The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘US

Option ARM – $98 pm on a $315K mortgage … for now


The last time saw a graphic such as this was 2007, when the schedule for mortgage resets on US sub prime mortgages pointed to an inevitable crash beginning end of 2007 and through early 2008.

Well here is the next picture that is eerily similar with forward predictions of similar catastrophe in 2011.   The US option ARM.  Apparently these are not necessarily sub-prime at least right now.  The real danger exists in the event that interest rates increase meaningfully to co-incide with the reset dates.

Also we must look at this in the context of the Banks rushing to repay government TARP / SCAP money.  It is quite possible the reverse will be happening with some banks in trouble again in 2011.

Option ARMs: Paying $98 a month on a $350 Thousand Mortgage | Calculated Risk

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

CreditSuisseResetMarch09

Written by Colin Henderson

June 11, 2009 at 15:17

Posted in subprime, US

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No consumer driven economy in US | Geithner in China


Some important messages within Geithners speech in China today that paint a very different next few years compared to the last 10, and as the ‘G2’ move to manage a transition the American economy into one that is very different, yet stable.  And all this to be managed against the backdrop of  the fear of eventual inflation, which would devalue foreign holdings in US T-Bills, something China is acutely aware of.

These macro factors will play a large role in US banks and credit unions strategy design for the next 5 years.

  1. no consumer purchase driven economy in US – with the implication of extended higher Government spending for some time to counter
  2. US consumers save (increasing savings accounts and paying down debt)
  3. China’s manufacturing supply is sold more and more within China, not Wal-Mart

Speech by Secretary Geithner – The United States and China, Cooperating for Recovery and Growth

In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past.

In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China’s ability to weather fluctuations in global supply and demand.

If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down.  And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.

Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer.

Written by Colin Henderson

June 1, 2009 at 09:11

Posted in economy, US

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California is in trouble – hard to imagine what that means


Could we see the state of California go under … ?

California – a nightmare vision of the future | FT

The Californian budget crisis is so severe that all public employees are having to take pay cuts. Public-health services are under serious threat, and there is talk of pushing Aids patients and the terminally-ill out onto the streets. It has proved impossible to raise taxes any further and the bond markets are in revolt. California is looking to Washington for help. But with the federal government running budget deficits of 12% of GDP, and the federal debt pushing up towards 100% of GDP – you have to wonder whether California’s present might, once again, be America’s future.

Written by Colin Henderson

May 30, 2009 at 23:04

Posted in Uncategorized

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FDIC aggregate bank losses masked by trading gains Q1 – 2009


The latest FDIC QBP is out and contains some sobering information on the impact of the recession on bank results.

FDIC Quarterly Banking Performance – 31st March 2009

INSURED INSTITUTION PERFORMANCE

  • Net Income of $7.6 Billion Is Less than Half Year-Earlier Level (61% less than previous period)
  • Noninterest Income Registers Strong Rebound at Large Banks
  • Aggressive Reserve Building Trails Growth in Troubled Loans
  • Industry Assets Contract by $302 Billion
  • Total Equity Capital Increases by $82.1 Billion

Looking behind the apparently positive net income of $7.6Bn we see that first quarter earnings were $11.7 billion (60.8 percent) lower than in the first quarter of 2008 but represented an apparently significant recovery from the $36.9 billion net loss the industry reported in the fourth quarter of 2008, however it included significant trading gains of $9.5 Bn which masked the continuing loan loss problems. Aggregate net income would have been in loss territory based on the business fundamentals.

While at first glance some recovery appears underway, the above along with industry asset contraction, reflecting pay-offs and write downs, suggests we are not close to being out of the woods on the banking sector.

I also note that the level of derivatives is has now increased in 2009 versus 2008, despite earlier commentary that derivatives were being unwound.  (Derivatives represent off balance sheet liabilities)

Written by Colin Henderson

May 27, 2009 at 11:34

Posted in US

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Map of Federal Reserve Districts | US


Screenshot-23

Written by Colin Henderson

May 26, 2009 at 23:40

Posted in economy

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The Aftermath of Financial Crises | study


A short and useful paper offerring some points that help to frame the next few years for strategic planning purposes.  This to be read of course in the context of politicians preaching ‘road to recovery’ which leaves the uninformed with the view that we will get over this blip and back to normal.

I prefer to think of this as a shift that will profoundly change things for the next few years, with some good and some not so good elements in that shift.  It may be good that the banking industry will be shaken up, and out of that some innovation and better services will appear.  The less good part is that more bank customers will have to work harder and longer for less money, and accumulation of wealth will return to a savings culture rather than an asset accumulation one.

All this provides a different prospect for financial services, and products will need to be restructured or invented to match those busier, poorer customers who nonetheless have financial goals such as debt reduction and wealth accumulation for retirement.

The paper outlines three core results of financial crises.  This is based on empirical evidence of 18 post war crises in the developed world, including “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992) along with some developing country crises (the 1997–1998
Asian crisis, Colombia 1998; and Argentina 2001.

No real surprises here;  Low asset values, high unemployment, and high government debt.  Click through for details (13 pages).

The Aftermath of Financial Crises pdf – Reinhart (Univ of Maryland), and Rogoff (Harvard)

First, asset market collapses are deep and prolonged. Real housing price  declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.

Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.

Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

Written by Colin Henderson

May 25, 2009 at 09:44

Transparency pledge in bank stress tests – now May 2009


Confusing messages coming out on the timing of the Bank stress tests – now expected May.

Transparency pledge in bank stress tests | FT

The White House on Wednesday pledged “transparency” over the stress tests used to assess the health of the biggest US banks, as officials pushed wary banks and regulators to agree to disclose as much information as possible.

Robert Gibbs, US presidential spokesman, said that “early in May” there would be “transparency of determining and showing to all involved some of the results” of the tests.

Written by Colin Henderson

April 15, 2009 at 21:29

Posted in economy

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