Thursday, October 29, 2015
With foreclosure and REO inventory shrinking, firms must seek new ways to eliminate costs.
By DS NEWS - Shannon Cobb - October 2015 issue of DS News magazine.
The rebound of the mortgage and housing market is good news for all including Private Money Lenders except those who work in the counter-cyclical segments, such as foreclosure and REO services. What was a boom period in the late 2000s has now dwindled along with the national foreclosure industry. Adding to the anxiety of most businesses is an increased regulatory scrutiny being placed on many in the industry, especially servicers.
As REO-related firms look ahead to the near future, they realize that order volume will be dramatically reduced. They will be battling for market share. They will also need to find new ways to contain costs, which are only rising as regulatory-driven requirements multiply. Some actions will be obvious to any business owner, but difficult to execute. Others might not be so readily apparent. Either way, it is never a bad idea to review expenditures and the systems, policies and procedures which spawn them, asking “where is my operation inefficient?”
New Technology?
About the last thing most business owners wish to do when markets recede is invest money into infrastructure—especially technology. It seems counter-intuitive to spend money when there’s less to spend. However, the long term perspective must win out in these cases. If the technology in question is outdated, the replacement cost savings in the not-too-distant future will easily outpace the near term expenses. New compliance requirements will likely mandate the implementation of new technology solutions to some degree (e.g. TRID’s impact on loan origination systems, vendor management systems and title production technology). Technology, used correctly, is an excellent way to leverage the resources in place more efficiently. It can eliminate redundancies and tasks previously done by personnel manually and increase available space in the facility. Used properly, it can save time and increase productivity. Unless your firm is facing extremely bad circumstances, consider this as the time to shore up your systems before the next market upswing arrives.
Make Better use of Human Resources
It is an unfortunately reality in our world that the most expensive asset a company can have is its personnel. Although it’s never easy, downsizing staff is generally one of the first orders of business as markets shrink. However, now is also a good time to add an element of versatility to your team. It is a good time to train specialists in multiple tasks and introduce them to other elements of the business. Although it is an investment in the short term, it can lead to increases in productivity as well as sowing the seeds for future managers (who generally are more effective when they have a broader understanding of the operation). It will also save on training expenses and time should there be a need to further trim staff in the future.
Ours is an industry that, for decades, has been willing to outsource some services, but not others. A firm that outsources its tax, accounting and IT functions, for example, might balk at using title search products or vendor management providers. However, it’s highly likely that some of the firm’s highest expenditures (whether as a function of time or cost) can be outsourced with no loss of quality. Although many outsourcing providers, at one time, tended to cut quality for the sake of speed and cost, that is no longer the case. Any business process outsourcing firm or outsourced product producer won’t be in business long if the services or products rendered fail to meet higher standards.
An inaccurate or poorly composed element of the larger real estate transaction can have surprisingly major repercussions, and may be an indicator that the firm providing the product or service has produced subpar results on a larger, systemic level. The secondary market, government enforcement agencies, and clients won’t tolerate the risk associated with poor products or services. Thus, the outsourcing industry is involved. As is the case with using any vendor, of course, decision makers should be sure to kick the tires on any potential partners, including but not limited to sending them sample orders and visiting their facilities if at all possible. Due diligence should also be performed by collecting formal references from the potential vendor and informally soliciting the opinion of all network connections about their experiences with the vendor. Engaging the right vendor after a sufficient vetting process could be the difference between profit and loss in a down market.
Cut Operational Costs
A slowing market also signals that it may be time to examine the entire operation, top to bottom, for needless or redundant costs. One major expense to any firm is the brick-and-mortar operation and its related expenses. Unless your function absolutely depends on having a physical presence, how many offices are needed need to manage the existing clientele and, perhaps, add some scalability through centralization of tasks? Centralizing standardized tasks is a way to reduce cost because it eliminates redundant staff and tasks within the organization and gives flexible capacity abilities when the need to reduce or add scale comes into play. Closing an office need not be the only recourse. Can you reduce the amount of space you are leasing in a particular building? Is the commercial market such that there is some leverage to renegotiate? Many firms open new branches when order counts rise. However, it’s much more difficult to shutter those same sites when the market dips. Nonetheless, it may have to happen.
Location isn’t just important for those seeking to buy or sell a home. The location of the office can have an impact on costs. It may be time to trade an office in a trendy urban location for a suburban home if the difference in taxes, utilities and space is significant. It’s easy to be sentimental when it comes to a business that has been in a certain office for a long time. But that sentimentality may be harming the actual business in the form of unwarranted costs.
Even the layout of an office or offices can have an impact on costs. Is the workspace laid out efficiently to allow staff to capitalize on all of the resources available to them? For example, if the firm still utilizes copiers and scanners, are the personnel who use them located nearby? Are the resources the team needs to complete its tasks readily available to them? Is the office setting relatively pleasant environment? Lean staffs tend to have lower morale, leading to lower productivity. Responsible executives must do everything possible to ensure that the workplace is a setting conducive to a positive outlook from employees. The operation ultimately depends on the performance of the team.
Manage Risk
The threat of being audited and/or fined or losing a client because of a failure to comply with regulatory and client requirements is today higher than ever before. More lenders are doing more onsite audits to ensure NPI (Non-Public Information) is thoroughly protected. More state regulators are paying greater attention to our industry. If compliance and security is not a priority for the organization, now is the time. Business will be more difficult to gain in a down market. The success of the organization should not be impeded because of an in ability or unwillingness to acclimate itself to the new reality. Client and consumer communication regarding, encryption, the storage of sensitive data (limited server access ), and even which desks are near first floor windows (clean desk policy) are potential points of risk to the business if a cohesive strategy has not been implemented.
Risk doesn’t rest upon internal operations alone. Partners and vendors should be audited regularly with several contingencies considered. Are they protecting client NPI? How do they monitor the quality of their products or services? How does their compliance policy work? In a day and age where a mortgage lender is liable for the actions of its service providers, that lender will want to know how closely vendors down the line are being monitored. Now is the time to implement a successful vendor audit program. The potential financial consequences will seem doubly harsh in a down market.
Trimming outlays in a down market is certainly no revolutionary concept. But it is something few enjoy doing. It’s always more enjoyable to simply increase sales efforts in thriving markets to cover one’s expenses. However, with foreclosed and REO inventory sinking quickly, it will be the businesses willing to answer the hard questions and make the difficult moves which maintain acceptable profit levels.
Shannon Cobb is an EVP with American Tax and Property Reporting. He is responsible for the sales and operations of title search product SmartProp and other planned products in the mortgage lender and real estate information segments. Shannon has over 20 years of experience in the title and settlement services industry.
Tuesday, October 27, 2015
Federal Reserve expected to hold interest rate at zero
BY: The Economic Times Business - AFP | 27 Oct, 2015, 09.01AM IST
Throughout the past few months, the US economy has been hit hard by weakness abroad, with many export-oriented industries reporting a significant drop in production. Private money lenders are desperately looking for opportunities to invest their money in something with less turbulence than the US economy.
WASHINGTON: The Federal Reserve is expected to again delay raising interest rates when it begins a two-day policy meeting on Tuesday amid more signs of lethargy in the world economy.
With central banks in China and Europe headed in the direction of more easing and deflationary pressures all around, many economists and the debt markets are now betting that the first rate increase in more than nine years will not happen until next year.
That will buy some more time for emerging market countries and their businesses to prepare better for a long-expected and challenging tightening of US monetary policy.
But the turbulence in capital and currency markets that has accompanied the Fed's slow shift toward the increase will then likely continue, equally vexatiously.
After the last Fed meeting in mid-September, Chair Janet Yellen said that the policymakers of the Federal Open Market Committee were looking for a bit more confirmation of US economic strength amid the global slowdown.
She also forecast a federal funds rate rise from the current floor of 0-0.25 percent before the end of the year.
But since then, US exports and inflation have looked weaker, more doubts have arisen over China's ability to beat back a sharp downturn and the powerful US job creation machine of the past two years has ratcheted back into first gear.
Underscoring the impact of this shift, in an uncommon public split, two members of the five-person Fed board of governors publicly declared themselves in favor of waiting since Yellen last spoke in September.
"The chances of a rate hike announcement at October's FOMC meeting are slim to none," said Kim Fraser of BBVA bank.
Fraser says the meeting takes place as third quarter growth appears likely to be much lower than the hot 3.9 percent pace of the second quarter.
"Throughout the past few months, the US economy has been hit hard by weakness abroad, with many export-oriented industries reporting a significant drop in production," she said.
Analysts said they expect the FOMC to "mark down" its assessment of the economy in its policy statement, after displaying consistent confidence since the begin ..
It is not where Yellen, now in her second year at the head of the Fed, expected to be.
A year ago, FOMC members were confident enough in US growth that, on average, they were predicting the Fed funds rate would be at 1.25 percent by the end of 2015.
With the rate having sat at zero since 2008 to shore up growth, the FOMC is anxious to move away from the extreme easy-money stance, which is fueling unneeded asset speculation and which has limits to its utility.
The Fed wants, however, the jobs market to tighten -- with clear signs, yet unseen, of rising wages -- and for inflation to pick up toward 2.0 percent, when it has generally weakened.
After the people's Bank of China last week lowered its rate and the European Central Bank hinted at the possibility of more easing in December, the Fed is further boxed in: a rate increase now would strengthen the dollar more, hurting US export industries and likely overall industrial output.
"The FOMC cited the strong dollar as a drag on net exports in the minutes to their September meeting, and also pointed out that the strong dollar holds down US inflation," said economist William Adams at PNC Bank.
Throughout the past few months, the US economy has been hit hard by weakness abroad, with many export-oriented industries reporting a significant drop in production. Private money lenders are desperately looking for opportunities to invest their money in something with less turbulence than the US economy.
WASHINGTON: The Federal Reserve is expected to again delay raising interest rates when it begins a two-day policy meeting on Tuesday amid more signs of lethargy in the world economy.
With central banks in China and Europe headed in the direction of more easing and deflationary pressures all around, many economists and the debt markets are now betting that the first rate increase in more than nine years will not happen until next year.
That will buy some more time for emerging market countries and their businesses to prepare better for a long-expected and challenging tightening of US monetary policy.
But the turbulence in capital and currency markets that has accompanied the Fed's slow shift toward the increase will then likely continue, equally vexatiously.
After the last Fed meeting in mid-September, Chair Janet Yellen said that the policymakers of the Federal Open Market Committee were looking for a bit more confirmation of US economic strength amid the global slowdown.
She also forecast a federal funds rate rise from the current floor of 0-0.25 percent before the end of the year.
But since then, US exports and inflation have looked weaker, more doubts have arisen over China's ability to beat back a sharp downturn and the powerful US job creation machine of the past two years has ratcheted back into first gear.
Underscoring the impact of this shift, in an uncommon public split, two members of the five-person Fed board of governors publicly declared themselves in favor of waiting since Yellen last spoke in September.
"The chances of a rate hike announcement at October's FOMC meeting are slim to none," said Kim Fraser of BBVA bank.
Fraser says the meeting takes place as third quarter growth appears likely to be much lower than the hot 3.9 percent pace of the second quarter.
"Throughout the past few months, the US economy has been hit hard by weakness abroad, with many export-oriented industries reporting a significant drop in production," she said.
Analysts said they expect the FOMC to "mark down" its assessment of the economy in its policy statement, after displaying consistent confidence since the begin ..
It is not where Yellen, now in her second year at the head of the Fed, expected to be.
A year ago, FOMC members were confident enough in US growth that, on average, they were predicting the Fed funds rate would be at 1.25 percent by the end of 2015.
With the rate having sat at zero since 2008 to shore up growth, the FOMC is anxious to move away from the extreme easy-money stance, which is fueling unneeded asset speculation and which has limits to its utility.
The Fed wants, however, the jobs market to tighten -- with clear signs, yet unseen, of rising wages -- and for inflation to pick up toward 2.0 percent, when it has generally weakened.
After the people's Bank of China last week lowered its rate and the European Central Bank hinted at the possibility of more easing in December, the Fed is further boxed in: a rate increase now would strengthen the dollar more, hurting US export industries and likely overall industrial output.
"The FOMC cited the strong dollar as a drag on net exports in the minutes to their September meeting, and also pointed out that the strong dollar holds down US inflation," said economist William Adams at PNC Bank.
According to CME Group data, two thirds of futures contract traders do not expect any movement in the rate before next year, with a majority expecting it only in March.
Some like the economists at Macroeconomic Advisors, predict a hike in December. But subsequent increases will come "at a slower pace than previously thought," given global weakness, they said.
Thursday, October 22, 2015
Is the Federal Reserve Really the Evil Empire?
BY: Barrons - John Kimelman - October 21, 2015
Where does Private Lenders stand? Would we want to return to a world free of interest-rate meddling by the Fed?
Where does Private Lenders stand? Would we want to return to a world free of interest-rate meddling by the Fed?
So what do we think of the Federal Reserve, the people who run it, and the role it plays in setting short-term rates and even influencing investment portfolios?
While the modern Fed has its supporters, the detractors seem to get most of the ink.
As veteran financial journalist Roger Lowenstein wrote in a recent column for The Wall Street Journal, “No federal agency, except the Internal Revenue Service, is held in lower regard than the Federal Reserve, according to public opinion surveys. The left accuses the Fed of being too cozy with banks; the right says it is planting the seeds of a massive inflation.”
Sen. Rand Paul (R., Ky.), an outspoken critic of the Fed, wrote in a recent Journal op-ed: “The master fallacy underlying so much economic commentary is to imagine that a handful of experts in Washington should be setting the price of borrowing money.”
The never-ending debate about the worthiness of the Federal Reserve and the economists who run it has received some fresh oxygen in the form of two news books: Lowenstein’s America’s Bank: The Epic Struggle to Create the Federal Reserve and former Fed chair Ben Bernanke’s A Courage to Act, his memoir about the financial crisis.
Both books have triggered a fresh round of discussion about the modern Fed, and I’ve chosen to call out some of the more interesting reactions.
In his op-ed piece, Sen. Paul, a GOP candidate for the presidency and a self-professed libertarian, argues that the monetary policy function shouldn’t even be the Fed’s job: It should be the work of the free market.
“The sooner Fed officials withdraw their artificial monetary injections and let interest rates rise to their natural level set by free markets rather than government decree, the sooner the economy can return to genuine, sustainable growth,” he writes.
But would we want to return to a world free of interest-rate meddling by the Fed?
In a recent article in the New York Times that explores the new Lowenstein book on the Fed’s origins, writer Adam Davidson takes us back to the free-wheeling times before the Fed came to be.
“The decades leading up to the Fed’s creation were punctuated by repeated financial crises, culminating in the ferocious panic of 1907,” Davidson writes. “The shortage of cash was so great that, as Lowenstein puts it, the nation seemed to be ‘reverting toward barter.’ These disruptions may have been severe and frequent, but they were largely problems of liquidity, not episodes of widespread insolvency. Lowenstein explains how harvest season routinely produced financial turmoil. Without a centralized mechanism to adjust the supply of currency or to lend to solvent banks experiencing liquidity pressures, the demand for money to pay workers and to finance the purchase of agricultural goods drove interest rates up and reduced the availability of credit. This stifled growth precisely when it should have been accommodated.”
Davidson adds that “Lowenstein contrasts the relative stability of the major European economies with American financial instability during the period. He shows that the United States needed what Europe had, but we lacked: a central banking arrangement that could mobilize reserves across the entire system, to serve as lender of last resort to solvent banks and to provide an ‘elastic currency’ that could be expanded when demand for currency increased or contracted when times became too frothy.”
Fast forward to the Fed in recent times. In his new book, Bernanke gives a blow by blow account of his role in handling the 2008 financial crisis that had the potential to inflict more damage on the economy than came to pass.
In his review of the Bernanke book on the Politico Website, Zachary Karabell, head of global strategy at Envestnet and a regular contributor to Barrons.com’s Wall Street’s Best Minds column, makes the case for both Bernanke and the Fed during challenging times.
He writes that “Bernanke and the Fed were the grown-ups in the room during a period of crises unprecedented since the Great Depression, regardless of whether you believe they have conducted themselves brilliantly or poorly.”
As he puts it, “the larger message is that Ben Bernanke is a wonk, an academic, a policy economist and a central banker who utterly lacks the arrogance and self-aggrandizement so evident in so many in Washington. He came to the Fed with a low-key, low charisma mien, and he left the Fed with that largely intact. He also did some truly extraordinary things under pressure, especially, for a fairly conservative, Republican-appointed Fed chief, and often in defiance of political expedience.”
Though Karabell’s column focuses on Bernanke, many of his comments seem to apply to Bernanke’s successor, Janet Yellen, and many of the other earnest economists who crunch the data and seek to use monetary policy to stabilize both the economy and financial markets.
If the inflation zealots are right about the Fed’s propensity toward super-low interest rates, where is the inflation after all these years of cheap money? Why is unemployment rate at a low 5.1%, on the cusp of the standard definition of full employment? And why is gold, a classic inflation hedge and harbinger of doom, in the doldrums?
As Lowenstein adds, “it is hard not to conclude that the Fed is doing at least a reasonable job.”
Tuesday, October 20, 2015
Millennials and Boomers Are Competing to Ruin an Urban Real Estate Market Near You
By: Jezebel Madeleine Davies - 10/19/15 3:50pm
Private Money Loans are an essential tool for baby boomers as they are willing to pay a premium if you can get them what they want in this competitive market.
Private Money Loans are an essential tool for baby boomers as they are willing to pay a premium if you can get them what they want in this competitive market.
Twenty-somethings are facing surprising new competition when it comes to finding nice condos in cool urban areas: their own dang parents. The baby boomers are coming for your city’s best apartments and—unlike you—they’re ready to pay premium.
“Roughly 10,000 baby boomers are retiring each day, and recent data shows that half of those who plan to move will downsize when they do,” reports Ylan Q. Mui of the Washington Post. “Many are seeking the type of urban living that typically has been associated with young college graduates—so much so that boomers are renting apartments and buying condos at more than twice the rate of their millennial children.”
While this is bad luck for millennials (either because they can no longer afford places to live or their parents are their new neighbors), it’s great news for real estate agents.
“Boomers will pay a premium if you can give them exactly what they want,” real estate agent Matt Robinson tells the Post. “Something closer to what was in their house, and that pushes up the price; they’re happy to pay for it.”
Meanwhile, people in their twenties are also paying for something closer to their former homes—in that many of their apartments are the size of their childhood bedrooms.
As Mui points out, most millennials are entering the real estate market at a disadvantage, having come of age during the recession when good work was scarce, student loan debt was high, and saving money was a more difficult task. Sadly, things are not likely to look up:
Analysts worry that the trend is making affordable housing more scarce at all ages — including for some boomers. Nationally, the cost of rent has made a double-digit jump since the recession and hit a record $803 a month, according to government data. At the same time, the [Harvard University’s Joint Center for Housing Studies] estimated that the number of families who pay more than half their income in rent is expected to rise 11 percent to 13.1 million over the next decade.
Leave it to baby boomers to make young, upper-to-middle class gentrifiers look good.
Monday, October 19, 2015
China economy logs weakest growth since 2009
BY: REUTERS Markets |
Private Money Loans keep growing at a faster rate due to nervous investors noticing China's growth slow and risk of deflation heightens.
China's economic growth dipped below 7 percent for the first time since the global financial crisis on Monday, hurt partly by cooling investment, raising pressure on Beijing to further cut interest rates and take other measures to stoke activity.
The world's second-largest economy grew 6.9 percent between July and September from a year ago, the National Bureau of Statistics said, slightly better than forecasts of a 6.8 percent rise but down from 7 percent in the previous three months.
That hardened expectations that China would avoid an abrupt fall-off in growth, with analysts predicting a more gradual slide in activity stretching into 2016.
"Underlying conditions are subdued but stable," said Julian Evans-Pritchard, an analyst at Capital Economics in Singapore. "Stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters."
Chinese leaders have been trying to reassure jittery global markets for months that the economy is under control after a shock devaluation of the yuan CNY=CFXS and a summer stock market plunge fanned fears of a hard landing.
Some analysts were hopeful that the third-quarter cooldown could mark the low point for 2015 as a burst of stimulus measures rolled out by Beijing comes into force in coming months, but muted monthly data for September kept such optimism in check.
"As growth slows and risk of deflation heightens, we reiterate that China needs to cut reserve requirement ratio (RRR) by another 50bps in Q4," economists at ANZ Bank said in a note to clients.
"Looming deflation risk suggests that the People's Bank of China will also adjust the benchmark interest rates, especially lending rate, down further."
In its battle against China's worst economic cooldown in more than six years, the central bank has cut interest rates five times since November and reduced banks' reserve requirement ratios three times this year.
Despite the spate of easing, Monday's GDP reading was still the worst since the first quarter of 2009, when growth tumbled to 6.2 percent.
POLICY SUPPORT
While Chinese officials put a brave face on China's economic woes, describing the slowdown as being "reasonable", senior leaders have occasionally voiced worries.
President Xi Jinping told Reuters in an interview over the weekend that the government has concerns about the economy and was working hard to address them.
Policymakers think they can stem a rapid rundown of the country's foreign exchange reserves and ease pressure on the currency by pump-priming the economy to meet this year's growth target of about 7 percent, sources involved in policy discussions say.
But key parts of the economy are still losing steam.
Factory output in September rose 5.7 percent from a year ago, missing forecasts for a 6 percent rise, and fixed-asset investment (FAI) climbed 10.3 percent in the first nine months, below estimates of 10.8 percent.
September retail spending alone bucked the trend, growing at an annual rate of 10.9 percent, slightly beating forecasts for 10.8 percent.
"The overall downturn pressure on the Chinese economy is still huge," said Zhou Hao, a senior economist at Commerzbank in Singapore, who expects government will lower the annual growth target in its next five-year plan at the end of this month.
The latest Reuters quarterly poll showed economists expect the central bank will cut interest rates by another 25 basis points (bps) and lower the amount banks must hold as reserves by 50 bps by year-end.
The same poll predicted economic growth of 6.8 percent in the fourth quarter, easing to 6.7 percent in the first of 2016.
China's consumer inflation cooled more than expected in September, while producer prices extended their slide to a 43rd straight month, highlighting the urgency for the central bank to tackle deflationary pressures.
To shore up growth, the government has quickened spending on infrastructure and eased curbs on the ailing property sector. The latter have helped revive weak home sales and prices but have not yet reversed a sharp decline in new construction.
Data released separately on Monday showed China's government spending surged almost 27 percent in September from a year ago.
Some market watchers believe current growth is much weaker than government figures, though officials deny allegations that the numbers are inflated.
Despite weak exports and imports, factory overcapacity and a cooling property market, Beijing reported annual economic growth of 7.0 percent in the first two quarters, in line with its full-year target.
However, some economists think the statistics may be underestimating strong consumption and service sector growth, putting too much weight on the cyclical and structural weaknesses in manufacturing.
(Reporting by Kevin Yao; Additional reporting by Winni Zhou, Shao Xiaoyi, Koh Gui Qing in BEIJING; Pete Sweeney in SHANGHAI and Shanghai Newsroom; Editing by Will Waterman)
Private Money Loans keep growing at a faster rate due to nervous investors noticing China's growth slow and risk of deflation heightens.
China's economic growth dipped below 7 percent for the first time since the global financial crisis on Monday, hurt partly by cooling investment, raising pressure on Beijing to further cut interest rates and take other measures to stoke activity.
The world's second-largest economy grew 6.9 percent between July and September from a year ago, the National Bureau of Statistics said, slightly better than forecasts of a 6.8 percent rise but down from 7 percent in the previous three months.
That hardened expectations that China would avoid an abrupt fall-off in growth, with analysts predicting a more gradual slide in activity stretching into 2016.
"Underlying conditions are subdued but stable," said Julian Evans-Pritchard, an analyst at Capital Economics in Singapore. "Stronger fiscal spending and more rapid credit growth will limit the downside risks to growth over the coming quarters."
Chinese leaders have been trying to reassure jittery global markets for months that the economy is under control after a shock devaluation of the yuan CNY=CFXS and a summer stock market plunge fanned fears of a hard landing.
Some analysts were hopeful that the third-quarter cooldown could mark the low point for 2015 as a burst of stimulus measures rolled out by Beijing comes into force in coming months, but muted monthly data for September kept such optimism in check.
"As growth slows and risk of deflation heightens, we reiterate that China needs to cut reserve requirement ratio (RRR) by another 50bps in Q4," economists at ANZ Bank said in a note to clients.
"Looming deflation risk suggests that the People's Bank of China will also adjust the benchmark interest rates, especially lending rate, down further."
In its battle against China's worst economic cooldown in more than six years, the central bank has cut interest rates five times since November and reduced banks' reserve requirement ratios three times this year.
Despite the spate of easing, Monday's GDP reading was still the worst since the first quarter of 2009, when growth tumbled to 6.2 percent.
POLICY SUPPORT
While Chinese officials put a brave face on China's economic woes, describing the slowdown as being "reasonable", senior leaders have occasionally voiced worries.
President Xi Jinping told Reuters in an interview over the weekend that the government has concerns about the economy and was working hard to address them.
Policymakers think they can stem a rapid rundown of the country's foreign exchange reserves and ease pressure on the currency by pump-priming the economy to meet this year's growth target of about 7 percent, sources involved in policy discussions say.
But key parts of the economy are still losing steam.
Factory output in September rose 5.7 percent from a year ago, missing forecasts for a 6 percent rise, and fixed-asset investment (FAI) climbed 10.3 percent in the first nine months, below estimates of 10.8 percent.
September retail spending alone bucked the trend, growing at an annual rate of 10.9 percent, slightly beating forecasts for 10.8 percent.
"The overall downturn pressure on the Chinese economy is still huge," said Zhou Hao, a senior economist at Commerzbank in Singapore, who expects government will lower the annual growth target in its next five-year plan at the end of this month.
The latest Reuters quarterly poll showed economists expect the central bank will cut interest rates by another 25 basis points (bps) and lower the amount banks must hold as reserves by 50 bps by year-end.
The same poll predicted economic growth of 6.8 percent in the fourth quarter, easing to 6.7 percent in the first of 2016.
China's consumer inflation cooled more than expected in September, while producer prices extended their slide to a 43rd straight month, highlighting the urgency for the central bank to tackle deflationary pressures.
To shore up growth, the government has quickened spending on infrastructure and eased curbs on the ailing property sector. The latter have helped revive weak home sales and prices but have not yet reversed a sharp decline in new construction.
Data released separately on Monday showed China's government spending surged almost 27 percent in September from a year ago.
Some market watchers believe current growth is much weaker than government figures, though officials deny allegations that the numbers are inflated.
Despite weak exports and imports, factory overcapacity and a cooling property market, Beijing reported annual economic growth of 7.0 percent in the first two quarters, in line with its full-year target.
However, some economists think the statistics may be underestimating strong consumption and service sector growth, putting too much weight on the cyclical and structural weaknesses in manufacturing.
(Reporting by Kevin Yao; Additional reporting by Winni Zhou, Shao Xiaoyi, Koh Gui Qing in BEIJING; Pete Sweeney in SHANGHAI and Shanghai Newsroom; Editing by Will Waterman)
Friday, October 16, 2015
Jeffrey Tesch: Private Lending—Turning Trash Into Treasure
By: CPExecutive.com - Jeffrey Tesch - October 15, 2015
While Dodd-Frank is putting the squeeze on traditional bank lending, Private Money Lenders are proving to be a much more viable and reliable option.
Lean in. We’re going to let mortgage brokers in on a little secret: There’s a ton of money to be made in private lending, and brokers today have a unique opportunity to cash in on this interesting scenario.
At a time when Dodd-Frank is putting the squeeze on traditional bank lending, private lenders are proving to be a much more viable and reliable option for developers and investors, and those who are tapping this unknown resource are experiencing a boon in taking advantage of a new profitable stream of income.
With limited funding options in today’s real estate market, it’s private lending that’s proving to be the path forward. But rest assured, the broker is always protected, and very well compensated in these transactions.
The key to success, however, is to first establish a relationship with a private lender, before the customer comes in looking for a loan. This can be a real game changer.
While no lending scenario is the same, the mortgage broker is always the liaison. The bottom line is that with every different lending scenario, private lending provides a myriad of options to create an innovative financing solution.
It may be all the same in a residential deal, but in a private lending scenario, for commercial loans on residential homes, every deal is different.
For example, a mortgage broker may have an investor who owns all kinds of properties and wants to buy another property. Or, the broker may have an investor who just wants to buy a property to fix and flip it.
Then there’s how to qualify the borrower: Some have a lot of cash on hand; others have very little, but have great equity. It’s all about working with that borrower to find the right solution for a private loan.
Traditional vs. Private
First, let’s review the differences between traditional bank lending versus private lending:
We begin with the purchase of an owner-occupied house, i.e. homeowner is moving into the house. This of course is not a deal that private lending underwrites. However, if the purchase is a non owner-occupied home, while some banks may like it, private lending lives on it.
And when it comes to the purchase of a home that’s in foreclosure, some banks may approve it, depending on whether the home has a certificate of occupancy; private lenders do these types of deals all day long.
For traditional bank financing on mixed-use properties, it depends on the bank’s appetite. Some banks in more urban areas are comfortable with mixed-use. Private lenders on the other hand covet the opportunity to finance mixed-use properties. It’s a win-win scenario for private lenders, brokers, and developers with rents downstairs of a commercial nature and apartments upstairs for residential living. It’s a perfect situation for the diversity of income.
Even for borrowers who have filed for bankruptcy, while lots of banks are turning these customers away, private lenders are a viable solution, especially if the borrower is coming out of bankruptcy better than ever.
With traditional banks, it’s all about fitting that borrower into a box. Private lenders take into account a series of outside variables. We don’t know exactly how the borrower’s poor credit score is going to impact the loan. However, if the borrower has cash, and is making money, then a private lender will do that loan. If the borrower’s score got beat up because of foreclosures or short sales in 2009, 2010, or 2011, it’s not an issue for private lenders.
We want to know exactly what’s going on today with that borrower – not what happened in the past.
For distressed properties, i.e. if the property is beat up and has the opportunity to be repaired, private lending is exactly where it can help investors succeed.
And for investors with multiple properties, while many banks will place a cap on the amount of properties a borrower can have on their books, private lenders don’t have a cap. It’s all about track record. We want to know that the borrower is churning through those properties and making money.
Advantages of Using a Private Lender
Intelligent Lending Criteria
Private lenders can establish their own lending criteria, which gives an investor a greater opportunity to qualify for a loan. This means there’s nobody in Washington DC telling me what my rate is going to be, or telling me what the credit score has to be on my borrower. It’s our money, so in the commercial world, we’re going to set the rate and we’re going to set the term. So if we don’t get paid, it’s our problem, not the taxpayers’ problem.
A borrower can receive funding for a distressed non-owner occupied property, rehab property and new construction.
When traditional lenders can’t provide investors solutions, private lenders have more room for negotiating and can come up with creative answers. For example, if a borrower owns a home with a lot of equity that they’re renting out, and they don’t have cash, we will be happy to put a mortgage on that existing property, pull out some cash, and put that towards a new home that they would like to purchase.
It’s these creative solutions that private lending does all the time.
Alternative Loan to Value
A private lender may lend a higher Loan to Value than a traditional bank.
Quick Loan Closing Time
Private lenders will typically respond to all loan inquiries within the same day.
Closing in two weeks, no problem.
This is precisely where private lending really shines over traditional bank lending. Most private lenders will provide short-term, bridge financing for Straight Acquisition, Acquisition/Rehab (fix & flip), Refinance, Cash-Out and Lines of Credit.
The flexibility and ability to close quickly can provide borrowers with a clear business advantage and afford them a competitive edge based on speed.
While a traditional loan can take up to ninety days to close, private lenders can often close a loan in as little as two weeks, or even a few days. This can give the borrower a greater sense of security early on in the loan process.
How do brokers make more money?
Some brokers like to have minimal involvement, while others like to have heavy involvement. The amount of compensation earned depends on the broker’s level of involvement and the loan scenario. It’s just that simple.
On the minimal side, maybe a broker’s business is booming and he/she doesn’t have time to deal with a private loan, then he/she would hand it off to the private lender. Once the deal is final and we close, we send the broker a point, and the check gets cut at closing.
If the broker wants to be actively involved in the private loan, and wants to control the deal, we will ask the broker to help collect documents and put the package together, and then split the points at closing.
Compensation
All fees that are earned by the broker are disclosed on the commitment letter up front. Origination fees are charged up front, and private lenders split points with the mortgage broker.
Broker fees are memorialized on the HUD and a transaction-specific agreement is provided. There’s no ambiguity.
A check is sent directly to the broker at closing.
Basic Loan Qualifying Factor
Traditional rules apply in the world of private lending, and the common sense approach works every time when it comes to underwriting. It all comes down to income, credit, and equity. If they have two out of the three, then we’re going to do that deal. If the borrower only has one, then we’re going to have a problem.
Exit strategy is at the top. The first question is how will the borrower pay us back? Since most loans are only 12-18 months, exit strategy is key. We want to know how we’re going to get paid back.
Experience and background are fundamental. We like to know that the people we’re dealing with know what they are doing. As great as the HGTV shows are when it comes to fix and flip, it’s not the real world education that we’re looking for when it comes to making private loans.
Existing leases also help when qualifying a loan. This shows good solid income upfront, and typically comes to play when buying a multifamily home or small apartment complex.
Of course, cash reserves cure all problems. When a borrower with a poor credit rating comes to us after declaring bankruptcy, but has a great track record of fixing and flipping homes, and has $200K in cash, we’re going to make that loan.
Private loans are not for everyone, but can be a financial game-changer for those with poor credit or those who are self-employed. Mortgage brokers have a unique opportunity to grow and expand their own business through this creative funding source as well. Rather than disregard private lending as cumbersome or out of reach, brokers should embrace the chance to make money outside traditional forms of bank financing.
While Dodd-Frank is putting the squeeze on traditional bank lending, Private Money Lenders are proving to be a much more viable and reliable option.
Lean in. We’re going to let mortgage brokers in on a little secret: There’s a ton of money to be made in private lending, and brokers today have a unique opportunity to cash in on this interesting scenario.
At a time when Dodd-Frank is putting the squeeze on traditional bank lending, private lenders are proving to be a much more viable and reliable option for developers and investors, and those who are tapping this unknown resource are experiencing a boon in taking advantage of a new profitable stream of income.
With limited funding options in today’s real estate market, it’s private lending that’s proving to be the path forward. But rest assured, the broker is always protected, and very well compensated in these transactions.
The key to success, however, is to first establish a relationship with a private lender, before the customer comes in looking for a loan. This can be a real game changer.
While no lending scenario is the same, the mortgage broker is always the liaison. The bottom line is that with every different lending scenario, private lending provides a myriad of options to create an innovative financing solution.
It may be all the same in a residential deal, but in a private lending scenario, for commercial loans on residential homes, every deal is different.
For example, a mortgage broker may have an investor who owns all kinds of properties and wants to buy another property. Or, the broker may have an investor who just wants to buy a property to fix and flip it.
Then there’s how to qualify the borrower: Some have a lot of cash on hand; others have very little, but have great equity. It’s all about working with that borrower to find the right solution for a private loan.
Traditional vs. Private
First, let’s review the differences between traditional bank lending versus private lending:
We begin with the purchase of an owner-occupied house, i.e. homeowner is moving into the house. This of course is not a deal that private lending underwrites. However, if the purchase is a non owner-occupied home, while some banks may like it, private lending lives on it.
And when it comes to the purchase of a home that’s in foreclosure, some banks may approve it, depending on whether the home has a certificate of occupancy; private lenders do these types of deals all day long.
For traditional bank financing on mixed-use properties, it depends on the bank’s appetite. Some banks in more urban areas are comfortable with mixed-use. Private lenders on the other hand covet the opportunity to finance mixed-use properties. It’s a win-win scenario for private lenders, brokers, and developers with rents downstairs of a commercial nature and apartments upstairs for residential living. It’s a perfect situation for the diversity of income.
Even for borrowers who have filed for bankruptcy, while lots of banks are turning these customers away, private lenders are a viable solution, especially if the borrower is coming out of bankruptcy better than ever.
With traditional banks, it’s all about fitting that borrower into a box. Private lenders take into account a series of outside variables. We don’t know exactly how the borrower’s poor credit score is going to impact the loan. However, if the borrower has cash, and is making money, then a private lender will do that loan. If the borrower’s score got beat up because of foreclosures or short sales in 2009, 2010, or 2011, it’s not an issue for private lenders.
We want to know exactly what’s going on today with that borrower – not what happened in the past.
For distressed properties, i.e. if the property is beat up and has the opportunity to be repaired, private lending is exactly where it can help investors succeed.
And for investors with multiple properties, while many banks will place a cap on the amount of properties a borrower can have on their books, private lenders don’t have a cap. It’s all about track record. We want to know that the borrower is churning through those properties and making money.
Advantages of Using a Private Lender
Intelligent Lending Criteria
Private lenders can establish their own lending criteria, which gives an investor a greater opportunity to qualify for a loan. This means there’s nobody in Washington DC telling me what my rate is going to be, or telling me what the credit score has to be on my borrower. It’s our money, so in the commercial world, we’re going to set the rate and we’re going to set the term. So if we don’t get paid, it’s our problem, not the taxpayers’ problem.
A borrower can receive funding for a distressed non-owner occupied property, rehab property and new construction.
When traditional lenders can’t provide investors solutions, private lenders have more room for negotiating and can come up with creative answers. For example, if a borrower owns a home with a lot of equity that they’re renting out, and they don’t have cash, we will be happy to put a mortgage on that existing property, pull out some cash, and put that towards a new home that they would like to purchase.
It’s these creative solutions that private lending does all the time.
Alternative Loan to Value
A private lender may lend a higher Loan to Value than a traditional bank.
Quick Loan Closing Time
Private lenders will typically respond to all loan inquiries within the same day.
Closing in two weeks, no problem.
This is precisely where private lending really shines over traditional bank lending. Most private lenders will provide short-term, bridge financing for Straight Acquisition, Acquisition/Rehab (fix & flip), Refinance, Cash-Out and Lines of Credit.
The flexibility and ability to close quickly can provide borrowers with a clear business advantage and afford them a competitive edge based on speed.
While a traditional loan can take up to ninety days to close, private lenders can often close a loan in as little as two weeks, or even a few days. This can give the borrower a greater sense of security early on in the loan process.
How do brokers make more money?
Some brokers like to have minimal involvement, while others like to have heavy involvement. The amount of compensation earned depends on the broker’s level of involvement and the loan scenario. It’s just that simple.
On the minimal side, maybe a broker’s business is booming and he/she doesn’t have time to deal with a private loan, then he/she would hand it off to the private lender. Once the deal is final and we close, we send the broker a point, and the check gets cut at closing.
If the broker wants to be actively involved in the private loan, and wants to control the deal, we will ask the broker to help collect documents and put the package together, and then split the points at closing.
Compensation
All fees that are earned by the broker are disclosed on the commitment letter up front. Origination fees are charged up front, and private lenders split points with the mortgage broker.
Broker fees are memorialized on the HUD and a transaction-specific agreement is provided. There’s no ambiguity.
A check is sent directly to the broker at closing.
Basic Loan Qualifying Factor
Traditional rules apply in the world of private lending, and the common sense approach works every time when it comes to underwriting. It all comes down to income, credit, and equity. If they have two out of the three, then we’re going to do that deal. If the borrower only has one, then we’re going to have a problem.
Exit strategy is at the top. The first question is how will the borrower pay us back? Since most loans are only 12-18 months, exit strategy is key. We want to know how we’re going to get paid back.
Experience and background are fundamental. We like to know that the people we’re dealing with know what they are doing. As great as the HGTV shows are when it comes to fix and flip, it’s not the real world education that we’re looking for when it comes to making private loans.
Existing leases also help when qualifying a loan. This shows good solid income upfront, and typically comes to play when buying a multifamily home or small apartment complex.
Of course, cash reserves cure all problems. When a borrower with a poor credit rating comes to us after declaring bankruptcy, but has a great track record of fixing and flipping homes, and has $200K in cash, we’re going to make that loan.
Private loans are not for everyone, but can be a financial game-changer for those with poor credit or those who are self-employed. Mortgage brokers have a unique opportunity to grow and expand their own business through this creative funding source as well. Rather than disregard private lending as cumbersome or out of reach, brokers should embrace the chance to make money outside traditional forms of bank financing.
Monday, October 12, 2015
Bank of America (BAC) Citigroup (C): Feeling The Pain Of Rate Hike Delays
By: CNA Finance - October 10, 2015
Big Banks are suffering with the news that the Federal Reserve is actually considering a negative interest rates to avoid future economic complications while private money investors keep gaining higher rates of return despite the Federal Reserve actions.
Bank of America Corp (NYSE: BAC) | Citigroup Inc (NYSE: C) Big banks were looking great about a month ago, just before the Federal Reserve meeting in September. However, after recent comments by the Federal Reserve with regard to the coming rate hike, big banks like Bank of America and Citigroup are having a rough time in the market. Today, we'll talk about how the Federal Reserve's interest rate affects banks, what we heard from the Federal Reserve, and what we can expect from BAC and C moving forward. So, let's get right to it... What Do Big Banks Have To Do With The Federal Reserve Interest Rate? When thinking about profits for banks like Bank of America and Citigroup, what is the first thing that comes to mind? If you're like most, you're thinking about loans. One of the biggest revenue drivers for these banks is the interest that consumers and businesses pay on loans. To borrow this money from the Federal Reserve, the banks have to pay the Federal Reserve's interest rate. So, in order to earn a profit, these banks add a markup to the Federal Reserve's rate; that markup turns into revenue for the banks! This is why big banks and big bank investors want the Federal Reserve to increase its rate. In general, big banks charge a percentage markup on the Federal Reserve's rate. So, the lower the Federal Reserve's interest rate is, the lower the margin for the banks. Adversely, when the Federal Reserve increases its rate, the margin banks earn on loan interest rises leading to higher profits. What We Heard From The Federal Reserve The Federal Reserve has been planning to increase its interest rate by the end of the year 2015. However, that doesn't seem like it's going to happen anymore. In fact, it's possible that the current rate of 0.25% will be reduced sometime soon. The Federal Reserve is concerned that worldwide economic concerns are going to lead to economic problems here in the United States - and for good reason. The reality is that the United States economy, like any other economy around the world, is closely tied to other world economies. That's because of the free trade environment that has created what's known as the global economy. Essentially, if big players in the global economy struggle, consumers in the countries that are struggling aren't going to be as willing to pay for American made products. This will take a heavy toll on the United States economy. While 0.25% is a record low interest rate for the United States, the Federal Reserve is actually considering a negative interest rate to avoid future economic complications. Here's what William Dudley, president of the New York Federal Reserve had to say on Friday...
Big Banks are suffering with the news that the Federal Reserve is actually considering a negative interest rates to avoid future economic complications while private money investors keep gaining higher rates of return despite the Federal Reserve actions.
Bank of America Corp (NYSE: BAC) | Citigroup Inc (NYSE: C) Big banks were looking great about a month ago, just before the Federal Reserve meeting in September. However, after recent comments by the Federal Reserve with regard to the coming rate hike, big banks like Bank of America and Citigroup are having a rough time in the market. Today, we'll talk about how the Federal Reserve's interest rate affects banks, what we heard from the Federal Reserve, and what we can expect from BAC and C moving forward. So, let's get right to it... What Do Big Banks Have To Do With The Federal Reserve Interest Rate? When thinking about profits for banks like Bank of America and Citigroup, what is the first thing that comes to mind? If you're like most, you're thinking about loans. One of the biggest revenue drivers for these banks is the interest that consumers and businesses pay on loans. To borrow this money from the Federal Reserve, the banks have to pay the Federal Reserve's interest rate. So, in order to earn a profit, these banks add a markup to the Federal Reserve's rate; that markup turns into revenue for the banks! This is why big banks and big bank investors want the Federal Reserve to increase its rate. In general, big banks charge a percentage markup on the Federal Reserve's rate. So, the lower the Federal Reserve's interest rate is, the lower the margin for the banks. Adversely, when the Federal Reserve increases its rate, the margin banks earn on loan interest rises leading to higher profits. What We Heard From The Federal Reserve The Federal Reserve has been planning to increase its interest rate by the end of the year 2015. However, that doesn't seem like it's going to happen anymore. In fact, it's possible that the current rate of 0.25% will be reduced sometime soon. The Federal Reserve is concerned that worldwide economic concerns are going to lead to economic problems here in the United States - and for good reason. The reality is that the United States economy, like any other economy around the world, is closely tied to other world economies. That's because of the free trade environment that has created what's known as the global economy. Essentially, if big players in the global economy struggle, consumers in the countries that are struggling aren't going to be as willing to pay for American made products. This will take a heavy toll on the United States economy. While 0.25% is a record low interest rate for the United States, the Federal Reserve is actually considering a negative interest rate to avoid future economic complications. Here's what William Dudley, president of the New York Federal Reserve had to say on Friday...
“We decided – even during the period where the economy was doing the poorest and we were pretty far from our objectives – not to move to negative interest rates because of some concern that the cost might outweigh the benefits... Some of the experiences suggest maybe we can use negative interest rates and the costs aren't as great as you anticipate...”
What This Means For Big Banks Moving Forward
Moving forward, I'm expecting to see more bearish movements out of US bank stocks. The reality is that investors were banking on the idea that the Federal Reserve was going to increase interest rates. Now that the Fed is considering negative interest rates to avert the next economic crisis, those expectations have been thrown out of the window which will likely lead to more declines.
Friday, October 9, 2015
Nonbank Lenders are Growing in Popularity and Capability
By ABA Banking Journal - Ashley Gunn - October 8, 2015
Nonbank Lender's or better known as Private Lenders have escalated their operations and reputations to the point where they attract institutional investors on a global scale.
According to a recent article published in the September issue of the Scotsman Guide, nonbank lenders are growing in popularity, making them more competitive against traditional bank lenders. The article claims that commercial mortgage brokers — who are knowledgeable about private, nonbank lending — will be best positioned to take advantage of this growing industry.
“Private lenders are no longer the questionable hard money lenders of a decade ago, when private money was regarded in a somewhat-negative manner,” the article said. “Today’s nonbank lenders sometimes control billions of dollars of funds that are available for investment…many of them have escalated their operations and reputations to the point where they attract institutional investors on a global scale.”
Initially these private lenders were financing riskier projects that banks were unable to underwrite due to strict regulatory requirements. Successful financing of these projects has propelled private lenders into this niche market, and wider client bases have “led to the gradual evolution of many private lenders into powerful nonbank commercial lending sources,” according to the article.
The article concluded by outlining the similarities between banks and nonbank lenders, including nearly identical transaction processes: “In many ways, qualifying for nonbank financing is as rigorous as qualifying for bank financing.”
Given these similarities, ABA is advocating for the regulatory environment to have a “level playing field” for all types of lenders. ABA recently expressed this opinion in response to the Treasury’s request for information on marketplace lending.
Nonbank Lender's or better known as Private Lenders have escalated their operations and reputations to the point where they attract institutional investors on a global scale.
According to a recent article published in the September issue of the Scotsman Guide, nonbank lenders are growing in popularity, making them more competitive against traditional bank lenders. The article claims that commercial mortgage brokers — who are knowledgeable about private, nonbank lending — will be best positioned to take advantage of this growing industry.
“Private lenders are no longer the questionable hard money lenders of a decade ago, when private money was regarded in a somewhat-negative manner,” the article said. “Today’s nonbank lenders sometimes control billions of dollars of funds that are available for investment…many of them have escalated their operations and reputations to the point where they attract institutional investors on a global scale.”
Initially these private lenders were financing riskier projects that banks were unable to underwrite due to strict regulatory requirements. Successful financing of these projects has propelled private lenders into this niche market, and wider client bases have “led to the gradual evolution of many private lenders into powerful nonbank commercial lending sources,” according to the article.
The article concluded by outlining the similarities between banks and nonbank lenders, including nearly identical transaction processes: “In many ways, qualifying for nonbank financing is as rigorous as qualifying for bank financing.”
Given these similarities, ABA is advocating for the regulatory environment to have a “level playing field” for all types of lenders. ABA recently expressed this opinion in response to the Treasury’s request for information on marketplace lending.
Wednesday, October 7, 2015
What Overregulation? How Regulation Will Increase Over the Next Decade
BY: October 2015 issue of DS News Magazine
Overregulation has led-and will continue to lead-to a dramatic increase in the scope and level of regulation in the financial services industry including private money lenders.
By Neal Doherty
In response to the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the most sweeping and comprehensive financial services legislation since the 1930s. One of the central features of Dodd-Frank was the creation of the Consumer Financial Protection Bureau (CFPB), a single federal agency responsible for all consumer protection functions. More importantly, Dodd-Frank essentially re-defined the existing regulatory structure by changing the roles of the various regulators, the scope of industries they regulate, and the tools they use to identify future problems. This structural change has led—and will continue to lead—to a dramatic increase in the scope and level of regulation in the financial services industry.
Who Regulates? Limitations to Exemptions of State Law
“It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”
This concept—with the states operating as laboratories of democracy, experimenting with new laws and policies—was described in 1932 by U.S. Supreme Court Justice Louis Brandeis in the case New State Ice Co. v. Liebmann. Prior to Dodd-Frank, many state laws attempting to regulate the activity of national banks were preempted by federal regulators, who asserted that the state laws overlapped or conflicted with federal law. Dodd-Frank changed this dynamic by raising the standards that must be met before federal regulators can assert preemption. The change fundamentally increased the importance of the role of the states in the regulatory process, and will result in increased legislative and regulatory activity as states are further empowered to act independently to achieve their own policy goals based on local conditions.
Increased Importance of State Attorneys General
As the individuals who enforce and often push for these laws, the state Attorneys General received a regulatory windfall under Dodd-Frank. Specifically, under § 1042, a “State regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this title or regulations issued under this title with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law…” State Attorneys General are rarely shy about using the power they have been granted and many have already brought actions by using these new Dodd-Frank powers—for example, the Illinois A.G. suing a predatory lender in Chicago; Connecticut and Florida in a joint lawsuit against a mortgage rescue company; and Mississippi bringing charges against a credit reporting agency.
This power also extends to other state regulators who may have been previously hamstrung by the law of their own states. For example, under New York General Business Law § 349, the Attorney General is the only state official empowered to bring an action for an unfair or deceptive act or practice. Dodd-Frank, however, extended this power such that other state regulators can bring these types of actions. Benjamin Lawsky, the former Superintendent of New York’s Department of Financial Services, was thus empowered, frequently wielding this new authority prior to his departure.
Increased Cooperation between CFPB and States
As a result of this expanded role for state regulators, the relationship between the states and federal regulators—in particular the CFPB—takes on new importance. In order to aid in this relationship, state regulators and the CFPB have entered into agreements to enhance cooperation. For example, in 2011, the CFPB and Conference of State Bank Supervisors signed an agreement to work together to achieve examination efficiencies and to avoid duplication of time and resources. Also in 2011, the National Association of Attorneys General and the CFPB agreed to a Joint Statement of Principles, establishing a framework for regulation of financial products and services. This cooperation has resulted in numerous joint enforcement actions starting with the 2012 National Mortgage Settlement with the country’s five largest mortgage servicers. This cooperative framework will lead to further public and private enforcement actions as the CFPB and states share information and cooperate to achieve common goals and objectives.
Who is Regulated? The Larger Participant Rule
Another major change caused by Dodd-Frank is re-defining the type of companies covered by federal regulation, including many companies that were previously regulated under state law, or perhaps not regulated at all. Dodd-Frank authorizes the Bureau to define by regulation larger participants of certain markets for financial products or services. These “larger participant” rules extend the CFPB’s oversight into markets which may not have been regulated in the past.
Dodd-Frank § 1024 specifically gives the Bureau supervisory authority over all nonbanks offering three specific types of consumer financial products or services: (i) mortgages; (ii) private education loans; and (iii) payday loans. The law also grants CFPB supervisory authority over “larger participants” (as defined by the Bureau) in markets for other consumer financial products or services. While defining a company as a larger participant does not impose new substantive consumer protection requirements, it does subject these companies to the Bureau’s regulatory and enforcement authority.
The Bureau is authorized to supervise these entities for purposes of: (i) assessing compliance with federal consumer financial law; (ii) obtaining information about the companies’ activities and compliance systems or procedures; and (iii) detecting and assessing risks to consumers and consumer financial markets. In order to accomplish this, the Bureau conducts formal examinations of these entities—or it may simply request information from supervised entities without conducting examinations. The Bureau prioritizes its activity among these companies based on, among other things, the size and risk to a particular market, the extent of relevant overlapping state regulation, and any market information that the Bureau has on the company, including, for example, any consumer complaints about the company which have been submitted to the Bureau.
The Bureau has defined larger participants in five markets to date: consumer reporting, consumer debt collection, student loan servicing, international money transfers, and most recently, automobile financing. This regulatory expansion was an intended goal of Dodd-Frank which will continue in the future.
How Regulation Happens
Collection Consumer Complaints
In addition to expanding the scope of what entities and industries are regulated by the CFPB, Dodd-Frank also instructs the Bureau on how it should make those determinations. One of the biggest changes as a result of Dodd-Frank is the reliance on consumer complaints to inform the regulatory agenda. In its 2015 Semi-Annual Report, the CFPB explains that information obtained from consumers “informs every aspect of the Bureau’s work, including research, rule writing, supervision, and enforcement.” Formation of regulatory policy based on the complaints of those who are impacted, without meaningful verification or interpretation as to the causes of the complaints, is a profound change in the way that regulation is formed.
Under Dodd-Frank § 1013, the Bureau is required to receive complaints from consumers, specifically by establishing a unit - the Office of Consumer Response - “whose functions shall include establishing a single, toll-free telephone number, a website, and a database or utilizing an existing database to facilitate the centralized collection of, monitoring of, and response to consumer complaints regarding consumer financial products or services.”
On March 19, 2015, the Bureau announced that it was finalizing rules to allow consumers to add narratives about their complaints. The addition of the consumer narratives will increase the significance and impact of these complaints. According to the Bureau, “consumer narratives provide a first-hand account of the consumer’s experience, and adding the option to share them will greatly enhance the utility of the database. The narratives will provide context to complaints, spotlight specific trends, and help consumers make informed decisions. The narratives may encourage companies to improve the overall quality of their products and services, and more vigorously compete over good customer service.”
In this respect, the CFPB’s function of collecting consumer complaints to inform its regulatory priorities, as required by Dodd-Frank, has morphed into a mechanism to police the quality of companies’ products and customer service, extending the Bureau’s regulatory oversight into the private relationship between a company and its customers. This extension is particularly intrusive—and unnecessary, considering we live in an age of social media which allows real-time feedback by consumers through a multitude of channels.
Data Collection
Another new regulatory tool at the CFPB’s disposal is the requirement that it collect information on the financial markets in order to determine its regulatory priorities. Under Dodd-Frank § 1022, the CFPB is directed to “monitor for risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services.”
The CFPB performs this monitoring by gathering and compiling information from “variety of sources, including examination reports concerning [companies], consumer complaints, voluntary surveys and voluntary interviews of consumers, surveys and interviews with [companies], and review of available databases.” In addition, the CFPB can gather information by requiring companies to provide other information as necessary for it to “fulfill the monitoring, assessment, and reporting responsibilities imposed by Congress.” This section of the law was enacted because prior to the financial crisis, Congress felt there was a lack of data on consumer financial products and services that hindered federal oversight and regulation.
The CFPB’s data collection regime has been the target of extensive criticism, especially from privacy advocates. In September 2014, the Government Accountability Office (GAO) published a report in which it reviewed the CFPB data collection program. According to the GAO report, the CFPB has conducted large-scale data collections including one where it obtained 173 million mortgage loans from a data aggregator.
While the GAO found that other federal regulators (e.g., the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency), collect similarly large amounts of data, it did determine that the CFPB “lacks written procedures and comprehensive documentation for a number of processes, including data intake and information security risk assessments. The lack of written procedures could result in inconsistent application of the established practices,” including “assessing and managing privacy risks,” “monitoring and auditing privacy controls,” and “documenting results of information security risk-assessments consistently and comprehensively.” The GAO’s finding is ironic, given the CFPB’s continued emphasis on the importance of companies having written policies and procedures in the context of effective compliance programs.
Beyond the obvious privacy and data security risks, the CFPB’s collection of large amounts of consumer data will fundamentally change the way regulators act. To reiterate, this was part of Dodd-Frank’s goal and is not an unintended consequence; its impact, however, will be dramatic as regulators utilize “big data” to more easily spot trends and trouble spots earlier—all of which will lead to increased regulation.
Conclusion
Although viewed by many as an overreaching agency run amuck, the CFPB is largely following the rules as established by Dodd-Frank. As a result, barring a major change in the law, the Bureau will continue to expand its reach, with a corresponding increase in the regulation of the financial services sector. The calls for regulatory reform and amendments to Dodd-Frank do not currently have the necessary political support. Until they do, this expanding regulatory environment will continue unabated.
WALZ Chief Compliance Officer, Maria Moskver, also contributed to this article.
Overregulation has led-and will continue to lead-to a dramatic increase in the scope and level of regulation in the financial services industry including private money lenders.
By Neal Doherty
In response to the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the most sweeping and comprehensive financial services legislation since the 1930s. One of the central features of Dodd-Frank was the creation of the Consumer Financial Protection Bureau (CFPB), a single federal agency responsible for all consumer protection functions. More importantly, Dodd-Frank essentially re-defined the existing regulatory structure by changing the roles of the various regulators, the scope of industries they regulate, and the tools they use to identify future problems. This structural change has led—and will continue to lead—to a dramatic increase in the scope and level of regulation in the financial services industry.
Who Regulates? Limitations to Exemptions of State Law
“It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”
This concept—with the states operating as laboratories of democracy, experimenting with new laws and policies—was described in 1932 by U.S. Supreme Court Justice Louis Brandeis in the case New State Ice Co. v. Liebmann. Prior to Dodd-Frank, many state laws attempting to regulate the activity of national banks were preempted by federal regulators, who asserted that the state laws overlapped or conflicted with federal law. Dodd-Frank changed this dynamic by raising the standards that must be met before federal regulators can assert preemption. The change fundamentally increased the importance of the role of the states in the regulatory process, and will result in increased legislative and regulatory activity as states are further empowered to act independently to achieve their own policy goals based on local conditions.
Increased Importance of State Attorneys General
As the individuals who enforce and often push for these laws, the state Attorneys General received a regulatory windfall under Dodd-Frank. Specifically, under § 1042, a “State regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this title or regulations issued under this title with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law…” State Attorneys General are rarely shy about using the power they have been granted and many have already brought actions by using these new Dodd-Frank powers—for example, the Illinois A.G. suing a predatory lender in Chicago; Connecticut and Florida in a joint lawsuit against a mortgage rescue company; and Mississippi bringing charges against a credit reporting agency.
This power also extends to other state regulators who may have been previously hamstrung by the law of their own states. For example, under New York General Business Law § 349, the Attorney General is the only state official empowered to bring an action for an unfair or deceptive act or practice. Dodd-Frank, however, extended this power such that other state regulators can bring these types of actions. Benjamin Lawsky, the former Superintendent of New York’s Department of Financial Services, was thus empowered, frequently wielding this new authority prior to his departure.
Increased Cooperation between CFPB and States
As a result of this expanded role for state regulators, the relationship between the states and federal regulators—in particular the CFPB—takes on new importance. In order to aid in this relationship, state regulators and the CFPB have entered into agreements to enhance cooperation. For example, in 2011, the CFPB and Conference of State Bank Supervisors signed an agreement to work together to achieve examination efficiencies and to avoid duplication of time and resources. Also in 2011, the National Association of Attorneys General and the CFPB agreed to a Joint Statement of Principles, establishing a framework for regulation of financial products and services. This cooperation has resulted in numerous joint enforcement actions starting with the 2012 National Mortgage Settlement with the country’s five largest mortgage servicers. This cooperative framework will lead to further public and private enforcement actions as the CFPB and states share information and cooperate to achieve common goals and objectives.
Who is Regulated? The Larger Participant Rule
Another major change caused by Dodd-Frank is re-defining the type of companies covered by federal regulation, including many companies that were previously regulated under state law, or perhaps not regulated at all. Dodd-Frank authorizes the Bureau to define by regulation larger participants of certain markets for financial products or services. These “larger participant” rules extend the CFPB’s oversight into markets which may not have been regulated in the past.
Dodd-Frank § 1024 specifically gives the Bureau supervisory authority over all nonbanks offering three specific types of consumer financial products or services: (i) mortgages; (ii) private education loans; and (iii) payday loans. The law also grants CFPB supervisory authority over “larger participants” (as defined by the Bureau) in markets for other consumer financial products or services. While defining a company as a larger participant does not impose new substantive consumer protection requirements, it does subject these companies to the Bureau’s regulatory and enforcement authority.
The Bureau is authorized to supervise these entities for purposes of: (i) assessing compliance with federal consumer financial law; (ii) obtaining information about the companies’ activities and compliance systems or procedures; and (iii) detecting and assessing risks to consumers and consumer financial markets. In order to accomplish this, the Bureau conducts formal examinations of these entities—or it may simply request information from supervised entities without conducting examinations. The Bureau prioritizes its activity among these companies based on, among other things, the size and risk to a particular market, the extent of relevant overlapping state regulation, and any market information that the Bureau has on the company, including, for example, any consumer complaints about the company which have been submitted to the Bureau.
The Bureau has defined larger participants in five markets to date: consumer reporting, consumer debt collection, student loan servicing, international money transfers, and most recently, automobile financing. This regulatory expansion was an intended goal of Dodd-Frank which will continue in the future.
How Regulation Happens
Collection Consumer Complaints
In addition to expanding the scope of what entities and industries are regulated by the CFPB, Dodd-Frank also instructs the Bureau on how it should make those determinations. One of the biggest changes as a result of Dodd-Frank is the reliance on consumer complaints to inform the regulatory agenda. In its 2015 Semi-Annual Report, the CFPB explains that information obtained from consumers “informs every aspect of the Bureau’s work, including research, rule writing, supervision, and enforcement.” Formation of regulatory policy based on the complaints of those who are impacted, without meaningful verification or interpretation as to the causes of the complaints, is a profound change in the way that regulation is formed.
Under Dodd-Frank § 1013, the Bureau is required to receive complaints from consumers, specifically by establishing a unit - the Office of Consumer Response - “whose functions shall include establishing a single, toll-free telephone number, a website, and a database or utilizing an existing database to facilitate the centralized collection of, monitoring of, and response to consumer complaints regarding consumer financial products or services.”
This extension is particularly intrusive—and unnecessary, considering we live in an age of social media which allows real-time feedback by consumers through a multitude of channels.To facilitate the submission of complaints, the CFPB launched its Consumer Complaint Database on June 19, 2012. It was initially populated with credit card complaint data, but has since been expanded to include other products, including mortgages, bank accounts, student loans, vehicle and other consumer loans, credit reporting, money transfers, debt collection, payday loans, and prepaid cards. As of March 1, 2005, the Bureau has handled nearly 560,000 complaints, with mortgages and debt collection being the most frequently covered areas.
On March 19, 2015, the Bureau announced that it was finalizing rules to allow consumers to add narratives about their complaints. The addition of the consumer narratives will increase the significance and impact of these complaints. According to the Bureau, “consumer narratives provide a first-hand account of the consumer’s experience, and adding the option to share them will greatly enhance the utility of the database. The narratives will provide context to complaints, spotlight specific trends, and help consumers make informed decisions. The narratives may encourage companies to improve the overall quality of their products and services, and more vigorously compete over good customer service.”
In this respect, the CFPB’s function of collecting consumer complaints to inform its regulatory priorities, as required by Dodd-Frank, has morphed into a mechanism to police the quality of companies’ products and customer service, extending the Bureau’s regulatory oversight into the private relationship between a company and its customers. This extension is particularly intrusive—and unnecessary, considering we live in an age of social media which allows real-time feedback by consumers through a multitude of channels.
Data Collection
Another new regulatory tool at the CFPB’s disposal is the requirement that it collect information on the financial markets in order to determine its regulatory priorities. Under Dodd-Frank § 1022, the CFPB is directed to “monitor for risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services.”
The CFPB performs this monitoring by gathering and compiling information from “variety of sources, including examination reports concerning [companies], consumer complaints, voluntary surveys and voluntary interviews of consumers, surveys and interviews with [companies], and review of available databases.” In addition, the CFPB can gather information by requiring companies to provide other information as necessary for it to “fulfill the monitoring, assessment, and reporting responsibilities imposed by Congress.” This section of the law was enacted because prior to the financial crisis, Congress felt there was a lack of data on consumer financial products and services that hindered federal oversight and regulation.
The CFPB’s data collection regime has been the target of extensive criticism, especially from privacy advocates. In September 2014, the Government Accountability Office (GAO) published a report in which it reviewed the CFPB data collection program. According to the GAO report, the CFPB has conducted large-scale data collections including one where it obtained 173 million mortgage loans from a data aggregator.
While the GAO found that other federal regulators (e.g., the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency), collect similarly large amounts of data, it did determine that the CFPB “lacks written procedures and comprehensive documentation for a number of processes, including data intake and information security risk assessments. The lack of written procedures could result in inconsistent application of the established practices,” including “assessing and managing privacy risks,” “monitoring and auditing privacy controls,” and “documenting results of information security risk-assessments consistently and comprehensively.” The GAO’s finding is ironic, given the CFPB’s continued emphasis on the importance of companies having written policies and procedures in the context of effective compliance programs.
Beyond the obvious privacy and data security risks, the CFPB’s collection of large amounts of consumer data will fundamentally change the way regulators act. To reiterate, this was part of Dodd-Frank’s goal and is not an unintended consequence; its impact, however, will be dramatic as regulators utilize “big data” to more easily spot trends and trouble spots earlier—all of which will lead to increased regulation.
Conclusion
Although viewed by many as an overreaching agency run amuck, the CFPB is largely following the rules as established by Dodd-Frank. As a result, barring a major change in the law, the Bureau will continue to expand its reach, with a corresponding increase in the regulation of the financial services sector. The calls for regulatory reform and amendments to Dodd-Frank do not currently have the necessary political support. Until they do, this expanding regulatory environment will continue unabated.
WALZ Chief Compliance Officer, Maria Moskver, also contributed to this article.
Tuesday, October 6, 2015
As an Anxious World Turns, the Fed Stands Pat
By: USNEWS Andrew Soergel - October 1, 2015
Private Money Lenders do not play by the same rules as the stock market and the Chinese economy. There is no uncertainty and no fear about when - even whether - the Federal Reserve should raise U.S. interest rates.
A lack of interest-rate action – and no firm sign of when to expect it – is playing on nerves at home and abroad.
All eyes are on Federal Reserve Chair Janet Yellen and her colleagues in the Federal Open Market Committee as they navigate uncharted monetary policy waters.
"Uncertainty" is a word that's been floating around a lot recently. It's there in the stock market. It's there in the Chinese economy. And there's certainly uncertainty about when – even whether – the Federal Reserve should raise U.S. interest rates.
In fact, the only certain thing right now seems to be that few analysts are certain about what will happen next month, next year and beyond. Few would have predicted a year ago that recent Chinese stock volatility would shake global markets, or that Beijing's economic interventions and currency devaluations would rock international trade, commodity prices and Chinese demand for imported goods.
A year before that, few would have predicted that the world would be plunged into such a prolonged period of low oil prices, which has been responsible for thousands of job losses and has weighed heavily on the economies of oil-exporting countries.
Drags on the global economy have hit hard and fast, while growth and improvement have been significantly more gradual. And with less-than-positive memories of the Great Recession and the subsequent global slowdown fresh on the minds of millions around the world, the current state of economic uncertainty is giving rise to something even more dire.
"We're in a fear cycle. It's hard to rationally say what happens in a fear cycle," Michael Kelly, managing director and global head of multi-asset at Pinebridge Investments, said in an interview last month with Bloomberg.
Not helping to ease that fear is a Fed that can be seen as, at best, dragging its feet on interest rates out of an abundance of caution. Federal Reserve Chair Janet Yellen, the most powerful figure in a central bank that sets monetary policy for the world's largest economy, specifically cited uncertainty as a deterrent to raising U.S. interest rates in September.
"In light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term," Yellen said after last month's Federal Open Market Committee meeting.
But at least part of the problem with these "uncertainties abroad" is that the Fed's interest rate indecisiveness is feeding into international concern, creating a disquieting and static cycle. U.S. monetary policy, with its impacts on variables like currency strength and debt repayment terms, holds global significance. Christine Lagarde, the managing director of the International Monetary Fund, on Wednesday mentioned America's ongoing rate hike saga in the same breath as China's economic turbulence, citing both as hindrances to global stability.
"The prospect of rising interest rates in the United States and China's slowdown are contributing to uncertainty and higher market volatility," Lagarde said during a speech in Washington.
The Fed, subsequently, finds itself in quite a hole: Officials want to hold off on a rate liftoff until the fog of global uncertainty lifts. But Lagarde suggests skies won't meaningfully clear until U.S. monetary policy stops timidly toeing the line and takes its own first step on interest rates.
Lagarde, to be fair, has previously said she thinks the Fed should wait to raise rates until 2016. But she acknowledged the "will they or won't they" saga has generated global confusion and put investors around the world on edge.
"It's hard to know the Fed's mind, and apparently they don't know their mind themselves," Hans Olsen, managing director and global head of investment strategy at Barclays Wealth and Investment Management, said in an interview Monday with CNBC. "You have a picture of the economy that actually is pretty good overall. But if you look at the equity market, the equity market's wheezing a little bit here."
Nowhere has uncertainty been more pronounced than in equity markets. The Dow Jones industrial average has regularly swung by hundreds of points in recent weeks, with investors showing more and more that no one's 100 percent certain what's going on.
"A lot of the traders in the market are saying, 'Look, the uncertainty of not knowing when you're going to move is creating so many ripple effects in the market right now, that it would just be better if [the Fed] gave some definitive direction,'" Bloomberg's Lisa Abramowicz observed earlier this month. "Frankly, people are waiting for what they don't know."
The youthfulness that dominates Wall Street is contributing to market unease, considering the average trader nowadays is only 30 years old. About 30 percent started working on Wall Street within the last five years, according to Bloomberg and salary comparison site Emolument.com, and two-thirds have never seen a full policy tightening cycle before.
That means low interest rates are all many traders know. And they're the ones who will be largely responsible for seeing the market through what is sure to be a long normalization path.
"It's even bigger than just not knowing how to react because you haven't seen it in a while. Nobody's seen [interest rates] come up off of zero before in the U.S. We have no idea," says Tara Sinclair, chief economist at jobs site Indeed.com. "We genuinely don't know. Despite all of the Fed's fantastic simulation models, they've only seen it in simulation."
The Fed has plotted out likely scenarios for what will happen to the economy once interest rates start to rise, but theory is often very different from reality. And the reality of America's current economic condition is that the Fed's goals in the labor market and price growth have not been met. Many thought the employment aspect of the Fed's dual mandate was plugging along smoothly, at least until a disastrous September jobs report threw the labor market's health into question. And core inflation still sits well shy of the central bank's long-term 2 percent objective.
"If you just look at their mandate, there's really no reason to be particularly concerned about moving anytime soon," Sinclair says. "The Fed has been between a rock and a hard place now for many years. They cannot win. They have a mandate that says that they're supposed to be targeting full employment and low and stable inflation, but the data aren't behaving at all in the normal, expected way."
Complicating matters further are the political pressures the Fed faces to provide more clarity on what its officials are thinking. Hawks on Capitol Hill and elsewhere are urging the Federal Open Market Committee to initiate a rate liftoff sooner rather than later, because such a move will give the Fed more monetary policy options in the event of another recession. If interest rates aren't sufficiently elevated in time, the Fed won't be able to meaningfully lower them again to stimulate growth.
"It is really hard for the Fed to forecast what's going to be happening, particularly with inflation and [the] unemployment rate. These things are not easy to forecast a year out," Sinclair says. "At some point, I understand they're going to say, 'We've done what we can do, so we have to normalize.'"
But at the risk of sounding like a broken record – or perhaps an iPod on repeat – precisely when that tipping point will come is still uncertain. The Federal Open Market Committee will next meet in October, but there's not much new data that will come out before then. Most have their eyes set on December, but even that's not set in stone.
In the meantime, the U.S. – along with the world – waits.
Private Money Lenders do not play by the same rules as the stock market and the Chinese economy. There is no uncertainty and no fear about when - even whether - the Federal Reserve should raise U.S. interest rates.
A lack of interest-rate action – and no firm sign of when to expect it – is playing on nerves at home and abroad.
All eyes are on Federal Reserve Chair Janet Yellen and her colleagues in the Federal Open Market Committee as they navigate uncharted monetary policy waters.
"Uncertainty" is a word that's been floating around a lot recently. It's there in the stock market. It's there in the Chinese economy. And there's certainly uncertainty about when – even whether – the Federal Reserve should raise U.S. interest rates.
In fact, the only certain thing right now seems to be that few analysts are certain about what will happen next month, next year and beyond. Few would have predicted a year ago that recent Chinese stock volatility would shake global markets, or that Beijing's economic interventions and currency devaluations would rock international trade, commodity prices and Chinese demand for imported goods.
A year before that, few would have predicted that the world would be plunged into such a prolonged period of low oil prices, which has been responsible for thousands of job losses and has weighed heavily on the economies of oil-exporting countries.
Drags on the global economy have hit hard and fast, while growth and improvement have been significantly more gradual. And with less-than-positive memories of the Great Recession and the subsequent global slowdown fresh on the minds of millions around the world, the current state of economic uncertainty is giving rise to something even more dire.
"We're in a fear cycle. It's hard to rationally say what happens in a fear cycle," Michael Kelly, managing director and global head of multi-asset at Pinebridge Investments, said in an interview last month with Bloomberg.
Not helping to ease that fear is a Fed that can be seen as, at best, dragging its feet on interest rates out of an abundance of caution. Federal Reserve Chair Janet Yellen, the most powerful figure in a central bank that sets monetary policy for the world's largest economy, specifically cited uncertainty as a deterrent to raising U.S. interest rates in September.
"In light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term," Yellen said after last month's Federal Open Market Committee meeting.
But at least part of the problem with these "uncertainties abroad" is that the Fed's interest rate indecisiveness is feeding into international concern, creating a disquieting and static cycle. U.S. monetary policy, with its impacts on variables like currency strength and debt repayment terms, holds global significance. Christine Lagarde, the managing director of the International Monetary Fund, on Wednesday mentioned America's ongoing rate hike saga in the same breath as China's economic turbulence, citing both as hindrances to global stability.
"The prospect of rising interest rates in the United States and China's slowdown are contributing to uncertainty and higher market volatility," Lagarde said during a speech in Washington.
The Fed, subsequently, finds itself in quite a hole: Officials want to hold off on a rate liftoff until the fog of global uncertainty lifts. But Lagarde suggests skies won't meaningfully clear until U.S. monetary policy stops timidly toeing the line and takes its own first step on interest rates.
Lagarde, to be fair, has previously said she thinks the Fed should wait to raise rates until 2016. But she acknowledged the "will they or won't they" saga has generated global confusion and put investors around the world on edge.
"It's hard to know the Fed's mind, and apparently they don't know their mind themselves," Hans Olsen, managing director and global head of investment strategy at Barclays Wealth and Investment Management, said in an interview Monday with CNBC. "You have a picture of the economy that actually is pretty good overall. But if you look at the equity market, the equity market's wheezing a little bit here."
Nowhere has uncertainty been more pronounced than in equity markets. The Dow Jones industrial average has regularly swung by hundreds of points in recent weeks, with investors showing more and more that no one's 100 percent certain what's going on.
"A lot of the traders in the market are saying, 'Look, the uncertainty of not knowing when you're going to move is creating so many ripple effects in the market right now, that it would just be better if [the Fed] gave some definitive direction,'" Bloomberg's Lisa Abramowicz observed earlier this month. "Frankly, people are waiting for what they don't know."
The youthfulness that dominates Wall Street is contributing to market unease, considering the average trader nowadays is only 30 years old. About 30 percent started working on Wall Street within the last five years, according to Bloomberg and salary comparison site Emolument.com, and two-thirds have never seen a full policy tightening cycle before.
That means low interest rates are all many traders know. And they're the ones who will be largely responsible for seeing the market through what is sure to be a long normalization path.
"It's even bigger than just not knowing how to react because you haven't seen it in a while. Nobody's seen [interest rates] come up off of zero before in the U.S. We have no idea," says Tara Sinclair, chief economist at jobs site Indeed.com. "We genuinely don't know. Despite all of the Fed's fantastic simulation models, they've only seen it in simulation."
The Fed has plotted out likely scenarios for what will happen to the economy once interest rates start to rise, but theory is often very different from reality. And the reality of America's current economic condition is that the Fed's goals in the labor market and price growth have not been met. Many thought the employment aspect of the Fed's dual mandate was plugging along smoothly, at least until a disastrous September jobs report threw the labor market's health into question. And core inflation still sits well shy of the central bank's long-term 2 percent objective.
"If you just look at their mandate, there's really no reason to be particularly concerned about moving anytime soon," Sinclair says. "The Fed has been between a rock and a hard place now for many years. They cannot win. They have a mandate that says that they're supposed to be targeting full employment and low and stable inflation, but the data aren't behaving at all in the normal, expected way."
Complicating matters further are the political pressures the Fed faces to provide more clarity on what its officials are thinking. Hawks on Capitol Hill and elsewhere are urging the Federal Open Market Committee to initiate a rate liftoff sooner rather than later, because such a move will give the Fed more monetary policy options in the event of another recession. If interest rates aren't sufficiently elevated in time, the Fed won't be able to meaningfully lower them again to stimulate growth.
"It is really hard for the Fed to forecast what's going to be happening, particularly with inflation and [the] unemployment rate. These things are not easy to forecast a year out," Sinclair says. "At some point, I understand they're going to say, 'We've done what we can do, so we have to normalize.'"
But at the risk of sounding like a broken record – or perhaps an iPod on repeat – precisely when that tipping point will come is still uncertain. The Federal Open Market Committee will next meet in October, but there's not much new data that will come out before then. Most have their eyes set on December, but even that's not set in stone.
In the meantime, the U.S. – along with the world – waits.
Friday, October 2, 2015
5 Reasons Home Sales Fall Through
Don't let financing trouble be the sale killer on your next transaction. Private Money Lending will help with a smooth transaction that can close fast before your transaction crumbles.
Nothing is more disappointing than thinking your home sale is a done deal, only to have it crumble in the final stages of the process. A closing may fall through for many reasons, including title-insurance surprises, buyer financing rejections, inspection failures, and lowball appraisals. Even buyer’s remorse can sour a deal.
Luckily, buyers and sellers who are aware of the more common deal breakers can prepare early to either avoid major issues or work around them. Once a buyer and seller agree on the general purchase terms such as price and timing, they still need to settle a slew of details and confirm key stipulations.
The truth is, almost anything can happen in escrow. Here are the five reasons most home sales fall apart.
1. Buyer financing woes
During the housing market boom, buyers rarely struggled with getting loans, and sellers didn’t have to worry as much about a home sale falling through because of buyer financing. But today, buyer financing trouble is among the biggest sale killers. It’s important to brace for this setback in several ways.
First, look for buyers who are preapproved for a loan. Although they can still get rejected in the mortgage approval process, preapproved buyers are more likely to land a loan than those without the initial credit screening. You can also favor cash-only buyers who don’t need financing, but beware that cash buyers often demand a lower price.
Second, check in with agents while the approvals process is underway to ensure the loan is on track. That way, you’re aware of financing concerns well before settlement. Finally, sellers who are really intent on closing the deal can work with the borrower to agree on a more affordable contract price within their financing means.
2. Low appraisals
Appraisals lower than the contract price can cause a deal to fall through. A buyer’s lender will only lend up to the value of the property, so if the home value appraises lower than the agreed amount, the buyer cannot secure the full mortgage.
If buyers can’t pony up the difference from their savings, a lower-than-expected appraisal can be a deal breaker. In these cases, sellers must be ready to negotiate and be willing to lower their price if they want to close immediately. Or sellers can suggest that the buyer secure a second appraisal, which could be higher and help the buyer qualify for the full mortgage. Sellers can also help the buyer supply the appraiser with evidence of comparable home sales in the area to make the case for a higher value.
3. Plan for title insurance and home inspection surprises
The purpose of title insurance is to ensure the owner’s home is fully theirs to sell. Lenders require title insurance to protect the asset — the home — that secures the loan. If a homeowner defaults on the loan and a faulty title reveals that the home is not actually theirs, the bank has no way of recouping the money it lent.
To stave off any surprise loan issues, don’t wait for the buyer’s title report. Get your own report in advance to make sure the property is fully in your possession with no threat of claims.
The same goes for home inspections. Many home sales fail to make it to closing if the buyer’s inspection reveals serious physical faults with the property. If possible, sellers should be aware in advance — before the buyer’s inspection — of any significant flaws in their home that would jeopardize a closing.
4. Watch for signs of buyer’s remorse
For buyers, the entire home purchase process can be very emotional. They’re investing a substantial amount of money in what they hope is their dream home. They have to live with the house and the community every day. And sometimes they just get cold feet. Unfortunately, there is little sellers can do to eliminate buyer’s remorse, but they can be on guard for buyers who seem especially anxious or hesitant about negotiating a deal. When you have the option, favor more enthusiastic, confident buyers.
5. Don’t hinge a deal on the buyer’s home sale
Many buyers need the equity in their current home to purchase a new one, and if your buyer’s home sale falls through, your home sale could fall through too. However, avoiding this pitfall is easy: Don’t allow the sale of a buyer’s home as a contract contingency. Instead, target buyers who have already sold their home, or who aren’t relying on the equity in their current home to help finance yours.
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