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The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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Yellen FSOC Punts on Mortgage Servicers; WGA Bottom 25 Banks

“You can’t lose money making deposits”


Vernon Hill

Former Chairman/CEO

RepublicFirst Bank



May 13, 2024  | Premium Service | We appreciate the many comments from our readers last week regarding the idea of Freddie Mac buying second lien mortgages (“Freddie Mac Buying HELOCs? Really Meredith? | UWMC & Disappearing MSRs”). A number of residents of the Washington housing policy community initially supported the idea, but now are strangely silent. Any readers with further thoughts on the matter please do post them to @rcwhalen on X.com


Below for our Premium Service subscribers, we critique the bottom 25 banks in the WGA Bank Top 100 Index. And h/t to Joe Garrett for the remembrance of former Commerce Bank CEO Vernon Hill, who  became chief executive officer of RepublicFirst Bancorp in 2021 and was fired in May 2022. The bank failed very notably a few weeks ago with a loss close to 15% of total assets. Hello.


Just when we thought the quota of dumb ideas was filled, on Friday the US Treasury under Janet “T-bill” Yellen issued a paper on nonbank mortgage servicers. The well-prepared paper from the Financial Stability Oversight Council (FSOC) contains some important information, but is also a bit misguided.


For example, Secretary Yellen suggests creating a fund to finance defunct IMBs after they file bankruptcy. Really? And, also last week, President Joe Biden wants to give away hundreds of dollars to first time homebuyers, like an aging Latin American dictator buying votes from campesinos with bags of groceries on election day.  Of course, neither Biden nor Yellen want to discuss the budget deficit.

 

 

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Federal officials like Yellen have a fascination with the idea of planning for the defaults of private companies, as though such things were even possible. Readers of The IRA will recall (“Reverse Mortgage Finance Festers”) that when Reverse Mortgage Investment Trust (RMIT) filed for bankruptcy in December 2022, the US Treasury ended up taking control of the nation’s largest reverse mortgage lender and servicing book. Why?


Private buyers were unwilling to acquire RMIT from bankruptcy and take responsibility for a money losing reverse mortgage portfolio.  When the third week of December 2022 arrived, the Treasury had to seize the servicing asset, pay the Ginnie Mae bondholders and advance cash to the elderly borrowers. The RMIT book was upside down to the tune of hundreds of millions of dollars and has cost the Treasury billions more since. 


As a result of the mishandling of the RMIT default by the Biden Administration, Texas Capital Bank (TCBI) got thrown under the bus as a lender to RMIT post-default. Of note, former Ginnie Mae President Alanna McCargo, who made verbal commitments to TCBI that resulted in a litigation between TCBI and Ginnie Mae, was just named President and Chief Executive Officer of the Federal Home Loan Bank of San Francisco. She replaces Teresa Bryce Bazemore at the FHLB San Francisco. 


Of note, the liquidity problem discussed in the FSOC report is specific to Ginnie Mae servicing assets and cannot be fixed without legislation. Conventional servicers get reimbursed by the GSEs after month four, but Ginnie Mae servicers must carry the financing load of coddling delinquent consumers and financing the float of loan forbearance for years. 


The proposal from Secretary Yellen in the FSOC report asks for Congressional authority to support government MBS issuers and raises some other important concerns, but it misses the key point that should have been learned in the RMIT fiasco involving Ginnie Mae


Once a mortgage company with a Ginnie Mae servicing business files bankruptcy, the firm will either be acquired voluntarily in a private transaction under Bankruptcy Court supervision or the US Treasury will end up the owner. Despite all of the fuss made by the FSOC and banking and housing regulators about mortgage servicers, they still don't get the joke.


When a Ginnie Mae issuer runs out of cash the decision tree for the buyer is binary: either the mortgage servicing right (MSR) has value or it does not.  If the servicing business cannot be sold in a bankruptcy auction, then nobody will lend to the debtor and the Treasury will own the servicing asset. Period. In fact, we still think Treasury may acquire another Ginnie Mae reverse MSR this year.


If the Biden Administration really wanted to address the liquidity “problems” of nonbank mortgage servicers, then Secretary Yellen would be demanding that Congress give Ginnie Mae more flexibility and funding, and allow nonbanks immediate membership into the Federal Home Loan Bank system. Perhaps President McCargo of the FHLB San Francisco will take up the cause of membership for the nonbanks.


The WGA Bottom 25 Banks


With aspirational stocks losing ground, the banking sector is starting to get more attention from managers after a long period in the basement compared with other sectors. Are there bank bargains down in the cellar waiting to be discovered? Below we take a look at the bottom quarter of our test group, banks that rank 76th through 100 in the WGA Bank Top 100 Index.  

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