01% interest on most of its deposits – to once again become bigger than the US and to finally fulfill the reason behind creation of the Federal Reserves.This post was originally published at Zero Hedge
Debt Ceiling Negotiations Crumble, McCarthy And Biden To Hold Sunday Call As Impasse Intensifies
Negotiations in Washington DC over the debt ceiling have taken a big step back over the weekend, as the White House and House Republicans continue to point fingers at each other.
“It seems as though he wants default more than he wants a deal,” House Speaker Kevin McCarthy (R-CA) told Fox News on Sunday. “We have got 11 days to go,” McCarthy continued, urging Biden and the Democrats to be “sensible about this.”
Republicans have been pushing for substantial, longer-term spending reductions, arguing that Congress needs to roll the nation’s deficit spending back to 2022 levels, while restricting the growth of government spending. The White House, on the other hand, wants to achieve policy goals via taxation.
McCarthy said there’s some talk of extending the debt ceiling until 2025, but he said he’s demanding cuts to federal spending in exchange for GOP votes to do so. Biden, he said, is resisting.
“The president keeps changing positions every time Bernie Sanders has a press conference,” he said.
McCarthy said Biden is demanding tax increases after earlier agreeing to keep them off the table. He also said Republicans have made compromises but didn’t specify them. –Bloomberg
Meanwhile, Biden – speaking at a press conference held after the Group of Seven (G-7) summit in Hiroshima, said that he would speak with McCarthy shortly, though he added that the Republican plan was unacceptable.
“The speaker and I’ll be talking later on the plane as we head back,” said Biden. “And our teams are going to continue working.”
“I’m willing to cut spending, and I proposed cuts in spending of over a trillion dollars,” he continued. “But I believe we have to also look at the tax revenues,” adding that the Republican proposal to cut $2 trillion in taxes would hurt the economy.
“Now it’s time for the other side to move from their extreme positions, because much of what they’ve already proposed is simply, quite frankly, unacceptable,” Biden told reporters. “And it’s time for Republicans to accept that there is no bipartisan deal to be made solely on their partisan terms.”
He also rambled a lot.
Biden’s comments came after McCarthy on Saturday accused the White House of backtracking during negotiations, and told reporters that there would be no progress made until Biden returns from the trip.
“The White House is moving backward in negotiations,” McCarthy tweeted Saturday afternoon. “Unfortunately, the socialist wing of the Democrat Party appears to be in control—especially with President Biden out of the country.”
“President Biden doesn’t think there is a single dollar of savings to be found in the federal government’s budget,” McCarthy tweeted in the evening. “He’d rather be the first president in history to default on the debt than to risk upsetting the radical socialists who are calling the shots for Democrats right now.”
One of McCarthy’s top deputies, House Financial Services Chair Patrick McHenry (R-NC) on Sunday said he’s ‘pessimistic’ about the current state of negotiations, and that there is no plans for DC-based negotiations to continue at this time.
In response to McCarthy’s comments, White House Press Secretary Karine Jean-Pierre issued a statement from Hiroshima, reiterating Biden’s c all for a “reasonable bipartisan budget agreement.”
“Last night in D.C., the Speaker’s team put on the table an offer that was a big step back and contained a set of extreme partisan demands that could never pass both Houses of Congress,” she said.
Meanwhile, Treasury Secretary Janet Yellen underscored the urgency of the situation, telling NBC that the likelihood the US would be able to pay its bills by mid-June is “quite low.”
“Well, there’s always uncertainty about tax receipts and spending,” Yellen told “Meet the Press” on Sunday. “And so it’s hard to be absolutely certain about this, but my assessment is that the odds of reaching June 15 while being able to pay all of our bills is quite low.”
“Deficits can be addressed both through changes in spending and also through changes in revenue — and Republicans have taken that off the table,” Yellen continued.
In short, drama right up to the finish line. Did you expect anything less?This post was originally published at Zero Hedge
Buffett Turns Gloomy: The “Incredible Period” For The US Economy Is Coming To An End
While Warren Buffett’s insights on the economy are traditionally cheerful and uplifting – usually hitting at time of peak pessimism in the form of self-serving NYT op-eds or CNBC vignettes (and usually around the time the Omaha billionaire knows that the government will backstop his TBTF investments, unlike those of pretty much anyone else), on Saturday the head of Berkshire Hathaway had a far more downbeat and gloomy prediction for his own businesses – and the broader economy in general – the good times may be over.
Speaking at Berkshire’s annual general meeting in Omaha, Nebraska, the billionaire investor said he expects earnings at the majority of the conglomerate’s operations to fall this year as the coming economic downturn slows corporate activity further. He made his pessimistic comments even as Berkshire posted an almost 13% gain in operating earnings to $8.07 billion for the first quarter, up from $7.04 billion a year ago.
“The majority of our businesses will report lower earnings this year than last year,” Buffett, 92, said, before crowds of thousands at the event on Saturday according to Bloomberg. During the last six months or so, the “incredible period” for the US economy has been coming to an end, he said.
As Bloomberg notes Berkshire is often viewed as a proxy for economic health owing to the expansive nature of its businesses ranging from railroad to electric utilities and retail. Buffett himself has said Berkshire owes its success to the incredible growth of the US economy over the decades, but his prediction for a slowdown at his firms comes as upheaval at regional banks threatens to curtail lending as inflation and higher rates continue to bite.
Buffett’s long-time business partner Charlie Munger, 99, who joined him on stage, said the more-difficult economic environment will also make it harder for value investors, who typically buy stocks that look cheap compared to the intrinsic value of the businesses.
“Get used to making less,” Munger said.
Despite the broader pessimism, Buffett said he expects earnings at its insurance underwriting operations — which are less correlated to business activity — to improve this year. Berkshire already reported higher earnings at those businesses including auto-insurer Geico, which swung to profitability following six quarters of losses.
Geico posted $703 million in earnings as higher average premiums and lower advertising spending contributed to the gain even as claim frequencies fell, Berkshire said in a statement reporting its earnings Saturday. That revival follows a difficult period for the underwriting business as inflation took its toll on the cost of materials and labor.
Geico has been facing particular pressure from rivals including Progressive, which Buffett has called “well-run,” and Allstate which had long used telematics programs to track drivers and encourage better behavior before Geico introduced the offering. Geico’s profit also helped Berkshire’s insurance underwriting businesses deliver $911 million in profit compared with $167 million a year earlier.
Berkshire previously said it expected Geico to return to operating profitability in 2023, after securing premium rate increases. Still, Geico remains an issue for Berkshire, with top line growth in the quarter of less than 1% that “significantly lags peers,” CFRA analyst Cathy Seifert said.
“I suspect rate hikes being put through to offset claim cost inflation is being met with policy cancellations,” she said. “While the loss of unprofitable policies is not always a bad thing- that’s not usually the policies — and policyholders — that leave.”
Other parts of the conglomerate took a bigger hit, with after-tax earnings from Berkshire Hathaway Energy falling 46.3% from the same time last year amid “lower earnings from the US regulated utilities, other energy businesses and real estate brokerage businesses.” Railroad results were also weaker than expected due to a fall in freight volumes and higher operating expenses, according to Edward Jones analyst Jim Shanahan.
But at one of Berkshire’s best known businesses, Brooks Running Co., Chief Executive Officer Jim Weber was skeptical of a steep consumer downturn.
“With unemployment being so low, it’s hard to be believing we’re going to fall off a cliff into a recession at the consumer level,” Weber said in an interview on Friday ahead of the meeting. “I wonder if this is going to be an asset-value recession.”
Among other topics discussed on Saturday were Buffett’s succession, the banking crisis, the US debt ceiling crisis, the company’s investment in Occidental, Chna’s upcoming invasion of Taiwan and more:
- Succession planning: Buffett named Greg Abel, 60, as heir apparent in 2021, and the vice chair for non-insurance operations has had a more pronounced presence ever since. On Saturday, Buffett reaffirmed he was “100% comfortable” with the decision and even indicated a largely business-as-usual transition, for whenever that could be. “Greg understands capital allocation as well as I do. That’s lucky for us,” Buffett said at the meeting in Omaha, Nebraska. “He will make those decisions, I think, very much in the same framework as I would make them. We have laid out that framework now for 30 years.”
- Occidental control: One analyst called it the biggest announcement of the day: Berkshire won’t make an offer for full control of Occidental Petroleum Corp., the energy firm it has spent months boosting its wagers on. The comment by Buffett likely helped temper speculation that Berkshire is seeking to own Occidental after winning approval from US regulators last year to acquire as much as 50% of the firm. Buffett didn’t rule out buying more stock of the Houston-based firm, adding it may — or may not — seek further purchases.
- Banking Turmoil: Buffett and Munger were so sure they’d be questions about the recent banking turmoil that they jokily brought placards bearing the accounting classifications spotlighted during the upheaval. One was labeled “available for sale,” while the other read “held to maturity.” Striking a more serious note, Buffett faulted the executives in charge of the failed banks, arguing they should be held accountable for mistakes that were hiding in “plain sight.” He also called out “messed up” incentives in banking regulation, as well as poor messaging by regulators, politicians and the press to the American public about the upheaval. Buffett pointed to First Republic Bank, the insolvent bank which last weekend was acquired by JPMorgan after it collapsed after offering jumbo, non-government-backed mortgages at fixed rates that were interest-only for 10 years in some cases — which Buffett called “a crazy proposition.”… “It was doing it in plain sight and the world ignored it ‘til it blew up,” Buffett said.
- Debt Ceiling: As lawmakers race to resolve a standoff around the US debt ceiling, Buffett said he couldn’t see how Washington would allow the US to default on its debt, an outcome that would tip the financial system into turmoil. Investors and politicians are zeroing in on whether or not the US government can avoid crashing into its statutory debt ceiling and a potentially catastrophic technical default that could follow. Despite the impasse, Buffett reiterated his belief in America as an “incredible society” with “everything going for us.” Given the choice, he would still want to be born in the US, he said.
- Geopolitics, Taiwan: In Q4 Buffett slashed his holding of Taiwan Semi just months after disclosing a major stake in a quick reversal that spooked investors. Buffett said Saturday the company was one of the best managed and most important in the world, but that he didn’t like the location — a reference to Taiwan amid rising tensions between the island and China. Buffett and Munger emphasized the need for smooth relations between the US and China and urged increased trade. While the two will be competitive, they will always need to judge “how far you can push the other guy without them reacting wrong,” Buffett said.
Separately, Berkshire topped up its cash pile, ending the quarter with $130.6 billion, a $2 billion increase from the $128.6 billion at the end of the year. This means that Berkshire stands to make a bonanza from interest income as the Fed keeps hiking rates: “Our investment income is going to be a lot larger this year than last year, and that’s built in,” Buffett said at the annual meeting.
The company was also a net seller of equities for the second quarter in a row, pocketing $10.4 billion in net stock sales ($13.3 billion gross) after deducting purchases of $2.9 billion.
Finally, Berkshire bought back $4.4 billion of stock, an increase from the same period last year, as Bekrshire confronted turbulent markets that offered fewer of the blockbuster deals he’s renowned for. Berkshire has turned toward buybacks more often as valuations in public markets had made it more challenging for Buffett to identify promising acquisitions.