The U.S. government fined one of the country’s largest banks more than $37 million for unlawfully retrieving customers’ credit reports and opening fictitious accounts, the Consumer Financial Protection Bureau (CFB) said Thursday.
The U.S. government fined one of the country’s largest banks more than $37 million for unlawfully retrieving customers’ credit reports and opening fictitious accounts, the Consumer Financial Protection Bureau (CFB) said Thursday.
Wells Fargo just announced that it’s shutting down all of its existing personal lines of credit – a popular product offered by the retail-focused Wall Street giant – a move that will likely infuriate legions of customers.
Get your money out of woke banks while you can
Wells Fargo has shut down the bank account of America First activist Lauren Witzke, leaving her stranded out of state with completely no money.
First JPMorgan admitted that over 500 of its generously paid employees had “illegally pocketed” covid-relief funds and then summarily fired most of them – and now it’s chronic lawbreaking recidivist Wells Fargo’s turn.
The bank, whose stock tumbled today after reporting dismal results and then was hit with even more selling after cutting its net interest income outlook, has fired more than 100 employees for illegally getting covid relief funds which were meant to help small businesses, Bloomberg reported citing a person familiar.
Warren Buffett’s favorite bank uncovered dozens of employees who defrauded the Small Business Administration “by making false representations in applying for coronavirus relief funds for themselves,” according to an internal memo reviewed by Bloomberg. Similar to JPMorgan, the abuse was tied to the Economic Injury Disaster Loan program and was outside the employees’ roles at the bank, according to the memo.
“We have terminated the employment of those individuals and will cooperate fully with law enforcement,” David Galloreese, Wells Fargo’s head of human resources, said in the memo. Wells Fargo’s actions follow JPMorgan Chase & Co.’s finding that more than 500 employees tapped the EIDL program which hands out as much as $10,000 in emergency advances that don’t have to be repaid, and dozens did so improperly.
The bank “will continue to look into these matters,” Galloreese added, saying the employees’ abuse didn’t involve customers… for once. “If we identify additional wrongdoing by employees, we will take appropriate action.”
As Bloomberg notes banks were urged by the SBA to look out for suspicious deposits from the EIDL program to their customers and even their own staff, after an analysis identified that at least $1.3 billion was sent out from the SBA for suspicious payments. While the program offers loans to businesses, much of the concern has focused on its advances of as much as $10,000 that don’t have to be repaid.
Wells Fargo is best known for its role in a massive account fraud scandal in which the bank created millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their consent over a 14-year period. The fallout led to the bank paying $3 billion to settle criminal charges and former CEO John Stumpf losing his job after a historic Congressional grilling, while also agreeing pay a personal $17.5 million fine. In 2018, Wells Fargo agreed to an unprecedented consent order from the Fed which capped the size of its balance sheet and limited how many loans the bank can issue, one of the factors behind the dismal performance of its stock in recent years, which even prompted Warren Buffett to finally dump some of his Wells Fargo holdings.
(Reuters) – Wells Fargo & Co (WFC.N) said on Thursday it has hired Flagstar Bank’s Kristy Fercho to run its mortgage division following the retirement of 23-year veteran Michael DeVito from the company.
Fercho will oversee home lending operations of the largest mortgage lender in the United States during a time of uncertainty in the industry. She had run Flagstar’s mortgage business for the past three years.
Wells Fargo has pared back some mortgage offerings and raised requirements for certain kinds of loans during the coronavirus-fueled economic downturn. As of last month, the bank had received forbearance requests for roughly 13% of its mortgage balances, it has said.
Since taking over as chief executive late last year, Charles Scharf has shaken up leadership at the bank and installed a slew of former colleagues in top positions. In the wake of racial tensions across the United States, Scharf has also pledged to diversify the bank’s leadership team.
“She has been an inspiring and vocal leader across the mortgage industry while driving transformational growth at Flagstar,” said Mike Weinbach, new CEO of Consumer Lending at Wells Fargo, referring to Fercho, who is Black.
DeVito, who ran the mortgage division for two years, will retire later this summer.
Following Wells Fargo’s complaint that it was unable to fully participate in the SBA’s Paycheck Protection Program, capping its small business bailout exposure to at most $10 billion, due to the Fed unprecedented 2018 enforcement action and restrictions on Wells Fargo’s balance sheet as punishment for the bank’s opening of millions of fake accounts which cost former CEO John Stumpf his job, it was only a matter of time before the Fed relented and eased the bank’s restrictions as the NYT reported two days ago.
And indeed, this happened moments ago when the Fed announced that “due to the extraordinary disruptions from the coronavirus, that it will temporarily and narrowly modify the growth restriction on Wells Fargo so that it can provide additional support to small businesses.”
Due to the extraordinary disruptions from the coronavirus, the Federal Reserve Board on Wednesday announced that it will temporarily and narrowly modify the growth restriction on Wells Fargo so that it can provide additional support to small businesses. The change will only allow the firm to make additional small business loans as part of the Paycheck Protection Program, or PPP, and the Federal Reserve’s forthcoming Main Street Lending Program.
However, in a curious twist, the Board said it would require profits and benefits from Well’s participation in the PPP and the Main Street Lending Program “to be transferred to the U.S. Treasury or to non-profit organizations approved by the Federal Reserve that support small businesses. The change will be in place as long as the facilities are active.”
In other words, the Fed will remove incentives for the remaining criminals on Wells’ staff to create fake bailout loans and profit from the Treasury’s guaranteed funds.
Some more details:
The Board’s growth restriction was implemented because of widespread compliance and operational breakdowns that resulted in harm to consumers and because the company’s activities were ineffectively overseen by its board of directors. The growth restriction does not prevent the firm from engaging in any type of activity, including the PPP, the Main Street Lending Program, or accepting customer deposits. Rather, it provides an overall cap on the size of the firm’s balance sheet. The change today provides additional support to small businesses hurt by the economic effects of the coronavirus by allowing activities from the PPP and the Main Street Lending Program to not count against the cap.
The Fed concludes that “the changes do not otherwise modify the Board’s February 2018 enforcement action against Wells Fargo. The Board continues to hold the company accountable for successfully addressing the widespread breakdowns that resulted in harm to consumers identified as part of that action and for completing the requirements of the agreement.”
The PPP program, while much needed by main street businesses, will in the coming years be revealed as an unprecedented criminal “free for all”, as tens of billions in funds are funneled into illicit organizations and shady deals.
This action, which is supposedly such a great move by the Federal Reserve, is a monkey hammer on any business who uses Wells Fargo. They just took away the profit motive for Wells to produce any loans under this program. So why would Wells write any loans? They won’t!
Do you realize how many businesses are hooked up to Wells that will now not be able to use this program?
Wells Fargo has agreed to pay $3 billion to settle U.S. investigations into more than a decade of widespread consumer abuses under a deal that lets the scandal-ridden bank avoid criminal charges.
The deal resolves civil and criminal investigations. It includes a so-called deferred prosecution agreement, where the Justice Department files, but doesn’t immediately pursue, criminal charges. It will eventually dismiss them if the bank satisfies the government’s requirements, including its continued cooperation with further government investigations, over the next three years.
The accord also resolves a complaint by the Securities and Exchange Commission.
“Our settlement with Wells Fargo, and the $3 billion criminal monetary penalty imposed on the bank, go far beyond ‘the cost of doing business,’” U.S. Attorney Andrew Murray for the Western District of North Carolina said in a statement.
“They are appropriate given the staggering size, scope and duration of Wells Fargo’s illicit conduct.”
All of which means – nobody goes to jail!
While today’s settlement shuts the door on a major portion of the bank’s legal problems related to the fake accounts, a scandal that has claimed two CEOs; it’s hardly the end of the bank’s legal woes. The firm remains under a growth cap imposed by the Federal Reserve. Last month the Office of the Comptroller of the Currency announced civil charges against eight former senior executives, some of whom settled. And probes into other suspected misconduct in other businesses are continuing.
Nearly four years after Wells Fargo’s reputation was terminally crushed by the humiliating fake accounts fraud scandal, the punishment for Warren Buffett’s favorite bank and its (mostly former) employees is still being doled out, and moments ago the Office of the Comptroller of the Currency announced $59 million in civil charges and settlements with eight former Wells Fargo senior executives on Thursday, including the payment of a $17.5 million fine by John Stumpf, the bank’s former CEO, who also agreed to a lifetime industry ban. Carrie Tolstedt, who led Wells Fargo’s community bank for a decade, faces a penalty of as much as $25 million.
“The actions announced by the OCC today reinforce the agency’s expectations that management and employees of national banks and federal savings associations provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations,” Joseph Otting, who heads the OCC, said in a statement.
Wells Fargo unleashed unprecedented public and political ire in 2016 after its was revealed that bank employees opened millions of fake accounts to meet sales goals. That and a slew of retail-banking issues that subsequently came to light have led to regulatory fallout that’s in many cases unprecedented for a major bank, including a growth cap from the Federal Reserve. It also led to a historic Congressional grilling of the bank’s then CEO, John Stumpf, who resigned shortly after.
Regulatory actions against Wells Fargo have also included billions of dollars in fines and legal costs, and an order giving the OCC the right to remove some of the bank’s leaders. The Department of Justice and the Securities and Exchange Commission also have been investigating the lender’s issues.
Why did it take 4 years for some individual justice to finally emerge? Simple: regulatory capture – as Bloomberg adds, the OCC drew scrutiny of its own as the firm’s main regulator throughout the scandals, prompting an internal review at the agency.
The OCC and the Fed have both cited a wide-ranging pattern of abuses and lapses at Wells Fargo, yet despite the universal condemnation, the bank’s biggest shareholder, Warren Buffett, has refused to dispose of his stake.
More than two years after Wells Fargo & Co. erupted into scandals, Chief Executive Officer Tim Sloan returned to Capitol Hill to lay out his efforts to clean up the mess. The bank has apparently made little progress in winning over lawmakers.
However, all eyes were on Rep. Alexandria Ocasio-Cortez (D-NY) after she suggested Wells Fargo was “involved” in the caging of migrant children because the bank used to finance private prison companies CoreCivic and Geo Group during congressinal hearing.
It was a brilliant distraction…
“Mr. Sloan, why was the bank involved in the caging of children and financing the caging of children to begin with?” the freshman House Democrat and economics major asked Wells Fargo CEO Timothy Sloan.
“Uh, I don’t know how to answer that question because we weren’t,” Sloan replied.
“Uh, so in finance — you, you were financing and involved in financing of debt of CoreCivic and Geo Group, correct?” she shot back.
To which Sloan replied: “For a period of time, we were involved in financing one of the firms — we’re not anymore and the other. I’m not familiar with the specific assertion that you’re making, but we weren’t directly involved in that.”
“OK, so these companies run private detention facilities run by ICE, which is involved in caging children, but I’ll move on,” AOC retorted.
Of note, Wells Fargo was prominently featured in a November 2016 report along with nine other banks for lending CoreCivic and GEO Group $444 million and $450 million respectively during the Obama administration – the same period of time during which a a photo of caged children misattributed to the Trump administration was taken.
Wells Fargo and other banks have decided to reevaluate their lending activities to private prisons amid controversy over the Trump administration’s immigration policies.
AOC then shifted gears, asking Sloan if Wells Fargo should be involved in paying for environmental cleanup if a bank-financed oil project such as the Dakota Pipeline were to leak.
“So hypothetically, if there was a leak from the Dakota Access Pipeline, why shouldn’t Wells Fargo pay for the cleanup of it, since it paid for the construction of the pipeline itself?” asked AOC – suggesting that the pipeline is “widely seen to be environmentally unstable.”
Sloan looked a bit puzzled, replying: “Again the reason we were one of the 17 or 19 banks that financed that is because our team reviewed the environmental impact and we concluded that it was a risk that we were willing to take.”
Socialist Rep. Alexandria Ocasio-Cortez (D-NY) asks Wells Fargo CEO Timothy Sloan: “Hypothetically, if there was a leak from the Dakota Access pipeline, why shouldn’t Wells Fargo pay for the clean up of it?”
Sloan: “Because we don’t operate the pipeline, we provide financing” pic.twitter.com/c6cShbStuk
— Ryan Saavedra (@RealSaavedra) March 12, 2019
The responses to AOC’s line of questioning have been entertaining to say the least.
Why in the hell are we paying to educate @AOC as she learns (at a snails pace) on the job? She’s making $175K while she attends fantasy camp.
— JDC (@johnc286) March 12, 2019
Hypothetically, if you moved campaign funds to an LLC to be redistributed against FEC rules, your donors should be responsible? @AOC smart
— AmeroAmigo (@AmeroAmigo) March 13, 2019
Budweiser is to blame for drunk driving, also
And cutlery companies for stabbings!
— Some random thoughts (@someideasnstuff) March 13, 2019
Wells Fargo is experiencing a system outage that is disrupting access to the firm’s website, mobile apps, ATMs and debit and credit cards.
Wells Fargo customers took to Twitter Thursday morning to report their frustration about their transactions being declined and being unable to withdraw money from their accounts or check their balances online.
The Wells Fargo Advisors website appears to still be up and running. However, investors are unable to check their brokerage accounts via the Wells Fargo mobile app.
InvestmentNews reached out to Wells Fargo to ask whether advisers’ internal systems are similarly impacted and what is causing the system outage.
“Wells Fargo Advisors is aware of the issue and technical teams are working to resolve the issue as quickly as possible,” spokeswoman Jackie Knolhoff wrote in an email.
At 9:06 a.m. EST, Wells Fargo tweeted an apology to customers. An hour later, the company followed with a tweet saying, “We’re experiencing a systems issue that is causing intermittent outages, and we’re working to restore services as soon as possible. We apologize for the inconvenience.”
TradePMR, a custodian that recently partnered with Wells Fargo on its growing RIA channel, said connectivity to First Clearing, Wells Fargo’s subsidiary for RIA services, is not affected.
“Advisers using TradePMR’s technology have not experienced any service issues,” said Robb Baldwin, founder and CEO of TradePMR, adding that his platform is completely separate from Wells Fargo Advisor technology. “It is business as usual for our advisers.”
Regional news outlet KULR 8 reported that the outage could be tied to a fire at a Wells Fargo server farm in Shoreview, Minn. The Shoreview fire department later clarified on Twitter that the server farm’s fire suppression system was triggered by dust from construction. It is unclear whether or not this is responsible for the entire system outage.
This is the second time in a week the firm experienced a digital disruption. A similar disruption occurred last Friday.
InvestmentNews will update this article as the story progresses.
(Wells Fargo Earnings Supplement) When ZeroHedge reported Wells Fargo’s Q3 earnings back in October, they drew readers’ attention to one specific line of business, the one they have repeatedly dubbed the bank’s “bread and butter“, namely mortgage lending, and which as they then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013.”
Well, unfortunately for Wells, despite the sharp drop in yields in Q4 which many had expected would boost mortgage lending or at least refi activity for the bank that was until recently America’s largest mortgage lender, the decline in mortgage activity has continued, because buried deep in its presentation accompanying otherwise unremarkable Q4 results (modest EPS best; sizable revenue miss), Wells just reported that its ‘bread and butter’ is once again missing, and in Q4 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $18 billion, the lowest level since the financial crisis.
Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was just as bad, dropping a whopping $12BN sequentially from $46 billion to just $38 billion, and effectively tied for the lowest print since the financial crisis. Putting this number in context, just six years ago, when the US housing market was actually solid, Wells was originating 4 times as many mortgages, or about $120 billion.
And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates resume their rise.
Going back to the headline numbers, here is a recap of the key metrics:
There was more bad news for Wells. First, as the chart below shows, Noninterest Income has been a disaster and is only getting worse with virtually every revenue category posting Y/Y declines.
Things were not better on the interest income side where the bank’s Net Interest Margin managed ended its recent streak of increases, and was unchanged at 2.94% resulting in $12.644 billion in Net Interest Income, and missing expectations of an increase to 2.95%. This is what Wells said: “NIM of 2.94% stable LQ as a benefit from higher interest rates and favorable hedge ineffectiveness accounting results were offset by the impacts of all other balance sheet mix and lower variable income.“
While Wells loss provisions declined modestly in Q4, its actual charge-offs jumped from $680MM to $721MM, the highest since Q1.
There was another problem facing Buffett’s favorite bank: while NIM failed to increase, deposits costs are rising fast, and in Q4, the bank was charged an average deposit cost of 0.55% on $914.3MM in interest-bearing deposits, double what its deposit costs were a year ago.
There was a silver lining however: amid concerns over the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion, in Q4 Wells finally succeeded in getting a modest increase in deposits, which rose to $1.286 trillion, if still down 4% Y/Y. This was driven by growth in Wealth & Investment Management deposits driven by higher retail brokerage sweep deposits, “partially reflecting a change in our customers’ risk appetite, as well as higher private
banking deposits.” Offsetting this were declines in small business banking deposits, partially offset by growth in retail banking consumer deposits.
And some more good news: the recent ongoing shrinkage in the company’s balance sheet appears to have finally reversed, because one quarter after average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY, average loans outstanding increased fractionally to $946.3BN, up $6.8BN, or 1% Q/Q. This rebound was entirely due to commercial loans , which were up $7.7 billion LQ on higher commercial & industrial loans. Meanwhile, consumer loans continued to decline, and were down $835 million LQ as growth in nonconforming first mortgage loans and credit card loans was more than offset by declines in legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgage loans due to run-off and sales, as well as lower auto loans.
And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $13.7BN Y/Y across most product groups.
What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage even at a time when rates are once again sliding. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
Wells Fargo is adopting an unusual defense against a shareholder lawsuit: claiming, essentially, that shareholders can’t hold the bank accountable for CEO Tim Sloan’s statements that it was “working to restore trust” and be “more transparent” about its scandals – because it should have been obvious that Sloan was lying.
The defense, which Wells Fargo put forth in a legal filing aimed at getting a shareholder lawsuit dismissed, relies on the legal concept of “puffery,” according to a Los Angeles Times report.
Generally, businesses engage in “puffery” when they make advertising claims that are vague or transparently untrue – a restaurant claiming it has “the world’s best burgers,” for instance. Judges and regulators have ruled that claims like that are so obviously inflated that consumers won’t take them seriously. Such claims aren’t actionable in court, the Times reported.
The thing is, “puffery” usually applies to out sized advertising claims. Wells Fargo is now claiming that the “puffery” defense should be applied to statements CEO Tim Sloan made to investors, and that a lawsuit filed by shareholders should be dismissed on those grounds.
The lawsuit stems from one of the bank’s many scandals – in particular the July 2017 revelation that Wells Fargo had for years been charging auto loan customers for unnecessary insurance. The lawsuit is seeking class certification for all investors who bought the company’s stock after Nov. 3, 2016, through Aug. 3, 2018, the Times reported.
It was on Nov. 3, 2016, that Sloan announced at an investor’s conference that he was “not aware” of any undisclosed scandals. In fact, Wells Fargo already knew that its improper auto insurance charges had pushed as many as 275,000 customers into delinquency and resulted in 25,000 improper repossessions. In fact, top bank executives allegedly knew of the problem as early as 2012, but took no action until 2016, according to the Times. Regulators have already slammed the bank for its inaction; earlier this year, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency fined Wells Fargo $1 billion for the auto-insurance scandal and a rash of improper mortgage fees.
The shareholder lawsuit focuses on efforts by Sloan and other Wells Fargo executives to conceal the auto-loan scandal, the Times reported. Wells Fargo execs were, at the time, already dealing with the bank’s massive fake-accounts scandal. They insisted that Wells Fargo would be “more transparent” about its scandals even while failing to disclose the auto-insurance issue.
During an investor call in January 2017, Sloan said that the bank wanted “to leave no stone un-turned. If we find something that’s important, we’ll communicate that.”
By that time, Sloan had already received an independent report on the auto-insurance scandal, the Times reported. The scandal did not become public, however, until the independent report was leaked to the media in July 2017.
The shareholder lawsuit contends that Wells Fargo lied about its intent to be transparency. Wells Fargo, however, maintains that Sloan’s statements were “puffery.” According to the bank’s legal filing, Sloan’s comments were generic statements “on which no reasonable investor could rely.”
“This is just another example of corporate actors making statements to the market, and then trying to avoid liability for the representations they made,” Darren Robbins, the attorney bringing the shareholder suit, told the Times.
(ZeroHedge) When we reported Wells Fargo’s Q1 earnings back in April, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013.”
Then, a quarter ago a glimmer of hope emerged for the America’s largest traditional mortgage lender (which has since lost the top spot to alternative mortgage originators), as both mortgage applications and the pipeline posted a surprising, if modest, rebound.
However, it was not meant to last, because buried deep in its presentation accompanying otherwise unremarkable Q3 results (modest EPS miss; revenues in line), Wells just reported that its ‘bread and butter’ is once again missing, and in Q3 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $22 billion, the lowest level since the financial crisis.
Yet while the mortgage pipeline has not been worse in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered recently in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).
Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, dropping $4BN sequentially from $50 billion to just $46 billion. And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.
That said, it wasn’t all bad news for Wells, whose Net Interest Margin managed to post a modest increase for the second consecutive quarter, rising to $12.572 billion. This is what Wells said: “NIM of 2.94% was up 1 bp LQ driven by a reduction in the proportion of lower yielding assets, and a modest benefit from hedge ineffectiveness accounting.” On the other hand, if one reads the fine print, one finds that the number was higher by $80 million thanks to “one additional day in the quarter” (and $54 million from hedge ineffectiveness accounting), in other words, Wells’ NIM posted another decline in the quarter.
There was another problem facing Buffett’s favorite bank: while true NIM failed to increase, deposits costs are rising fast, and in Q3, the bank was charged an average deposit cost of 0.47% on $907MM in interest-bearing deposits, nearly double what its deposit costs were a year ago.
Just as concerning was the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion. This was driven by consumer and small business banking deposits of $740.6 billion, down $13.7 billion, or 2%.
But even more concerning was the ongoing shrinkage in the company’s balance sheet, as average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY driven by “driven by lower commercial real estate loans reflecting continued credit discipline” while period-end loans slipped by $9.6BN to $942.3BN, as a result of “declines in auto loans, legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgages, as well as lower commercial real estate loans.” This is a problem as most other banks are growing their loan book, Wells Fargo’s keeps on shrinking.
And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $11.3BN Y/Y across most product groups.
What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
As hopes for a steeper yield curve have lifted bank stocks, Wells Fargo CEO Tim Sloan is apparently trying to bolster Wells’ lagging share price as the numerous scandals that have tarnished the banks credibility and triggered fines, criminal probes and an unprecedented Fed sanction have continued to take their toll.
Per Bloomberg, Sloan is planning to trim its workforce by between 5% and 10% over the next three years with the explicit goal of propping up the company’s shares. While the cuts could provide the bank with necessary cover to purge bad apples from its employee ranks, they have also been broadly expected since the bank reported one of its worst-ever mortgage numbers as the division struggles under the yoke of Fed sanctions and with a housing market that is already beginning to roll over.
Wells Fargo CEO Tim Sloan
In recognition of Wells’ collapse in mortgage lending, Sloan announced last month that the bank would lay off more than 600 employees from its mortgage division after losing the mantle of America’s top mortgage lender to non-bank fintech phenom Quicken Loans. Also, the fact that the housing market is beginning to roll over isn’t helping bolster the bank’s assets.
Sloan, who made the announcement to employees at a town-hall meeting on Thursday, has reduced headcount as he cleans up the bank and streamlines operations. The San Francisco-based lender is struggling to grow under the weight of a Federal Reserve assets cap. It had 265,000 employees as of June 30, according to a regulatory filing.
“It says something about the revenue environment for them,” Charles Peabody, an analyst at Portales Partners, said in an interview. “If they’re not in the midst of recognizing that revenues are in trouble, they’re anticipating it.”
Sloan has already promised $4 billion in cost cutbacks by the end of next year. The cuts announced Thursday have already been incorporated into the bank’s year-end expense targets for 2018, 2019 and 2020, according to the company.
“We are continuing to transform Wells Fargo to deliver what customers want – including innovative, customer-friendly products and services – and evolving our business model to meet those needs in a more streamlined and efficient manner,” Sloan said in a statement.
Wells shares have climbed 23% since Sloan took the reins in October 2016. However, it continues to lag the KBW Ban Index by 53%.
Meanwhile, analysts’ continued pessimism has sparked rumors that the bank’s board is seeking to oust Sloan. Earlier this year, reports circulated that they had approached Gary Cohn about taking over.
Analysts cut their estimates for Wells Fargo earnings again and again after the Fed punished the bank with an unprecedented cap on growing assets. The analysts began this year predicting a record $24 billion annual profit, and now the average estimate is for less than $21 billion, the weakest since 2012. Speculation that the bank wants a new CEO spilled into public this week when the New York Post said the board had approached former Goldman Sachs Group Inc. executive Gary Cohn. Cohn, who earlier this year finished a stint as a White House adviser, denied the report, as did Wells Fargo Chair Betsy Duke, who said Sloan “has the unanimous support of the board, and this support has never wavered.”
But with the bank unable to meaningfully expand its assets thanks to the Fed’s sanctions, Sloan has few alternatives aside from trimming head count and costs if he wants to impress the analysts. Expect more heads to roll in the near future.
Another day, another scandal involving Warren Buffett’s favorite bank.
According to the WSJ, the DOJ is now probing whether employees committed fraud in Wells Fargo’s wholesale banking unit after revelations that employees improperly altered customer information. This follows a prior WSJ report that some employees in the unit added information on customer documents, such as Social Security numbers and dates of birth, without their consent.
Meanwhile, the bank’s own review discovered in recent months that in its wholesale banking group the problems were more widespread than previously thought: problems with altered documents initially centered in the part of the wholesale banking business called the business banking group, which focuses on companies with annual sales of $5 million to $20 million. Wells Fargo has found similar problems in its commercial banking division, which primarily serves middle-market companies, and its corporate trust services group, which helps with the administration of securities issued by companies and governments, one of the people said.
According to the Journal, employees altered the customer documents as Wells Fargo was rushing to meet a deadline to comply with a 2015 consent order from the Office of the Comptroller of the Currency.
The regulator had ordered the bank to beef up its anti-money-laundering controls, including its processes for ensuring that there are proper identification documents and that the bank has the ability to see client activities across a common database.
When the OCC issued the consent order, Wells Fargo had more than 100,000 customer accounts it needed to verify, the Journal previously reported. Wells Fargo in May formally asked the OCC for an extension beyond the initial June 30, 2018, deadline.
As a result, over the past year, the bank has been reaching out to thousands of clients requesting updated documentation on information such as relevant client addresses or dates of birth. Banks must have certain information, known as “know your customer” regulatory requirements, in order to keep banking their clients.
In other words, there was fraud everywhere, and then there was fraud to cover up the fraud..
As the WSJ adds, the Justice Department is trying to learn if there is a pattern of unethical and potentially fraudulent employee behavior tied to management pressure. The employees in the wholesale banking unit, the side of the bank that deals with corporate customers, mishandled the documents last year and earlier this year.
The latest probe adds to the problems at Wells Fargo, whose reputation has been crushed since a sales scandal in its consumer bank imploded two years ago.
It also underscores how bad behavior has emerged throughout the bank and has continued even after the 2016 blow-up over sales practices. The bank’s problems have cascaded since then, with issues related to lofty sales goals and improper customer charges emerging across all of its major business units, prompting a range of other federal and state investigations.
The news of the latest probe sent Wells stock tumbling as investors wonder just how “low can Fargo go.”
(HuffPost) Wells Fargo executives know that everyone hates them. In the last two years, the bank has launched three separate marketing campaigns hoping to clean up its public image, only to see each effort thwarted by fresh, catastrophic scandals ― like wrongly repossessing 27,000 cars and foreclosing on 400 families for no reason.
The bank’s latest quarterly filing with the Securities and Exchange Commission dedicates more than 2,000 words to “Additional Efforts To Rebuild Trust,” listing “automobile lending,” “mortgage interest rate lock extensions,” “consumer deposit account freezing/closing,” “certain activities within wealth and investment management,” “foreign exchange business,” “fiduciary and custody account fee calculations,” “mortgage loan modifications,” and “add-on products” as areas where the company may have been improperly seizing large sums of money that belong to other people. That section is followed by over 4,250 words on major legal liabilities the bank is currently facing.
Wells Fargo is even scamming rich people now, according to recent Yahoo Finance reporting, by intentionally steering high-net-worth clients into unnecessary products with high fees.
To any reasonable person, Wells Fargo is a rolling disaster ― a ripoff, wrapped in a swindle, inside a bank. And yet to a Wall Street investor, Wells Fargo looks like a pretty good bet. The bank has reported a combined $39.1 billion in profit since the final quarter of 2016. The Federal Reserve recently approved a 10 percent increase in the quarterly dividend the bank pays to its shareholders, allowing those profits to be converted into straight cash for its owners.
Wells Fargo’s very existence, not to mention its continued profitability, is an indictment of two decades of embarrassing regulatory oversight from four separate administrations. Ever since the 2008 financial crisis, the top minds in global finance have wondered whether the biggest U.S. banks are strong enough to withstand the next crash. But Wells Fargo reveals a different problem: a chronically dysfunctional, predatory bank that is perfectly profitable. It’s not only “too big to fail,” but too big to fix.
“We tend to think of these big firms as stocks and portfolios, but there are deep systemic cultures that develop over time and are really hard to change,” said University of Georgia law professor Mehrsa Baradaran. “Wells Fargo is one of those firms that has a toxic culture.”
Wells Fargo is a rolling disaster ― a ripoff, wrapped in a swindle, inside a bank. And yet to a Wall Street investor, Wells Fargo looks like a pretty good bet.
If Wells Fargo were liquidated right now, its shareholders would reap about $211 billion, according to the bank’s latest official accounting. But the company’s stock is currently valued at around $281 billion ― indicating that the stock market believes there is something special about Wells Fargo that adds $70 billion in value to all the crap the company actually owns.
The stock market is wrong all the time, but it’s useful to consider why investors think Wells Fargo is so valuable. Since we know the bank is managed very badly ― federal agencies have sanctioned it for misconduct 43 different times in the years following the 2008 financial crisis ― it is hard to conclude that Wall Street’s enthusiasm has much to do with the skill of Wells Fargo’s management.
Instead, the bank’s magic $70 billion is an expression of its political power, derived from its sheer size. Regulators might focus on fixing individual problems when they arise, but the bank, insulated for decades from serious penalties like prosecution or dissolution, has no pressing incentive to head them off.
“Consequences matter,” said Vermont Law School professor Jennifer Taub. “Until law enforcement holds gilded grifters accountable, they will continue to operate companies … unlawfully.”
Most histories of the 2008 financial crisis focus on elements of the mess that were new, complex or strange ― the explosive growth in exotic products like subprime mortgages and credit default swaps, the spread of risk through new channels of “interconnectivity.” But much of the crisis was the result of something much simpler: There were just way, way too many bank mergers at the turn of the millennium. Several of them became the bank we call Wells Fargo today.
Back in 1996, Wells Fargo was a California-only operation with about $50 billion in assets that wanted to grow. It made a bid for the similarly-sized First Interstate Bank and ended up acquiring the firm in a hostile takeover. The result was an almost immediate debacle. As The Wall Street Journal recounted in 1997:
Wells Fargo lost customers’ deposits, bounced good checks, incorrectly withdrew money from some accounts and added funds to others. Angry customer complaints went unanswered at understaffed branches and telephone support centers.
By 1998, Wells Fargo was in so much trouble it was acquired by a Minneapolis-based bank called Norwest, which assumed the California bank’s name. The stagecoach logo was good, and by taking on the faltering bank’s brand, Norwest could claim a legacy going back to 1852 ― a nice marketing asset. The following year, the combined bank went on an acquisition bender before Wells Fargo and Norwest had even finished integrating their systems, picking up 13 smaller firms in Texas, Pennsylvania, Wyoming, New York, Colorado and Minnesota. Suddenly the bank had $212 billion in assets ― four times the size of the California namesake firm that had botched its big merger three years earlier.
Norwest had been managed by hard-charging CEO Dick Kovacevich, who urged his employees to “cross-sell” as many financial products to its customers as possible. In 1997, before the bank had set its sights on Wells, Kovacevich pushed ahead with an initiative he called ”Going for Gr-Eight,” in which every client would end up with at least eight different Norwest products: a bank account, credit card, insurance, mortgage ― whatever, just get to eight, whether this actually meets a customer’s needs or not. When Kovacevich stepped down in 2007, his deputy, John Stumpf, took over and tweaked the line, living by the motto, ”eight is great.” This may help explain why we later found the bank embroiled in a scandal over several million fake accounts.
But in the meantime, the bank kept growing, buying back big blocks of its own stock and paying out huge dividends to its shareholders. In the two years after the Norwest merger, Wells Fargo announced the acquisition of 41 separate companies. By 2003, the list of takeovers included 22 banks, 17 insurance brokerages, 12 consumer finance companies, 10 “specialized” lenders, four securities brokers, three trust companies, three commercial real estate firms and a mass of loan portfolios and servicing contracts. By 2008, Wells Fargo had had $521 billion in total assets ― 10 times its size a dozen years earlier ― and was raking in over $8 billion a year in profits.
None of this would have been possible without some help from the government. Until 1994, it was illegal for banks to expand across state lines, and when the Clinton administration repealed the Glass-Steagall Act in 1999, they were also permitted to merge with insurance companies and investment banks. Advocates of deregulation argued it would help make banks more stable; if one line of business faltered, the bank would have alternate revenue streams to keep it afloat. The idea that one toxic line of business might poison others ― or that dozens of different fiefdoms would prove impossible for management to corral ― did not seem important. Wells Fargo kept expanding.
But it never really got its basic business in order. There were signs that something was going terribly awry beneath the bank’s profitable veneer. In 2005, a securities regulator fined Wells Fargo $3 million for ripping off its mutual fund clients. In 2007, it paid $12.8 million to settle a lawsuit alleging the bank had stiffed its employees for overtime pay. In January 2008, eight months before the failure of Lehman Brothers, the City of Baltimore filed a civil rights lawsuit against Wells Fargo alleging that the bank had been steering borrowers of color into predatory subprime mortgages. A year later, the state of Illinois filed a similar lawsuit.
“At one point Wells Fargo developed this culture of sell the product, customer be damned,” said Baradaran. “And they are not going to change that model because they are making plenty of money despite, maybe even because of, these violations.”
The crash revealed that Wells Fargo had been up to the same nasty business that the rest of the banking industry had been ― selling toxic mortgages and toxic securities, misleading investors and the federal government alike. The bank was still paying out settlements for pre-crash abuse as late as 2016.
Wells Fargo survived the recession with a series of gifts from the federal government ― the Congressional bailout and a lot of help from the Fed. But it also picked up the remains of another massive, faltering bank: Wachovia, in the fall of 2008.
Wachovia was itself another big bank merger horror story. It had acquired Golden West in 2006, a lender that specialized in non-traditional mortgages. Golden West was far from perfect, but it had been careful enough with its customers to survive the savings and loan crisis of the late 1980s and early 1990s. Its signature products, however, were tailor-made for foreclosures if home prices declined. They allowed people to pay low rates early in the life of the loan, with payments ratcheting higher as the years passed. If a borrower couldn’t afford the higher payment and didn’t have the equity to refinance, they were doomed. When Wachovia pumped these loans through its existing bank network, the result was a mortgage meltdown that destroyed the bank.
The Wachovia deal transformed Wells Fargo into a $1.2 trillion behemoth. And through sheer salesmanship willpower, the combined institution expanded by another 50 percent over the next six years. By the time the fake account scandal broke, the company had nearly $1.9 trillion in assets. In 20 years, it had grown by roughly 3,700 percent.
“We tend to think of these big firms as stocks and portfolios, but there are deep systemic cultures that develop over time and are really hard to change. Wells Fargo is one of those firms that has a toxic culture. University of Georgia law professor Mehrsa Baradaran.
The truth is, Wells Fargo has never been able to manage its bulk ― not in 1996, not in 2006, not today. The market is meting out some punishment for its recent misconduct, or Wells Fargo wouldn’t be launching so many advertising campaigns. But much of the company’s consumer business doesn’t actually face consumers ― Wells Fargo just buys up loans and contracts from other firms and processes them, collecting a fee for its service. Plenty of Wells Fargo’s customers don’t really have a say in whether they want to work with the bank or not. Regulatory fines generate headlines ― most notably a $1 billion sanction for that mass automobile repossession screw-up ― but are too small to serve as much more than a cost of doing business.
“Over the past two years, we have made significant progress. We have completed many comprehensive third-party reviews, made fundamental changes to retail sales practices, and received final approval on a class-action settlement concerning retail sales practices,” said Wells Fargo spokeswoman Cynthia Sugiyama.
Among the changes the company says it has enacted are increased pay for entry-level employees, expanded public disclosures and an overhaul for the way it rewards performance of its retail bankers, focusing on “customer experience” rather than numerical sales targets.
Earlier this year, outgoing Fed Chair Janet Yellen took the strongest action against the bank to date, forcing it to replace four of its 12 board members. But no whittling at the edges is going to change Wells Fargo. Though Stumpf was forced out of office in the uproar over the fake accounts, his replacement, Timothy Sloan, is a co-designer of this monster. He made $60.4 million serving in various executive capacities for the bank between 2011 and 2016, according to SEC filings, and certainly doesn’t seem interested in radically overhauling an extraordinarily lucrative business.
Wells Fargo may not even be the worst big bank out there. Citigroup, another merger monstrosity, is so poorly pieced together that today, Wall Street investors don’t even believe the bank is worth its liquidation price. JPMorgan Chase has notched 52 fines and settlements since the crash. Goldman Sachs has 16, three of them this year.
In a revealing interview with New York Magazine earlier this month, former FDIC Chair Sheila Bair said she wished regulators had broken up a bank after the crisis, probably Citigroup. Forcing at least one institution to pay the ultimate corporate price would have put pressure on other major firms to clean up their acts.
Both the Bush and Obama administrations rejected Bair’s plan. And so today, the American banking system ― rescued by taxpayers a decade ago to protect the economy ― has transformed into a very large, very profitable criminal syndicate.
The Justice Department announced that embattled Wells Fargo, which has seen its name feature in virtually every prominent banking scandal in the past year, will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented.
According to the DOJ, investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities (RMBS) containing loans originated by Wells Fargo.
“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Acting U.S. Attorney for the Northern District of California, Alex G. Tse. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”
“This settlement holds Wells Fargo accountable for actions that contributed to the financial crisis,” said Acting Associate Attorney General Jesse Panuccio. “It sends a strong message that the Department is committed to protecting the nation’s economy and financial markets against fraud.”
The United States alleged that, despite its knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information, and instead reported to investors false debt-to-income ratios in connection with the loans it sold.
Wells Fargo also allegedly heralded its fraud controls while failing to disclose the income discrepancies its controls had identified. The United States further alleged that Wells Fargo took steps to insulate itself from the risks of its stated income loans, by screening out many of these loans from its own loan portfolio held for investment and by limiting its liability to third parties for the accuracy of its stated income loans.
Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.
Wells Fargo stock dipped on the news, and is now back to unchanged on the day.
Seattle split with Wells Fargo a year ago in protest over the bank’s investments in the Dakota Access Pipeline and fraud scandals. But the two are together again after the city could find no other bank to take its business.
The city of Seattle will keep banking with Wells Fargo & Co. after it could get no other takers to handle the city’s business.
The City Council in February 2017 voted 9-0 to pull its account from Wells Fargo, saying the city needs a bank that reflects its values.
Council members cited the bank’s investments in the Dakota Access Pipeline, as well as a roiling customer fraud scandal, as their reasons to sever ties with the bank.
Some council members declared their vote as a move to strike a blow against not only Wells Fargo, but “the billionaire class.”
“Take our government back from the billionaires, back from [President] Trump and from the oil companies,” Council member Kshama Sawant said at the time.
The contract was set to expire Dec. 31, but as finance managers for the city searched for arrangements to handle the city’s banking, it got no takers, said Glen Lee, city finance director. That was even after splitting financial services into different contracts to try to attract a variety of bidders, including smaller banks.
In the end, there were none at all.
It became clear this was our best and only course of action,” Lee said of the city’s decision to stick with Wells Fargo after all.
The first sign that it would be hard to make the council’s wish a reality came soon after the vote when Wells Fargo too-hastily informed the city it could sever its ties immediately with no penalty for breaking the contract. The bank even promised to help the city find a new financial partner.
But it quickly became clear how hard that would be as the city reworked its procurement specifications and searched for months.
The bank announced Friday afternoon that it reached a new settlement over its sales practices and will pay $480 million to a group of shareholders who accused the bank of making “certain misstatements and omissions” in the company’s disclosures about its sales practices.
The settlement stems from actions originally taken in 2016 by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the city and county of Los Angeles to fine the bank $150 million for more than 5,000 of the bank’s former employees opening as many as 2 million fake accounts in order to get sales bonuses.
The action led to a class action lawsuit brought on behalf of the bank’s customers who had a fake account opened in their name.
That lawsuit led to a $142 million fake accounts class action settlement that covers all people who claim that Wells Fargo opened a consumer or small business checking or savings account or an unsecured credit card or line of credit without their consent from May 1, 2002 to April 20, 2017.
But that wasn’t the only legal battle that Wells Fargo was facing.
According to the bank, a putative group of the bank’s shareholders also sued the bank in U.S. District Court for the Northern District of California, alleging the bank committed securities fraud by not being wholly honest in its statements about its sales practices.
Despite stating that it denies the claims and allegations in the lawsuit, Wells Fargo is choosing to settle the case and will pay out $480 million, assuming the settlement amount is approved by the court.
According to the bank, it reached the agreement in principle to “avoid the cost and disruption of further litigation.”
This settlement is also separate from the recent $1 billion fine handed down against the bank by the CFPB and the OCC for mortgage lending and auto insurance abuses.
The bank stated that the new settlement amount of $480 million has been fully accrued, as of March 31, 2018.
“We are pleased to reach this agreement in principle and believe that moving to put this case behind us is in the best interest of our team members, customers, investors and other stakeholders,” Wells Fargo CEO Tim Sloan said in a statement. “We are making strong progress in our work to rebuild trust, and this represents another step forward.”
When ZH reported Wells Fargo’s Q4 earnings back in January, they drew readers’ attention to one specific line of business, the one they dubbed the bank’s “bread and butter“, namely mortgage lending, and which as they then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled. Specifically in Q4 Wells’ mortgage applications plunged by $10bn from the prior quarter, or 16% Y/Y, to just $63bn, while the mortgage origination pipeline dropped to just $23 billion”, and just shy of the post-crisis lows recorded in late 2013.
Fast forward one quarter when what was already a grim situation for Warren Buffett’s favorite bank, has gotten as bad as it has been since the financial crisis for America’s largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (modest EPS and revenue beats), Wells just reported that its ‘bread and butter’ is virtually gone, and in Q1 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline failed to rebound, and remained at $24 billion, the lowest level since the financial crisis.
Yet while the mortgage pipeline has not been worse since in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $63BN in Q4 to $58BN in Q1, down 2% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered just two days ago in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).
Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, plunging $10BN sequentially from $53 billion to just $43 billion, the second lowest number since the financial crisis. Since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.
Adding insult to injury, as one would expect with the yield curve flattening to 10 year lows just this week, Wells’ Net Interest margin – the source of its interest income – failed to rebound from one year lows, and missed consensus expectations yet again. This is what Wells said about that: “NIM of 2.84% was a stable LQ as the impact of hedge ineffectiveness accounting and lower loan swap income was offset by the repricing benefit of higher interest rates.” But we’re not sure one would call this trend “stable” as shown visually below:
There was another problem facing Buffett’s favorite bank: while NIM fails to increase, deposits costs are rising fast, and in Q1, the bank was charged an average deposit cost of 0.34% on $938MM in interest-bearing deposits, exactly double what its deposit costs were a year ago.
And finally, there was the chart showing the bank’s consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $9.5BN sequentially across all product groups, far more than the $1.7BN decline last quarter.
What these numbers reveal, is that the average US consumer can not afford to take out mortgages at a time when rates rise by as little as 1% or so from all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
In the latest quarter, the broker-dealer suffered a net loss of 145 brokers
The Federal Reserve on Friday announced it was forcing Wells Fargo to oust board members and limit its growth, responding to a wave of abuses at the San Francisco giant that include opening accounts for customers who didn’t request them.
In the last major move of Chairwoman Janet Yellen’s reign at the central bank, the Fed said it won’t let Wells Fargo WFC, -6.21% add assets beyond the level of the end of 2017 until it improves governance and controls. Wells Fargo ended 2017 with $1.95 trillion in assets.
Wells Fargo will be able to continue current activities including accepting customer deposits or making consumer loans, the Fed said.
“We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again,” Yellen said in a statement. “The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.”
The asset cap is unprecedented, according to Federal Reserve officials.
Federal Reserve officials didn’t say it was specifically planned for Yellen’s last day — and they said the bank agreed to the terms on Friday afternoon.
The Fed cited not only the millions of customer accounts Wells Fargo opened without authorization but also more recent revelations that the bank charged hundreds of thousands of borrowers for unneeded guaranteed auto protection or collateral protection insurance for their automobiles.
Wells Fargo will replace three current board members by April and a fourth board member by the end of the year, the Fed said. Sen. Elizabeth Warren, the Massachusetts Democrat, had requested the Fed oust Wells Fargo board members. The Fed didn’t identify which board members will have to leave.
The Fed also singled out Stephen Sanger, the former lead independent director, and former CEO John Stumpf with letters excoriating them for the abuses.
The vote for the sanctions was 3-0, with the incoming chairman, Jerome Powell, joining Yellen and Gov. Lael Brainard. The new vice chairman for regulation, Randal Quarles, abstained.
Quarles previously said he would recuse himself from Wells Fargo matters because he and his family previously had a financial interest in the bank.
In after-hours trade late Friday, Wells Fargo shares dropped over 5%.
Source: By Steve Goldstein | MarketWatch
We have frequently noted the precarious state of the U.S. mall REITs (see “Myopic Markets & The Looming Mall REITs Massacre” and “Is CMBS The Next “Shoe To Drop”? GGP Sales Suggest Commercial Real Estate Crashing“), but the epic collapse of the Galleria at Pittsburgh Mills paints a uniquely horrific outlook for mall operators. The 1.1 million square foot mall, once valued at $190 million after being opened in 2005, sold at a foreclosure auction this morning for $100 (yes, not million…just $100). According to CBS Pittsburgh, the mall was purchased by its lender, Wells Fargo, which credit bid it’s $143 million loan balance, which was originated in 2006, to acquire the property.
Pittsburgh Mills mall auctioned off for a hundred bucks. Bid by Wells Fargo which is holding 149 Mill. Debt on mall.
— PAUL D. MARTINO (@PMARTKDKA) January 18, 2017
Like many malls around the country, Pittsburgh Mills has suffered the consequences of weak traffic amid tepid demand from the struggling U.S. consumer resulting in massive tenant losses. According to the Pittsburgh Tribune, the mall is only 55% occupied and was last appraised for $11 million back in August.
The value of the mall has been plummeting since it opened in July 2005. Once worth $190 million, it was appraised at $11 million in August.
The mall has lost a number of key tenants over the years, including a Sears Grand store. The mall’s retail space is nearly half empty, with about 55 percent occupied.
Of course, New York Fed President Bill Dudley laid out a very compelling case for retailers yesterday if he can just convince American homeowners to commit the same mistakes they made back in 2006 by repeatedly withdrawing all of the equity in their homes to fund meaningless shopping sprees. So it’s probably safe to keep buying those mall REITs…after all those 3% dividend yields are amazing alternatives to Treasuries and you’re basically taking the same risk…assuming you overlook the billions of property-level debt that ranks senior to your equity position.
While one can argue that both JPM and Bank of America posted results that were ok, with some aspects doing better than expected offset by weakness elsewhere, even if moments ago JPM stock just hit an all time high, there was little to redeem the report from the scandal-ridden largest mortgage lender in America, Wells Fargo. Not only did the company miss revenues significantly, reported $21.6bn in Q4 top line, nearly $1 bn below the $22.4bn consensus, but it had to reach deep into its non-GAAP adjustment bag to convert the $0.96 EPS miss into a $1.03 EPS beat (net of “accounting effect”), but the details of its core business were, well, deplorable, which perhaps was to be expected following the recent drop in new credit card and bank account growth, following last year’s fake account scandal.
Incidentally, Wells Fargo reported its latest customer metrics alongside 4Q earnings, and in December the bank said that the retail public continued to shy away, as new checking accounts plunged 40%Y/Y while new credit card applications tumbled 43%. On the other hand, deposit balances debit card transactions continued growing which probably is not a good sign, if only for the Keynesians in the administration: it means that consumers are saving.
But back to Wells results, which revealed that in Q4, the bank’s ROE, one of Buffett’s favorite indicators, fell to 10.94%. which was the lowest quarterly level posted in years according to the WSJ. “While the return had been grinding lower for some time, largely due to the declining interest-rate environment, the fourth quarter also marked the first, full reporting period since the bank’s sales-tactics scandal erupted in September.”
More troubling however, was that in Q4, Wells overall profit fell to $5.27 billion, or 96 cents a share (excluding the various non-GAAP addbacks, down from $5.58 billion, or EPS of $1 in Q4 2015.
So back to Wells Fargo’s retail banking business. Here the bank reported that while credit cards outstanding rose 5% compared to $33.14 billion last quarter and jumped 8% from $34.04 billion in the year-earlier period, new accounts tumbled 52% to 319,000 from 667,000 last quarter and fell 47% from 597,355 in the year-earlier period, once again this is a reflection of the bank’s ongoing legal scandals.
But it was the bank’s bread and butter, mortgage lending, that was the biggest alarm because as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, and after hitting multi-year highs in the third quarter when mortgage rates were likewise hugging multi-year lows, in Q4 Wells’ mortgage applications plunged by $25bn from the prior quarter to $75bn, while the mortgage origination pipeline plunged by nearly half to just $30 billion, and just shy of all time lows recorded in late 2013 and 2014. Moynihan’s explanation was redundant: “the pipeline is weaker because of fewer refi loans.” This should not come as a surprise: just one month ago, Freddie Mac warned that as mortgage rates continue to surge, “expect mortgage activity to be significantly subdued in 2017.”
Wells Fargo did not even have to wait that long, and as shown in the chart below, the biggest US mortgage lender is already suffering.
Expect even greater declines in the coming quarters should rates continue to rise.
Apparently the biggest banks in the US didn’t learn their lesson the first time around…
Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!
I’m sure you remember how this all blew up back in 2008.
Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.
With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.
Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.
Fast forward eight years and the banks are dusting off the old playbook once again.
Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.
Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.
At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.
I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.
But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.
In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.
The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.
In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.
Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.
[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]
Now, here’s the craziest part: the US government is in on the scam.
The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.
Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.
They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”
Because that’s precisely what happens.
The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.
This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.
You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.
Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.
In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.
Today interest rates are barely above zero, and the Fed is technically insolvent.
Back in 2008 they were at least able to -just barely- prevent an all-out collapse.
This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.
Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.
But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.
So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…
… especially when they’re only paying you 0.1% interest anyhow. What’s the point?
There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.
You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.
(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)
There are even a number of cryptocurrency options.
Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.
In the wake of its recent $1.2 billion settlement with the government, whereby Wells Fargo admitted to deceiving the government into insuring thousands of risky mortgages (yet nobody went to jail), the bank has decided to break with the Federal Housing Administration and offer its own minimal down payment mortgage program.
The new program partners with Fannie Mae in order to allow borrowers with credit scores as low as 620 to make as little as a 3% down payment and use income from family members or renters to qualify. Naturally, the intent is to make more loans to low and middle-income borrowers – in the process pushing up home prices countrywide – without going through the FHA.
As a reminder, the FHA insures mortgages made to buyers who would otherwise have a hard time getting loans, but it has been shunned by banks following a wave of lawsuits by the Justice Department that alleged poor underwriting.
Wells Fargo made $6.3 billion in FHA-backed loans last year, and is a top 20 originator for the FHA according to the WSJ. It’s not just FHA however: as we have shown previously, Wells’ own mortgage origination pipeline has been slowing down in recent years, and as such the corner office of the country’s largest mortgage originator is desperate to find new and innovative ways to boost lending.
After being called out for its deceptive practices, the bank has scaled back on FHA backed mortgage lending in recent years. Wells Fargo accounted for just 2.5% of total FHA mortgages in 2015, down from 13% in 2010, and ultimately coming to this end game where the bank has a path forward without the FHA.
Self-Help Ventures Fund, based out of Durham, NC will now be taking the default risk on these low down payment mortgages originated by Wells Fargo.
Self-Help comprises a state and federally chartered credit union as well as the ventures loan fund, and has a total of $1.6 billion in assets. The “fund” has been partnering with Bank of America on insuring loans from their low down payment loan program since February, and has said it is on track to make between $300 million and $500 million in its BofA mortgage product within the first year.
As the WSJ explains, the new Wells Fargo product could save borrowers money
The new Wells Fargo product might save money for some borrowers who would have otherwise taken out an FHA-backed loan. For example, a borrower who buys a $200,000 home and has a credit score of 715 would pay about $1,040 a month with an FHA loan from Wells Fargo, assuming the borrower includes the FHA program’s upfront costs in the loan amount and makes a 3.5% down payment, the minimum the agency requires. The same borrower under the new program would pay about $994 a month with a 3% down payment.
By taking a housing-education course, the borrower could reduce the mortgage rate by an additional one-eighth of a percentage point, making the payment about $979 a month.
Fannie Mae Vice President of Product Development Jonathan Lawless expects other lenders to develop such programs as well, and that he expects the volume of low down-payment mortgages that Fannie backs to grow.
In summary, Wells Fargo didn’t like being taken to task on its deceptive actions and has decided to continue with risky mortgage origination, but shifting the risk to Self-Help instead of the FHA. This sounds like another New Century style lending blowup in the making, only this time one where there is a far more ambiguous relationship with the sponsor bank, in this case Wells Fargo.
Of course, the fact that the loans will be purchased by Fannie Mae means that the risk is still ultimately on the taxpayer if Self-Help is overwhelmed with defaults as happened during the last bubble, so one can probably say that the problem of taxpayers being once again exposed to risky subprime lending practices has just returned with a vengeance.
Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:
“A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”
Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.
It didn’t stop there and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.
Then, on Friday, U.S. Bancorp disclosed the specific level of reserves it holds against its $3.2 billion energy portfolio for the first time. “The reason we did that is that oil is under $30” said Andrew Cecere, the bank’s chief operating officer. What else will Bancorp disclose if oil drops below $20… or $10?
It wasn’t just the small or regional banks either: as we first reported, on Thursday JPMorgan did something it hasn’t done in 22 quarter: its net loan loss reserve increased as a result of a jump in energy loss reserves. On the earnings call, Jamie Dimon said that while he is not worried about big oil companies, his bank has started to increase provisions against smaller energy firms.
Then yesterday it was the turn of the one bank everyone had been waiting for, the one which according to many has the greatest exposure toward energy: Wells Fargo. To be sure, in order not to spook its investors, among whom most famously one Warren Buffet can be found, for Wells it was mostly “roses”, although even Wells had no choice but to set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013.
What was laughable is that the losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter. Why laughable? Because that $90 million in higher oil-and-gas loan losses was on a total of $17 billion in oil and gas loans, suggesting the bank has seen a roughly 0.5% impairment across its loan book in the past quarter.
How could this be? Needless to say, this struck us as very suspicious because it clearly suggests that something is going on for Wells (and all of its other peer banks), to rep and warrant a pristine balance sheet, at least until a “digital” moment arrives when just like BOK Financial, banks can no longer hide the accruing losses and has to charge them off, leading to a stock price collapse.
Which brings us to the focus of this post: earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.
Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead
— zerohedge (@zerohedge) January 11, 2016
We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by what it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.
This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.
In other words, the Fed has advised banks to cover up major energy-related losses.
Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.
In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”
Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up.
Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we first showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.
However, the big wildcard here is the Fed: what we do not know is whether as part of the Fed’s latest “intervention”, it has also promised to backstop bank loan losses. Keep in mind that according to Wolfe Research and many other prominent investors, as many as one-third of American oil-and-gas producers face bankruptcy and restructuring by mid-2017 unless oil rebounds dramatically from current levels.
However, the reflexive paradox embedded in this problem was laid out yesterday by Goldman who explained that oil could well soar from here but only if massive excess supply is first taken out of the market, aka the “inflection phase.” In other words, for oil prices to surge, there would have to be a default wave across the US shale space, which would mean massive energy loan book losses, which may or may not mean another Fed-funded bailout of US and international banks with exposure to shale.
What does it all mean? Here is the conclusion courtesy of our source:
If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind. My question for bank eps is if you issued terms in 2013 (2012 reserves) at 110/bbl, and redetermined that revolver in 2014 at 86, how can you be still in compliance with that same rating and estimate in 2016 (knowing 2015 ffo and shut ins have led to mechanically 40pc ffo decreases year over year and at least 20pc rebooting of pud and pdnp to 2p via suspended or cancelled programs). At what point in next 12 months does interest payments to that syndicate start to unmask the fact that tranch is never being recovered, which I think is what pva and mhr was all about.
Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn’t the purpose behind Yellen’s rate hike to burst a bubble? Or is the Fed less than “macro prudential” when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?
The Dallas Fed, whose new president Robert Steven Kaplan previously worked at Goldman Sachs for 22 years rising to the rank of vice chairman of investment banking, has not responded to our request for a comment as of this writing. ( source: ZeroHedge )
Over the weekend, we gave the Dallas Fed a chance to respond to a Zero Hedge story corroborated by at least two independent sources, in which we reported that Federal Reserve members had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances.
Moments ago the Dallas Fed, whose president since September 2015 is Robert Steven Kaplan, a former Goldman Sachs career banker who after 22 years at the bank rose to the rank of vice chairman of its investment bank group – an odd background for a regional Fed president – took the time away from its holiday schedule to respond to Zero Hedge.
This is what it said.
— Dallas Fed (@DallasFed) January 18, 2016
We thank the Dallas Fed for their prompt attention to this important matter. After all, as one of our sources commented, “If revolvers are not being marked anymore, then it’s basically early days of subprime when MBS payback schedules started to fall behind.” Surely there is nothing that can grab the public’s attention more than a rerun of the mortgage crisis, especially if confirmed by the highest institution.
As such we understand the Dallas Fed’s desire to avoid a public reaction and preserve semantic neutrality by refuting “such guidance.”
That said, we fully stand by our story, and now that we have engaged the Dallas Fed we would like to ask several very important follow up questions, to probe deeper into a matter that is of significant public interest as well as to clear up any potential confusion as to just what “guidance” the Fed is referring to.
“while we are taking what we believe to be the appropriate reserves for that, I’m just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That’s just not something that we’ve traditionally done in the past.”
Since the Fed is an entity tasked with serving the public, and since it took the opportunity to reply in broad terms to our previous article, we are confident that Mr. Kaplan and his subordinates will promptly address these follow up concerns.
Finally, in light of this official refutation by the Dallas Fed, we are confident that disclosing the Fed’s internal meeting schedules is something the Fed will not object to, and we hereby request that Mr. Kaplan disclose all of his personal meetings with members of the U.S. and international financial system since coming to office, both through this article, and through a FOIA request we are submitting concurrently. (source: ZeroHedge)
Fed Scrambles as Oil ETN Premium Soars to New Highs
Over the weekend, Zero Hedge reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. By suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.
Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.
Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:
Initially, I thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says “safe” like buying an ETN that is 36% above its fair value.
Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.
I thought I had connected the dots on the Oil ETN story. It was just retail ignorance. Then I saw this comment from a Zero Hedge reader:
He had a point. On Friday, stocks were slammed, and the team known as 3:30 Ramp Capital was noticeably absent.
Or were they?
Behold, the missing 3:30 ramp has been found:
With the oil fallout quickly spreading, the Fed is resorting to behind-the-scenes manipulation of energy debt, and now, that apparently includes oil ETNs as well.
Oil swooned again on Wednesday, with the benchmark West Texas Intermediate closing at $60.94. And on Thursday, WTI dropped below $60, currently trading at $59.18. It’s down 43% since June.
Yesterday, OPEC forecast that demand for its oil would further decline to 28.9 million barrels a day next year, after having decided over Thanksgiving to stick to its 30 million barrel a day production ceiling, rather than cutting it. It thus forecast that there would be on OPEC’s side alone 1.1 million barrels a day in excess supply.
Hours later, the US Energy Information Administration reported that oil inventories in the US had risen by 1.5 million barrels in the latest week, while analysts had expected a decline of about 3 million barrels.
So the bloodletting continues: the Energy Select Sector ETF (XLE) is down 26% since June; S&P International Energy Sector ETF (IPW) is down 34% since July; and the Oil & Gas Equipment & Services ETF (XES) is down 46% since July.
Goodrich Petroleum, in its desperation, announced it is exploring strategic options for its Eagle Ford Shale assets in the first half next year. It would also slash capital expenditures to less than $200 million for 2015, from $375 million for 2014. Liquidity for Goodrich is drying up. Its stock is down 88% since June.
They all got hit. And in the junk-bond market, investors are grappling with the real meaning of “junk.”
Sabine Oil & Gas’ $350 million in junk bonds still traded above par in September before going into an epic collapse starting on November 25 that culminated on Wednesday, when they lost nearly a third of their remaining value to land at 49 cents on the dollar.
In early May, when the price of oil could still only rise, Sabine agreed to acquire troubled Forest Oil Corporation, now a penny stock. The deal is expected to close in December. But just before Thanksgiving, when no one in the US was supposed to pay attention, Sabine’s bonds began to collapse as it seeped out that Wells Fargo and Barclays could lose a big chunk of money on a $850-million “bridge loan” they’d issued to Sabine to help fund the merger.
A bridge loan to nowhere: investors interested in buying it have evaporated. The banks are either stuck with this thing, or they’ll have to take a huge loss selling it. Bankers have told the Financial Times that the loan might sell for 60 cents on the dollar. But that was back in November before the bottom fell out entirely.
As so many times in these deals, there is a private equity angle to the story: PE firm First Reserve owns nearly all of Sabine and leveraged it up to the hilt.
The same week, a $220-million bridge loan, put together by UBS and Goldman Sachs for PE firm Apollo Group’s acquisition of oilfield-services provider Express Energy, was supposed to be sold. But investors balked. As of December 2, the loan was still being marketed, “according to two people with knowledge of the deal,” Bloomberg reported. If it can be sold at all, it appears UBS and Goldman will end up with a loss.
And so energy-related leveraged loans are tanking. These ugly sisters of junk bonds are issued by junk-rated corporations, and they have everyone worried [Treasury Warns Congress (and Investors): This Financial Creature Could Sink the System]. Their yields have shot up from 5.1% in August to 7.4% in the latest week, and to nearly 8% for those of offshore drillers [“Yes, it Was a Brutal Week for the Oil & Gas Loan Sector”].
Six years of the Fed’s easy money policies purposefully forced even conservative investors to either lose money to inflation or venture way out on the risk curve. So they ventured out, many of them without knowing it because it happened out of view inside their bond funds. And they funded the fracking boom and the offshore drilling boom, and the entire oil revolution in America, no questions asked.
Energy junk bonds now account for a phenomenal 15.7% of the $1.3 trillion junk-bond market. Alas, last week, JPMorgan warned that up to 40% of them could default over the next few years if oil stays below $65 a barrel. Bond expert Marty Fridson, CIO at LLF Advisors, figured that of the 180 “distressed” bonds in the BofA Merrill Lynch high-yield index, 52 were issued by energy companies. And Bloomberg reported that the yield spread between energy junk bonds and Treasuries has more than doubled since September to 942 basis points (9.42 percentage points).
The toxicity of energy junk bonds is spreading to the broader junk-bond market. The iShares iBoxx High Yield Corporate Bond ETF fell 1.2% to $88.43 on Thursday, the lowest since June 2012. And at the riskiest end of the junk-bond market, it’s getting ugly: the effective yield index for bonds rated CCC or lower jumped from 7.9% in late June to 11.4% on Wednesday.
After not finding any visible yield in the classic spots, thanks to the Fed’s policies, institutional investors – the folks that run your mutual fund or pension fund – took big risks just to get a tiny bit of extra yield. And to grab a yield of 5% in June, they bought energy junk debt so risky that it now has lost a painfully large part of its value, and some of it might default.
Oil and gas are inseparable from Wall Street. Over the years, as companies took advantage of the Fed’s policies and issued this enormous amount of risky debt at a super-low cost, and as they raised money by spinning off subsidiaries into over-priced IPOs that flew off the shelf in one of the most inflated markets in history, and as they spun off other assets into white-hot MLPs, and as banks put now iffy bridge loans together, and as mergers and acquisitions were funded, at each step along the way, Wall Street extracted its fees.
Now the boom is turning into a bust, and the contagion is spreading from the oil patch to Wall Street. Energy companies are cutting back. BP, Chevron, Goodrich…. They’re not cutting back production by turning a valve. They’ll keep the oil and gas flowing to generate cash to stay alive, and it will contribute to the glut.
Instead, they’re cutting back on exploration and drilling projects. It will hit local economies in the oil patch and ripple beyond them. As energy companies slash their capex and their stock buybacks, they’ll borrow less, those that can still borrow at all, and there won’t be many energy IPOs, and there may not be a lot of spinoffs into MLPs or any of the other financial maneuvers that Wall Street got so fat on during the fracking and offshore drilling boom. The fees will dry up. And some of the losses will come home to roost on bank balance sheets.
The contagion is already visible on Wall Street. Susquehanna Financial Group downgraded Goldman Sachs to neutral on Wednesday, citing the mayhem in the oil markets and the impact it has on junk bonds and leveraged loans and the other financial mechanism by which Goldman’s investment and lending divisions sucked fees out of the oil patch and its investors. And this is just the beginning.
Growth in home sales prices continued to slow across the nation in September, marking nine straight months of deceleration, data from S&P/Case-Shiller showed Tuesday.
U.S. single-family home prices gained just 4.8% (on a seasonally-adjusted basis) over prices one year earlier, down from a 5.1% annual increase in August, the S&P/Case-Shiller National Home Price Index shows. The measure covers all nine Census divisions. Significantly, September also marked the first month that the National Index decreased (by 0.1%) on a month-over-month basis since November 2013.
“The overall trend in home price increases continues to slow down,” says David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “The only region showing any sustained strength is the Southeast led by Florida; price gains are also evident in Atlanta and Charlotte.”
Price gains have been steadily slowing since December after a streak of double-digit annual price increases in late 2013 and early 2014. Eighteen of the 20 cities Case-Shiller tracks reported slower annual price gains in September than in August, with Charlotte and Dallas the only cities where annual price gains increased. Miami (10.3%) was the only city to report double-digit annual price gains.
The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.8% annual gain in September 2014. The 10- and 20-City Composites posted year-over-year increases of 4.8% and 4.9%, compared to 5.5% and 5.6% in August.
National Index, year-over-year change in prices (seasonally adjusted):
June 2013: 9.2%
July 2013: 9.7%
August 2013: 10.2%
September 2013: 10.7%
October 2013: 10.9%
November 2013: 10.8%
December 2013: 10.8%
January 2014: 10.5%
February 2014: 10.2%
March 2014: 9.0%
April 2014: 8.0%
May 2014: 7.1%
June 2014: 6.3%
July 2014: 5.6%
August 2014: 5.1%
September 2014: 4.8%
“Other housing statistics paint a mixed to slightly positive picture,” Blitzer said. “Housing starts held above one million at annual rates on gains in single family homes, sales of existing homes are gaining, builders’ sentiment is improving, foreclosures continue to be worked off and mortgage default rates are at precrisis levels. With the economy looking better than a year ago, the housing outlook for 2015 is stable to slightly better.”
Blitzer is referring to a report last week that showed housing starts (groundbreakings on new homes) down 2.8% in October, but still at a stronger pace than one year earlier. What’s more, single-family starts showed a 4.2% increase over the prior month. Also, in October existing (or previously-owned) home sales hit their fastest pace in more than one year. (Both reports are one month ahead of the S&P/Case-Shiller report, the industry standard but unfortunately with a two-month lag time.) Taken together, the data suggest that the rapid price gains seen late last year and in the first part of this year are mostly behind us.
“The days of double-digit home value appreciation continue to rapidly fade away as more inventory comes on line, and the market is becoming more balanced between buyers and sellers,” said Stan Humphries, Zillow’s chief economist. “Like a perfectly prepared Thanksgiving turkey, it’s important for things to cool off a bit in the housing market, because too-fast appreciation risks burning both buyers and sellers. In this more sedate environment, buyers can take more time to find the right deal for them, and sellers can rest assured they won’t be left without a seat at the table when they turn around and become buyers. This slowdown is a critical step on the road back to a normal housing market, and as we approach the end of 2014, the housing market has plenty to be thankful for.”
As of September 2014, average home prices across the U.S. are back to their spring 2005 levels for the National Index (which covers 70% of the U.S. housing market), while both the 10-City and 20-City Composites are back to their autumn 2004 levels. For the city Composite indices, prices are still off their mid-summer 2006 peaks by about 15% to 17%. Prices have bounced back from their March 2012 lows by 28.8% and 29.6% for the 10-City and 20-City composites.
S&P/Case-Shiller is now releasing its National Home Price Index each month. Previously, it was published quarterly, while the 10-City and 20-City Composites were published monthly. The “July” numbers above for the National Index above reflect a roll-up of data for the three-month average of May, June and July prices.
As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: The Federal Reserve.
Federal Reserve chair Janet Yellen recently treated the nation to an astonishing lecture on the solution to rising wealth inequality–according to Yellen, low-income households should save capital and buy assets such as stocks and housing.
It’s difficult to know which is more insulting: her oily sanctimony or her callous disregard for facts. What Yellen and the rest of the Fed Mafia have done is inflate bubbles in credit and assets that have made housing unaffordable to all but the wealthiest households.
Fed policy has been especially destructive to young households: not only is it difficult to save capital when your income is declining in real terms, housing has soared out of reach as the direct consequence of Fed policies.
Two charts reflect this reality. The first is of median household income, the second is the Case-Shiller Index of housing prices for the San Francisco Bay Area.
I have marked the wage chart with the actual price of a modest 900 square foot suburban house in the S.F. Bay Area whose price history mirrors the Case-Shiller Index, with one difference: this house (and many others) are actually worth more now than they were at the top of the national bubble in 2006-7.
But that is a mere quibble. The main point is that housing exploded from 3 times median income to 12 times median income as a direct result of Fed policies. Lowering interest rates doesn’t make assets any more affordable–it pushes them higher.
The only winners in the housing bubble are those who bought in 1998 or earlier. The extraordinary gains reaped since the late 1990s have not been available to younger households. The popping of the housing bubble did lower prices from nosebleed heights, but in most locales price did not return to 1996 levels.
As a multiple of real (inflation-adjusted) income, in many areas housing is more expensive than it was at the top of the 2006 bubble.
While Yellen and the rest of the Fed Mafia have been enormously successful in blowing bubbles that crash with devastating consequences, they failed to move the needle on household income. Median income has actually declined since 2000.
Inflating asset bubbles shovels unearned gains into the pockets of those who own assets prior to the bubble, but it inflates those assets out of reach of those who don’t own assets–for example, people who were too young to buy assets at pre-bubble prices.
Inflating housing out of reach of young households as a matter of Fed policy isn’t simply unjust–it’s cruel. Fed policies designed to goose asset valuations as a theater-of-the-absurd measure of “prosperity” overlooked that it is only the older generations who bought all these assets at pre-bubble prices who have gained.
In the good old days, a 20% down payment was standard. How long will it take a young family to save $130,000 for a $650,000 house? How much of their income will be squandered in interest and property taxes for the privilege of owning a bubblicious-priced house?
If we scrape away the toxic sludge of sanctimony and misrepresentation from Yellen’s absurd lecture, we divine her true message: if you want a house, make sure you’re born to rich parents who bought at pre-bubble prices.
As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: The Federal Reserve.
This new class action against Ocwen addresses the marked-up default services fees that Ocwen is charging homeowners, particularly distressed homeowners, as part of a scheme of self-dealing with companies such as Altisource, and with the involvement of William C. Erbey, Executive Chairman, who has a leadership role on the Board of Ocwen and Altisource:
Weiner v Ocwen Financial Corporation a Florida Corporation COMPLAINT.
Weiner v. Ocwen Fin. Corp. and Ocwen Loan Servicing, LLC, No 2:14-cv-02597 (E.D.Cal.), filed Nov. 5, 2014.
52. Ocwen’s scheme works as follows: Ocwen directs Altisource to order and coordinate default-related services, and, in turn, Altisource places orders for such services with third-party vendors. The third-party vendors charge Altisource for the performance of the default-related services, Altisource then marks up the price of the vendors’ services, in numerous instances by 100% or more, before “charging” the services to Ocwen. In turn, Ocwen bills the marked-up fees to homeowners.
58.Thus, the mortgage contract discloses to homeowners that the servicer will pay for default-related services when reasonably necessary, and will be reimbursed or “paid back” by the homeowner for amounts “disbursed.” Nowhere is it disclosed to borrowers that the servicer may engage in self-dealing to mark up the actual cost of those services to make a profit. Nevertheless, that is exactly what Ocwen does.
[Ed.: Explanation of Modern Relationship Between Loan Servicers and Home Loan Borrowers]
America’s Lending Industry Has Divorced itself from the Borrowers it Once Served
18. Ocwen’s unlawful loan servicing practices exemplify how America’s lending industry has run off the rails.
19. Traditionally, when people wanted to borrow money, they went to a bank or a “savings and loan.” Banks loaned money and homeowners promised to repay the bank, with interest, over a specific period of time. The originating bank kept the loan on its balance sheet, and serviced the loan — processing payments, and sending out applicable notices and other information — until the loan was repaid. The originating bank had a financial interest in ensuring that the borrower was able to repay the loan.
20. Today, however, the process has changed. Mortgages are now packaged, bundled, and sold to investors on Wall Street through what is referred to in the financial industry as mortgage backed securities or MBS. This process is called securitization. Securitization of mortgage loans provides financial institutions with the benefit of immediately being able to recover the amounts loaned. It also effectively eliminates the financial institution’s risk from potential default. But, by eliminating the risk of default, mortgage backed securities have disassociated the lending community from homeowners.
21. Numerous unexpected consequences have resulted from the divide between lenders and homeowners. Among other things, securitization has led to the development of an industry of companies which make money primarily through servicing mortgages for the hedge funds and investment houses who own the loans.
22. Loan servicers do not profit directly from interest payments made by homeowners. Instead, these companies are paid a set fee for their loan administration services. Servicing fees are usually earned as a percentage of the unpaid principal balance of the mortgages that are being serviced. A typical servicing fee is approximately 0.50% per year.
23. Additionally, under pooling and servicing agreements (“PSAs”) with investors and note holders, loan servicers assess fees on borrowers’ accounts for default-related services. These fees include, inter alia, Broker’s Price Opinion (“BPO”) fees, appraisal fees, and title examination fees.
24. Under this arrangement, a loan servicer’s primary concern is not ensuring that homeowners stay current on their loans. Instead, they are focused on minimizing any costs that would reduce profit from the set servicing fee, and generating as much revenue as possible from fees assessed against the mortgage accounts they service. As such, their “business model . . . encourages them to cut costs wherever possible, even if [that] involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.”3
25. As one Member of the Board of Governors of the Federal Reserve System has explained:
While an investor’s financial interests are tied more or less directly to the performance of a loan, the interests of a third-party servicer are tied to it only indirectly, at best. The servicer makes money, to oversimplify it a bit, by maximizing fees earned and minimizing expenses while performing the actions spelled out in its contract with the investor. . . . The broad grant of delegated authority that servicers enjoy under pooling and servicing agreements (PSAs), combined with an effective lack of choice on the part of consumers, creates an environment ripe for abuse.4 (citing See Sarah Bloom Raskin, Member Board of Governors of the Federal Reserve System, Remarks at the National Consumer Law Center’s Consumer Rights Litigation Conference, Boston Massachusetts, Nov. 12, 2010, available at http://www.federalreserve.gov/newsevents/speech/raskin20101112a.htm (last visited Jan. 23, 2012).
The recent pull back in crude oil prices is often portrayed as being a consequence of the rapid growth of North American shale oil production.
The thesis is often further extrapolated to suggest that a major slowdown in North American unconventional oil production growth, induced by the oil price decline, will be the corrective mechanism that will bring oil supply and demand back in equilibrium (given that OPEC’s cost to produce is low).
Both views would be, in my opinion, overly simplistic interpretations of the global supply/demand dynamics and are not supported by historical statistical data.
The current oil price correction is, arguably, the most pronounced since the global financial crisis of 2008-2009. The following chart illustrates very vividly that the price of the OPEC Basket (which represents waterborne grades of oil) has moved far outside the “stability band” that seems to have worked well for both consumers and producers over the past four years. (It is important, in my opinion, to measure historical prices in “today’s dollars.”)
Given the sheer magnitude of the recent oil price move, the economic signal to the world’s largest oil suppliers is, arguably, quite powerful already. A case can be made that it goes beyond what could be interpreted as “ordinary volatility,” giving the hope that the current price level may be sufficient to induce some supply response from the largest producers – in the event a supply cut back is indeed needed to eliminate a transitory supply/demand imbalance.
It is debatable, in my opinion, if the continued growth of the U.S. onshore oil production can be identified as the primary cause of the current correction in the oil price. Most likely, North American shale oil is just one of several powerful factors, on both supply and demand sides, that came together to cause the price decline.
The history of oil production increases from North America in the past three years shows that the OPEC Basket price remained within the fairly tight band, as highlighted on the graph above, during 2012-2013, the period when such increases were the largest. Global oil prices “broke down” in September of 2014, when North American oil production was growing at a lower rate than in 2012-2013.
If the supply growth from North America was indeed the primary “disruptive” factor causing the imbalance, one would expect the impact on oil prices to become visible at the time when incremental volumes from North America were the highest, i.e., in 2012-2013.
There is no question that the sharp pullback in the price of oil will impact operating margins and cash flows of North American shale oil producers. However, a major slowdown in North American unconventional oil production growth is a lot less obvious.
First, the oil price correction being seen by North American shale oil producers is less pronounced than the oil price correction experienced by OPEC exporters. It is sufficient to look at the WTI historical price graph below (which is also presented in “today’s dollars”) to realize that the current WTI price decline is not dissimilar to those seen in 2012 and 2013 and therefore represents a signal of lesser magnitude than the one sent to international exporters (the OPEC Basket price).
Furthermore, among all the sources of global oil supply, North American oil shales are the least established category. Their cost structure is evolving rapidly. Given the strong productivity gains in North American shale oil plays, what was a below-breakeven price just two-three years ago, may have become a price stimulating growth going into 2015.
Therefore, the signal sent by the recent oil price decline may not be punitive enough for North American shale oil producers and may not be able to starve the industry of external capital.
Most importantly, review of historical operating statistics provides an indication that the previous similar WTI price corrections – seen in 2012 and 2013 – did not result in meaningful slowdowns in the North American shale oil production.
The following graph shows the trajectory of oil production in the Bakken play. From this graph, it is difficult to discern any significant impact from the 2012 and 2013 WTI price corrections on the play’s aggregate production volumes. While a positive correlation between these two price corrections and the pace of production growth in the Bakken exists, there are other factors – such as takeaway capacity availability and local differentials – that appear to have played a greater role. I should also note that the impact of the lower oil prices on production volumes was not visible in the production growth rate for more than half a year after the onset of the correction.
Production growth track record by several leading shale oil players suggests that U.S. shale oil production will likely remain strong even in the $80 per barrel WTI price environment. Several examples provide an illustration.
Continental Resources (NYSE:CLR) grew its Bakken production volumes at a 58% CAGR over the past three years (slide below). By looking at the company’s historical production, it would be difficult to identify any impact from the 2012 and 2013 oil price corrections on the company’s production growth rate. Continental just announced a reduction to its capital budget in 2015 in response to lower oil prices, to $4.6 billion from $5.2 billion planned initially. The company still expects to grow its total production in 2015 by 23%-29% year-on-year.
EOG Resources (NYSE:EOG) expects that its largest core plays (Eagle Ford, Bakken and Delaware Basin) will generate after-tax rates of return in excess of 100% in 2015 at $80 per barrel wellhead price. EOG went further to suggest that these plays may remain economically viable (10% well-level returns) at oil prices as low as $40 per barrel. The company expects to continue to grow its oil production at a double-digit rate in 2015 while spending within its cash flow. EOG achieved ~40% oil production growth in 2012-2013 and expects 31% growth for 2014. While a slowdown is visible, it is important to take into consideration that EOG’s oil production base has increased dramatically in the past three years and requires significant capital just to be maintained flat. Again, one would not notice much impact from prior years’ oil price corrections on EOG’s production growth trajectory.
Anadarko Petroleum’s (NYSE:APC) U.S. onshore oil production growth story is similar. Anadarko increased its U.S. crude oil and NLS production from 100,000 barrels per day in 2010 to close to almost 300,000 barrels per day expected in Q4 2014. Anadarko has not yet provided growth guidance for 2015, but indicated that the company’s exploration and development strategies remain intact. While recognizing a very steep decline in the oil price, Anadarko stated that it wants “to watch this environment a little longer” before reaching conclusions with regard to the impact on its future spending plans.
Devon Energy (NYSE:DVN) posted company-wide oil production of 216,000 barrels per day in Q3 2014. While Devon will provide detailed production and capital guidance at a later date, the company has indicated that it sees 20% to 25% oil production growth and mid‐single digit top‐line growth “on a retained‐property basis” (pro forma for divestitures) in 2015.
The list can continue on.
Based on preliminary 2015 growth indications from large shale oil operators, North American oil production growth in 2015 will likely remain strong, barring further strong decline in the price of oil.
No slowdown effect from lower oil prices will be seen for at least six months from the time operators received the “price signal” (August-September 2014).
Given the effects of the technical learning curve in oil shales and continuously improving drilling economics, the current ~$77 per barrel WTI price is unlikely to be sufficient to eliminate North American unconventional production growth.
North American shale oil production remains a very small and highly fragmented component of the global oil supply.
The global oil “central bank” (Saudi Arabia and its close allies in OPEC) remain best positioned to quickly re-instate stability of oil price in the event further significant decline occurred.
Single-family home construction is expected to increase 26 percent in 2015, the National Association of Home Builders reported Oct. 31. NAHB expects single-family production to total 802,000 units next year and reach 1.1 million by 2016.
Economists participating in the NAHB’s 2014 Fall Construction Forecast Webinar said that a growing economy, increased household formation, low interest rates and pent-up demand should help drive the market next year. They also said they expect continued growth in multifamily starts given the nation’s rental demand.
The NAHB called the 2000-03 period a benchmark for normal housing activity; during those years, single-family production averaged 1.3 million units a year. The organization said it expects single-family starts to be at 90 percent of normal by the fourth quarter 2016.
NAHB Chief Economist David Crowe said multifamily starts currently are at normal production levels and are projected to increase 15 percent to 365,000 by the end of the year and hold steady into next year.
The NAHB Remodeling Market Index also showed increased activity, although it’s expected to be down 3.4 percent compared to last year because of sluggish activity in the first quarter 2014. Remodeling activity will continue to increase gradually in 2015 and 2016.
Moody’s Analytics Chief Economist Mark Zandi told the NAHB that he expects an undersupply of housing given increasing job growth. Currently, the nation’s supply stands at just over 1 million units annually, well below what’s considered normal; in a normal year, there should be demand for 1.7 million units.
Zandi noted that increasing housing stock by 700,000 units should help meet demand and create 2.1 million jobs. He also noted that things should level off by the end of 2017, when mortgage rates probably will rise to around 6 percent.
“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” Zandi told the NAHB.
Robert Denk, NAHB assistant vice president for forecasting and analysis, said that he expects housing recovery to vary by state and region, noting that states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets
States with the healthiest job growth include Louisiana, Montana, North Dakota, Texas and Wyoming, as well as farm belt states like Iowa.
Meanwhile Alabama, Arizona, Nevada, New Jersey, New Mexico and Rhode Island continue to have weaker markets.
Despite an improving job market and low interest rates, the share of first-time homebuyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential, according to an annual survey released by the National Association of Realtors (NAR). The survey additionally found that an overwhelming majority of buyers search for homes online and then purchase their home through a real estate agent.
The 2014 NAR Profile of Home Buyers and Sellers continues a long-running series of large national NAR surveys evaluating the demographics, preferences, motivations, plans and experiences of recent home buyers and sellers; the series dates back to 1981. Results are representative of owner-occupants and do not include investors or vacation homes.
The long-term average in this survey, dating back to 1981, shows that four out of 10 purchases are from first-time home buyers. In this year’s survey, the share of first-time home buyers dropped five percentage points from a year ago to 33 percent, representing the lowest share since 1987 (30 percent).
“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said Lawrence Yun, NAR chief economist. “Adding more bumps in the road, is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
Yun added, “Stronger job growth should eventually support higher wages, but nearly half (47 percent) of first-time buyers in this year’s survey (43 percent in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected. Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”
The household composition of buyers responding to the survey was mostly unchanged from a year ago. Sixty-five percent of buyers were married couples, 16 percent single women, nine percent single men and eight percent unmarried couples.
In 2009, 60 percent of buyers were married, 21 percent were single women, 10 percent single men and 8 percent unmarried couples. Thirteen percent of survey respondents were multi-generational households, including adult children, parents and/or grandparents.
The median age of first-time buyers was 31, unchanged from the last two years, and the median income was $68,300 ($67,400 in 2013). The typical first-time buyer purchased a 1,570 square-foot home costing $169,000, while the typical repeat buyer was 53 years old and earned $95,000. Repeat buyers purchased a median 2,030-square foot home costing $240,000.
When asked about the primary reason for purchasing, 53 percent of first-time buyers cited a desire to own a home of their own. For repeat buyers, 12 percent had a job-related move, 11 percent wanted a home in a better area, and another 10 percent said they wanted a larger home. Responses for other reasons were in the single digits.
According to the survey, 79 percent of recent buyers said their home is a good investment, and 40 percent believe it’s better than stocks.
Financing the purchase
Nearly nine out of 10 buyers (88 percent) financed their purchase. Younger buyers were more likely to finance (97 percent) compared to buyers aged 65 years and older (64 percent). The median down payment ranged from six percent for first-time buyers to 13 percent for repeat buyers. Among 23 percent of first-time buyers who said saving for a down payment was difficult, more than half (57 percent) said student loans delayed saving, up from 54 percent a year ago.
In addition to tapping into their own savings (81 percent), first-time homebuyers used a variety of outside resources for their loan downpayment. Twenty-six percent received a gift from a friend or relative—most likely their parents—and six percent received a loan from a relative or friend. Ten percent of buyers sold stocks or bonds and tapped into a 401(k) fund.
Ninety-three percent of entry-level buyers chose a fixed-rate mortgage, with 35 percent financing their purchase with a low-down payment Federal Housing Administration-backed mortgage (39 percent in 2013), and nine percent using the Veterans Affairs loan program with no downpayment requirements.
“FHA premiums are too high in relation to default rates and have likely dissuaded some prospective first-time buyers from entering the market,” said Yun. “To put it in perspective, 56 percent of first-time buyers used a FHA loan in 2010. The current high mortgage insurance added to their monthly payment is likely causing some young adults to forgo taking out a loan.”
Buyers used a wide variety of resources in searching for a home, with the Internet (92 percent) and real estate agents (87 percent) leading the way. Other noteworthy results included mobile or tablet applications (50 percent), mobile or tablet search engines (48 percent), yard signs (48 percent) and open houses (44 percent).
According to NAR President Steve Brown, co-owner of Irongate, Inc., Realtors® in Dayton, Ohio, although more buyers used the Internet as the first step of their search than any other option (43 percent), the Internet hasn’t replaced the real estate agent’s role in a transaction.
“Ninety percent of home buyers who searched for homes online ended up purchasing their home through an agent,” Brown said. “In fact, buyers who used the Internet were more likely to purchase their home through an agent than those who didn’t (67 percent). Realtors are not only the source of online real estate data, they also use their unparalleled local market knowledge and resources to close the deal for buyers and sellers.”
When buyers were asked where they first learned about the home they purchased, 43 percent said the Internet (unchanged from last year, but up from 36 percent in 2009); 33 percent from a real estate agent; 9 percent a yard sign or open house; six percent from a friend, neighbor or relative; five percent from home builders; three percent directly from the seller; and one percent a print or newspaper ad.
Likely highlighting the low inventory levels seen earlier in 2014, buyers visited 10 homes and typically found the one they eventually purchased two weeks quicker than last year (10 weeks compared to 12 in 2013). Overall, 89 percent were satisfied with the buying process.
First-time home buyers plan to stay in their home for 10 years and repeat buyers plan to hold their property for 15 years; sellers in this year’s survey had been in their previous home for a median of 10 years.
The biggest factors influencing neighborhood choice were quality of the neighborhood (69 percent), convenience to jobs (52 percent), overall affordability of homes (47 percent), and convenience to family and friends (43 percent). Other factors with relatively high responses included convenience to shopping (31 percent), quality of the school district (30 percent), neighborhood design (28 percent) and convenience to entertainment or leisure activities (25 percent).
This year’s survey also highlighted the significant role transportation costs and “green” features have in the purchase decision process. Seventy percent of buyers said transportation costs were important, while 86 percent said heating and cooling costs were important. Over two-thirds said energy efficient appliances and lighting were important (68 and 66 percent, respectively).
Seventy-nine percent of respondents purchased a detached single-family home, eight percent a townhouse or row house, 8 percent a condo and six percent some other kind of housing. First-time home buyers were slightly more likely (10 percent) to purchase a townhouse or a condo than repeat buyers (seven percent). The typical home had three bedrooms and two bathrooms.
The majority of buyers surveyed purchased in a suburb or subdivision (50 percent). The remaining bought in a small town (20 percent), urban area (16 percent), rural area (11 percent) or resort/recreation area (three percent). Buyers’ median distance from their previous residence was 12 miles.
Characteristics of sellers
The typical seller over the past year was 54 years old (53 in 2013; 46 in 2009), was married (74 percent), had a household income of $96,700, and was in their home for 10 years before selling—a new high for tenure in home. Seventeen percent of sellers wanted to sell earlier but were stalled because their home had been worth less than their mortgage (13 percent in 2013).
“Faster price appreciation this past year finally allowed more previously stuck homeowners with little or no equity the ability to sell after waiting the last few years,” Yun said.
Sellers realized a median equity gain of $30,100 ($25,000 in 2013)—a 17 percent increase (13 percent last year) over the original purchase price. Sellers who owned a home for one year to five years typically reported higher gains than those who owned a home for six to 10 years, underlining the price swings since the recession.
The median time on the market for recently sold homes dropped to four weeks in this year’s report compared to five weeks last year, indicating tight inventory in many local markets. Sellers moved a median distance of 20 miles and approximately 71 percent moved to a larger or comparably sized home.
A combined 60 percent of responding sellers found a real estate agent through a referral by a friend, neighbor or relative, or used their agent from a previous transaction. Eighty-three percent are likely to use the agent again or recommend to others.
For the past three years, 88 percent of sellers have sold with the assistance of an agent and only nine percent of sales have been for-sale-by-owner, or FSBO sales.
For-sale-by-owner transactions accounted for 9 percent of sales, unchanged from a year ago and matching the record lows set in 2010 and 2012; the record high was 20 percent in 1987. The share of homes sold without professional representation has trended lower since reaching a cyclical peak of 18 percent in 1997.
Factoring out private sales between parties who knew each other in advance, the actual number of homes sold on the open market without professional assistance was 5 percent. The most difficult tasks reported by FSBOs are getting the right price, selling within the length of time planned, preparing or fixing up the home for sale, and understanding and completing paperwork.
NAR mailed a 127-question survey in July 2014 using a random sample weighted to be representative of sales on a geographic basis. A total of 6,572 responses were received from primary residence buyers. After accounting for undeliverable questionnaires, the survey had an adjusted response rate of 9.4 percent. The recent home buyers had to have purchased a home between July of 2013 and June of 2014. Because of rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent. All information is characteristic of the 12-month period ending in June 2014 with the exception of income data, which are for 2013.
American Realty Capital Properties (NASDAQ:ARCP) just cannot catch a break. Reuters reported that the Federal Bureau of Investigation has opened a criminal investigation into ARCP, according to their sources. The FBI is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, according to the Reuters report.
This news comes just days after the company announced a series of accounting errors which had been intentionally not corrected and thus concealed from the public. The amount of money involved, roughly $9.24 million GAAP and $13.60 million AFFO, was relatively small. However, these accounting errors resulted in the resignation of two senior executives, chief financial officer, Brian Block, and chief accounting officer, Lisa McAlister.
Shares of ARCP were trading for as low as $7.85 each on Wednesday, before recovering to $10 per share after CEO David Kay held fairly well received conference call explaining what happened. In the call, Mr. Kay stressed that ARCP’s key metrics were sound. He reaffirmed that the dividend policy will not change, noting that the operating metrics were not impacted and that the NAV is unchanged at $13.25. Nevertheless, the stock continued to fall, closing the week at below $9 per share. In total, ARCP’s stock has fallen 30% since news of the accounting errors first arose, wiping out $4 billion in market value.
This is quite the shocking development. Not only is the FBI looking into ARCP, but also the Securities and Exchange Commission, which announced its own investigation of the accounting errors late last week. Furthermore, the company was placed on CreditWatch with negative implications by S&P, which risks putting the credit rating into junk territory.
As I noted in my earlier article, accounting issues equal an automatic sell in my book. I sold most of my ARCP holdings on Wednesday, though I still kept some shares, opting instead to sell calls on the remaining position. I now lament that choice as I fear the stock can fall further. An FBI criminal probe is no small matter and represents a clear material risk. What an absolute disaster.
Investors in American Realty Capital Properties (NASDAQ:ARCP) need to demonstrate that they have nerves of steel at the moment. After the company reported that it overstated its AFFO last week, and that its Chief Financial Officer and Chief Accounting Officer departed as a result of the accounting scandal, more bad news are seeing the light of day.
First of all, as various news outlets reported, the Federal Bureau of Investigation is putting up some additional heat on ARCP. As Reuters reported:
(Reuters) – U.S. authorities have opened a criminal probe of American Realty Capital Properties in the wake of the real estate investment trust’s disclosure that it had uncovered accounting errors, two sources familiar with the matter said on Friday.
The Federal Bureau of Investigation is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, the sources said. Further details of the probe could not be learned.
The involvement of the New York U.S. Attorney’s office is particularly bad news as Preet Bharara takes a tough stance with companies that break the law or push its limits too far. While the criminal probe certainly is bad news and comes in addition to the involvement of the SEC, something else caused massive irritation among ARCP shareholders today: The Cole Capital deal with RCS Capital Corporation (NYSE: RCAP) is in real danger.
According to ARCP’s latest (and angry) press release:
In the middle of the night, we received a letter from RCS Capital Corporation purporting to terminate the equity purchase agreement, dated September 30, 2014, between RCS and an affiliate of ARCP. As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement. In addition, we believe that RCS’s unilateral public announcement is a violation of its agreement with ARCP. The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital® business, generally. ARCP management and the independent members of the ARCP Board of Directors are committed to doing what is in the best interests of ARCP stockholders and its business, including Cole Capital.
That’s right. Since the FBI now has its fingers in the pie, and the SEC, management at RCS Capital has informed ARCP that it is terminating the deal. Whatever side you are one, you’ve got to admit: American Realty Capital Properties is just falling apart.
The once mighty real estate investment trust has lost a staggering 36% of its market capitalization since shares closed at $12.38 on October 28, 2014, which is a tough pill to swallow for those investors who pledged allegiance to American Realty Capital Properties, despite the turbulence that erupted a week ago.
Shares of American Realty Capital Properties are trading extremely weakly today in light of the new information, and I continue to see further downside potential for this REIT in the near term.
It seems as if all the forces of the universe are conspiring to bring American Realty Capital Properties down to its knees, and an investment in this REIT is not recommendable at the moment.
The American Realty Capital Properties’ story has gotten significantly worse today: In addition to two of the most important executives abruptly leaving the company amid an accounting scandal, the SEC and the FBI are investigating the company, lawyers are very likely going to hit ARCP with litigation, and the latest transaction is in the process of collapsing.
Bulls must either have nerves of steel or clinging to hope. In any case, ARCP’s prospects have gotten much worse today, and I continue to expect further downside potential driven by litigation concerns, potential fines and extremely negative investor sentiment.
by Adam Aloisi
This is one of the tougher articles I’ve written for Seeking Alpha. Asset allocation and portfolio strategy for income investors has been my focal point of writing over the past three years. I’ve always been of the opinion that talking about how to fish trumps simply giving someone fish to chew on.
Still, I mention equity-income stocks all the time in articles, but it’s rare that I write focus articles. On October third, I wrote, “American Realty Capital Properties: 30% Total Return Next Year“. Less than a month later, I find that post in an inverse position, with American Realty Capital (NASDAQ:ARCP) having dropped around 30% in market value.
First, I will tell readers that I sold a bit more than half of my position as a result of ARCP’s restatement, and still retain shares. However, it is now one of my smallest income portfolio positions and one that I have lost a majority of my conviction in. ARCP, in my mind, has transitioned from being a higher-risk investment into now becoming day-trader fodder, and at least for the near term, highly speculative. I would have been all over this thing during my trading days, but having become more conservative today with less portfolio churn, it has little room in my portfolio.
I considered all options here. I thought about increasing my position, extinguishing it altogether, selling put options at attractive premiums, or potentially doing nothing. Being so supportive of this story over the past year, I was mostly disappointed that I had to put any thought into the matter at all. For a variety of reasons, I came to the conclusion that halving the position — taking a loss, which I needed to do anyway for taxes — was a prudent near-term choice. I will revisit the decision in a month, and could conceivably buy back those shares once wash sale rules have passed.
Though selling during a period of fear and volatility is not typically in my playbook, following this restatement, I have lost confidence in this story. If you follow me, you know that I certainly identified the elevated risk that ARCP brought to real estate investors. Over the past six months, here are some comments that I made in regard to ARCP in several articles:
If you invest in ARCP today, you should expect the unexpected.
Given all the deals and potential for a misstep, there is heightened risk in owning ARCP.
But with the baggage it continues to drag along with it…..it may not necessarily be appropriate for more conservative investors
I do not consider the stock a table pounding buy.
I even compared Nick Schorsch to Monty Hall from “Let’s Make A Deal,” following the Red Lobster purchase and flip-flop on the strip mall IPO-then-sale.
As the year wore on, however, my convictions rose, since the company did not materially change its guidance to investors, despite all the acquisition activity. I figured if there were a stumble, it would have been disclosed earlier this year as the various acquisitions had time to be absorbed into operations.
While there was much criticism over the Cole quasi-divestiture to RCS and lowered guidance, I remained resolute, thinking there wasn’t another buyer, and this at least got Cole out from under the ARCP umbrella.
Of course as we now know, some financial disclosures were not to be relied upon and guidance should have been changed. If there were not so much other controversy with regard to this company, I doubt the stock would have tanked as much as it has. When you have a managerial crisis of confidence already in place and make a restatement announcement, you create panic. If we take this on face value, it does not appear to be a huge restatement, but taken in totality, this is a monumental, perhaps insurmountable, credibility problem. It’s now all aboard for the ambulance-chasing lawyers.
At this point I have decided that it is in my best interest to rip the towel in half and throw it in. I see it as a hedge against further deterioration in this story that I would not necessarily rule out given the loose management style that I and every ARCP investor knew existed.
We’re not talking about some low level accounting bean counter or paper pusher that seems to have perpetrated this; we’re talking about CFO Brian Block, assumedly someone that David Kay and Nick Schorsch had drinks with regularly. So when Kay defended the culture at ARCP on the conference call by uttering, “We don’t have bad people, we had some bad judgment there,” forgive me if I now wonder if he really has a clue how good, sweet, and honest his executives and rank-and-file workers really are. Although the restatements appear isolated to this year’s AFFO, we’ll have to see if anything turns up in 2013. While I’d like to give this company the benefit of the doubt once again, I’m finding myself staring at a slippery slope of hope that another shoe will not drop.
Still, I did not jettison the entire position because these are emotional times, and the glass-is-half-full part of me says the market is overreacting. We are, keep in mind, still talking about a high-quality portfolio of real estate, not a biotech company whose sole drug was deemed inefficacious by the FDA. In the end, however, I had to make a decision for my own portfolio that I deemed appropriate. This was it.
Meanwhile, I would not criticize nor blame someone for selling out here and moving on to more stable pastures. Fellow REIT writer Brad Thomas apparently has. On the flip side, I could see the more adventurous or those with continued conviction buying in now or upping exposure. The “right” thing to do for many investors may be to simply hold through the volatility. As I opined in a past article on ARCP:
But with the considerable sentiment overhang and “show me” attitude of the market, it could take some time and a strong stomach to see it through.
The sentiment “overhang” has basically become something much worse. And at this point I wouldn’t even want to predict how much time it could take for a rebound. Your stomach constitution will need to be stronger than I first suspected.
I’ve had more than one reader tell me that the various risks I identified made them conclude that ARCP was not a stock they should own. And given what has happened here, at least for the near-term, that was obviously a prudent decision. We must all come to personal conclusions as to how much risk we are willing to take to attain income and capital growth goals.
For investors of all types, the most important thing to take away from this near-term “disaster” is that diversification and limiting position size is critical. If ARCP amounted to a couple of percent, or less, of a portfolio, the stock’s tank may not be all that impacting. If it was a more concentrated portion of the overall pie, it becomes a more painful near-term event and makes various portfolio maneuver decisions more challenging to come to.
In the end, portfolio management is a personal endeavor that amounts to an inexact science. Whether you think what I’ve done with my ARCP position is right or not is not really all important. The more important thing is whether you are comfortable with the personal portfolio decisions you make or not, why you make them, and whether they are right for your situation.
I’ve used the word “I” more than I normally would in an article. This one was indeed about me and owning up to putting wholesale trust in a management team that apparently I shouldn’t have. And it was a about a decision I really didn’t want to make as a result. Unfortunately, we have to take the bad with the good in the investment world, brush ourselves off, move on, and continue to make personal decisions that are right for our portfolios.