Friday, September 18, 2009

3 Oligarchs Now Dominate Mortgage Market; All Backstopped By You

This entry goes hand in hand with the previous as a nice combo.

A concise but good discussion on the state of the mortgage market; all subsidized by the Federal Reserve / Government aka you. Three Oligarchs get the cheese, and you sir/madam shall get the eventual trap. Hug your local JPMorgan (JPM), Wells Fargo (WFC), or Bank of America (BAC) oligarch; they are a kindly lords and as serfs we should be grateful they allow us the land.

I believe we call this corporate socialism... err, free market capitalism. Too "bigger to fail" setting us up for a new decade of bubble and bust cycles. As you note the dogma of "thousands of banks competing in the US marketplace", I will continue to post in each of these entries the dominance in assets held by our largest oligarchs - the big 4. Made even more dominant after this financial disaster the past few years.

  1. Bank of America (BAC) $2.3 Trillion
  2. JPMorgan (JPM) $2.0 Trillion
  3. Citigroup (C) $1.8 Trillion
  4. Wells Fargo (WFC) $1.3 Trillion
To put in perspective let me scurry down the list (looking at commercial banks not the "bank holding companies" like Morgan Stanley) - even if I go to down to something a few slots lower on the list, such as a Suntrust (STI), assets are $177 Billion, roughly 1/10th the size of our top 4 oligarchs. Even at the bottom of the "top 50" (again out of thousands) I find something like TCF Financial (TCB) at $17 Billion. Roughly 1/100th the size of our top 4. So you can imagine the tiny scale most of the thousands of (ahem) "competitors" to the oligarchs truly are. Clearly they will have the resources to advertise, upgrade technology, cross sell, and compete with the big dogs ;)

Via the Wall Street Journal
  • More than half of U.S. residential mortgages are being made by just three large banks. It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America and J.P. Morgan Chase?
  • Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged. (aka free market capitalism)
  • The optimistic take is that this support, though large, will shrink when market forces regain confidence. But there is a darker possible outcome: The emergency assistance is entrenching a system in which the taxpayer takes the default risk on most mortgages, while a small number of large banks get a larger share of the fee revenue from originating and servicing mortgages. That is what is happening now.
Boo Yah! Reverse Robin Hood... take from the many, give to the few.
  • While big banks are originating lots of mortgages, they are selling nearly all of them to Fannie Mae and Freddie Mac.
And who then takes these from Fannie and Freddie and stuffs them on their balance sheet? The Fed. (but don't you dare audit them) Oligarchs win, as the shell game continues. Can you find your tax money? It's not that hard to find; it's been transferred to the "Big 3 / 4". Now let's get back to our regularly scheduled recovery, bought and paid for....

  • Indeed, combined single-family mortgages held on the balance sheets at J.P. Morgan, BofA and Wells actually fell 3.5% in the first half.
Indeed! So even as the big 3 (in mortgages) take up more and more market share, they are holding less on their balance sheet. That's incredible math. But as long as I can talk up housing recoveries by ANY means possible, it works for me. Can I start writing checks directly to Ken Lewis, Jamie Dimon and Pandit? Would save the middle man.

Why should these banks bother with stinky mortgages they originate - what lender would want to actually bear the risk of the loans they make? That is NOT innovative. Moving the risk to the taxpayer? Not that's financial innovation baby.
  • And even as their mortgage holdings fall, these banks are posting big jumps in fee revenue from mortgage banking. Combined, it was $14 billion in the first half, up more than threefold from $4.1 billion in the year-earlier period.
So again I am stressing the same point in all these posts. The American taxpayer has become the new sucker. In the old days of "financial innovation" these mortgages were sliced, diced, and packaged with fancy AAA ratings. Suckers across the world bought them, and the banks got the fees. You know how that sad story ended. So what have we learned? Hah! You can't fool the same sucker twice in 5 years. That seems to be the only lesson. We have the same situation today - except all rational buyers have run away. That leaves the American taxpayer aka sucker - as the consumer of said loans.

So we can see why these bank stocks are ramping, they get the fees, and the can offload the risks. The same game that was played in the middle of the decade. How did that work out again? But please don't worry - the loans have much stricter requirements this time around, right FHA? 3.5% down - where the $8000 "tax credit" can be used as a down payment and closing costs, meaning first time buyers can now amazingly save less to buy a new home than they needed to rent... because at least landlords require a security deposit. But not the US government. Free money! Houses for all! No risks, all rewards! Look at those bank stocks roar! Look at those housing numbers rebound!

  • The three originated 52% of mortgages in the first half, according to Inside Mortgage Finance, just over double these banks' market share in 2005. In servicing, their share is 49%, compared with 22% in 2005.
"Too Bigger to Fail" - obviously we fixed the problem that got us here in the first place.
  • making themselves indispensable for the functioning of the mortgage market, these banks are more likely to be rescued if they get into trouble.
  • Rather than trying to implement change, the government appears to be reinforcing a system in which it provides subsidies to an asset that periodically goes through highly leveraged speculative booms.
Wells Fargo, who Warren Buffet has a large investment in, has some smart leaders at the top ... they, unlike the American taxpayer is NOT a sucker. See this quote at the end of the story:
  • Despite the bust, conforming mortgages that qualify for government backing remain mispriced. That can be seen in the fact that banks have no desire to keep the most common mortgage on their books. Wells's chief executive, John Stumpf, recently said: "We're not putting on 30-year [fixed-rate] mortgages at these rates."
Now aren't you glad you own those mortgages whose prices are completely wrong due to the interference by government / Federal Reserve? The oligarchs don't want to hold these - the risk does not parallel the pricing.

Therefore they need a sucker. Look in the mirror. (feel free to pass this along to your neighbors who have no idea what is going on since all this economic stuff is "too complicated"; they are involuntary suckers too)

But this is all a small cost to get the stock market roaring, keep our oligarchs plump and happy (or else they will move to another country!), and pump up GDP figures by stealing from future generations. Thank you again taxpayer (even the unborn ones).

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