Dimon returns to work; Fannie, Freddie may need bailout if lockdown persists

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Uneasy launch

“Some of the biggest U.S. banks aren’t ready to handle an expected flood of applications from potential borrowers” under the Small Business Administration’s Paycheck Protection Program, which opens Friday. “Many details of the program remain unclear, which is complicating efforts by lenders to gear up for what is expected to be an onslaught of prospective borrowers,” the Wall Street Journal says. “Among what lenders say are the unanswered questions are how much due diligence of borrowers is required and whether they will be able to sell these loans to create liquidity.”

One of those banks is JPMorgan Chase, which the Financial Times says was “on a collision course” with Treasury Secretary Steven Mnuchin over the $350 billion emergency program. The bank said it “most likely” would be unable to launch the loans on Friday. “Institutions have yet to receive proper application forms and other basic information needed to begin processing requests,” the paper says. But Mnuchin promised the program “will be up and running” Friday as scheduled.

Mnuchin “also said he was doubling the interest rates on the loans to 1%, versus the 0.5% announced earlier in the week, to encourage banks’ participation.”

While “still waiting for much of the information they need to participate, lenders are also nervous about how they — and the government — will handle what is expected to be a huge crush of demand,” the New York Times says.

Bankers said “parts of the program are unclear and onerous,” American Banker reports.

“In addition to earning some interest,” banks and other lenders “stand to reap billions of dollars in fees for underwriting” the loans, the Journal reports. And they “face virtually no credit risk because the government will fully refund banks for the loans that go sour.” The government is also “paying processing fees equal to 1% to 5% of loan amounts to lenders that handle applications.”

“Some banking officials have warned that the abbreviated review process ― which allows borrowers to attest to their own eligibility without the government’s approval ― will make the program a magnet for fraud,” the Washington Post says. “Although the SBA will be able to audit lenders and borrowers later, it will fall primarily to private bankers to make decisions about who should receive taxpayer-backed loans.”

Back at the (home) office

JPMorgan Chase CEO Jamie Dimon returned to work this week, a month after undergoing emergency heart surgery. “I have been recuperating well and getting stronger every day,” he said in a memo to employees, noting he is “working remotely like so many of you.” Wall Street Journal, Financial Times

Separately, JPMorgan Chase said it reached an agreement to take 100% control of its Chinese fund-management joint venture, “opening a path to becoming the first foreign firm to do so in China’s asset-management industry.” Wall Street Journal, Financial Times

Frannie and Freddie Frail?

Fannie Mae and Freddie Mac “could require their second bailout in just over a decade if the U.S. economy remains in a lockdown for several months,” Mark Calabria, the director of the Federal Housing Finance Agency warned. “If we start to go more than two or three months, then there is going to be real stress in the mortgage market, we’re talking in terms of what happened during the great recession,” he told the FT. “If we are talking about a drawn-out period where people are not in a position to pay their mortgages, if we are talking about 25% of people having to ask for forbearance, the system doesn’t have that kind of liquidity. That would require Congress to step in, or the Fed.”

Mark Calabria, the director of the Federal Housing Finance Agency
Mark Calabria, the director of the Federal Housing Finance Agency

“Struggling homeowners are flooding their mortgage companies with requests for help, but many are having a hard time getting it,” the Journal says. “Homeowners say they are waiting hours on the phone just to reach a real person. When they do, some are told that getting an answer could take weeks. That is a troublesome timeline for the many borrowers whose mortgage payments are due in the first half of April.”

Wall Street Journal

Silence is golden

The Federal Reserve Bank of New York argues “there is a benefit of limiting disclosure of information on the soundness of banks in times of stress” in order to avoid setting off bank runs. “Undesirable outcomes can occur if the publication of balance sheet information induces runs on solvent banks,” the bank said in a blog post Thursday, according to the paper. “As a result, it may be desirable for regulators to suspend the publication of bank-specific information during a crisis so as to make banks more opaque to depositors.”

Limiting disclosure “prevents depositors from being able to distinguish between banks with stronger and weaker balance sheets, reducing the chance that depositors will run on a weak, but still solvent bank,” the authors say.

Financial Times

Liquidity pressures

Moody's lowered its outlook for U.S. non-bank mortgage lenders to “negative” from “stable” on Thursday, warning they face “intense” liquidity pressures as “they await clarity from the federal government about how to deal with mortgage payment forbearance.”

“Our baseline scenario is that over the next several quarters non-bank mortgage firms will face ongoing liquidity stress, weaker profitability, as well as declines in capitalization and asset quality,” Moody’s says.

More forbearance

The U.K.’s Financial Conduct Authority “is proposing a temporary freeze on credit card and loan repayments, plus interest-free overdrafts, extending its help for borrowers hit by coronavirus disruption beyond the mortgage payment holidays granted last month.” Banks and card issues have until Monday to respond to the plan, which would take effect April 9, if they accept.

“Among the proposed new reliefs are a payment freeze on credit cards, store cards, personal loans and catalogue credit for up to three months, although lenders may also consider other measures, such as reductions in monthly payments. They may not suspend cards or accounts during the period, though.” Lenders may charge a “reasonable rate of interest,” but the FCA said that should be waived “in the event that a customer requires full forbearance.”

Lucky again?

To the surprise of many, the U.S. auto loan market emerged from the 2008 financial crisis “relatively unscathed” as “cash-strapped borrowers prioritized paying off their cars over their homes and credit cards. Now, however, the $1.3 trillion industry — about 60% bigger than it was back then — is facing an entirely different set of threats. Not only are millions of people being put out of work, but governments are calling for everyone to stay at home to limit the spread of coronavirus. That raises questions over whether borrowers will continue to put their cars above all else when money gets tight.”

Strong-armed?

Four out of the U.K.’s five largest banks that agreed to suspend dividend payments during the coronavirus crisis did so only after the Bank of England “laid down the law,” the paper reports. “RBS, which is majority owned by the taxpayer, was the only one willing to comply.”

“Making the BoE force our hands was the only way of protecting ourselves from a shareholder revolt,” one banker said. “If we had done it of our own volition then we would have faced legal challenges.”

New York Times

Debt relief for all

The Trump Organization, many of whose golf courses and hotels are closed due to the pandemic, “has been exploring whether it can delay payments on some of its loans and other financial obligations,” the paper reports. “Representatives of Mr. Trump’s company have recently spoken with Deutsche Bank, the president’s largest creditor, about the possibility of postponing payments on at least some of its loans from the bank. And in Florida, the Trump Organization sought guidance last week from Palm Beach County about whether it expected the company to continue making monthly payments on county land that it leases for a 27-hole golf club.”

Quotable

“The response is overwhelming — it’s unlike anything I’ve ever seen in my career. We’re talking about attempting to do 10 times our normal monthly loan volume, and maybe more than that.” — Craig Street, chief lending officer of United Midwest Savings Bank in Columbus, Ohio, about the Small Business Administration’s Paycheck Protection Program

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Small business lending JPMorgan Chase Jamie Dimon Fannie Mae Freddie Mac Liquidity Auto lending
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