Fannie, Freddie capital goals raised; credit card, auto loans eroding

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More capital

The Federal Housing Finance Agency said Fannie Mae and Freddie Mac need $240 billion in capital after they are returned to private ownership, more than 10 times their current capital and well above previous estimates. “The figure sets a high hurdle for the companies,” the Wall Street Journal said, noting that the two “currently hold about $23.5 billion of capital between them. In 2018, when the FHFA was still run by an Obama appointee, the agency estimated that they would need to hold about $180 billion in loss absorbing capital after exiting government control.”

“The proposal on Wednesday, pitched as the next step towards what could be the largest public offering in history, comes against the backdrop of tumbling profits at the two companies, which guarantee more than half of all U.S. mortgages,” the Financial Times said. “Millions of Americans are skipping payments during the coronavirus downturn under a forbearance program promoted by Fannie and Freddie, which has set back the companies’ ability to rebuild their balance sheets on their own.”

“The plan unveiled Wednesday would align capital requirements for the government-sponsored enterprises with those of the large banks once the two companies are privatized, whenever that is,” American Banker’s Hannah Lang writes.

Return planning

Some JPMorgan Chase workers “may be required to sit at common desks, or ‘hot desks,’ a temporary seating arrangement that management hopes will make it easier to clean” when they eventually return to the office, Reuters reports. “The memo, sent on Wednesday to staff in Europe, the Middle East and Africa, said the bank has no timeline for returning staff to offices, but that it is working on a plan that will limit the number of staff in buildings to about 50% at any one time.”

“That puts JPMorgan's plans in line with Goldman Sachs and other global banks, which are working out plans to return staff to offices while avoiding the kind of close social contact that could lead to a resurgence in the novel coronavirus. More than 90% of the JPMorgan’s 250,000 employees worldwide have worked from home or other remote locations since mid-March. That has proved disruptive, however, for some heavily regulated and technology-intensive jobs in trading and compliance.”

Mastercard “will not ask staff to return to its worldwide corporate offices until a vaccine is available,” Reuters also reported. “Mastercard joins other technology and financial firms that have said they do not plan to implement widespread get-back-to-the-office initiatives any time soon, including its main rivals American Express Co and Visa. But Mastercard has gone slightly further than others by saying it is waiting for a vaccine and not necessarily aligning its reopening timeline with when government lockdown orders end.”

“As lockdowns begin easing, banks are wrestling with how many traders to send back to the office,” the Financial Times reports. “The abrupt upheaval” brought on by the coronavirus “has forced traders to challenge their own assumptions” about working remotely. “It is also prompting senior executives in London and on Wall Street to rethink not just the working patterns for staff, but what the trading floor of the future will look like.”

Wall Street Journal

Tweaking PPP

Federal lawmakers “are accelerating their push to extend the time frame for small-business owners to spend funds received through the $670 billion Paycheck Protection Program. The Senate will consider legislation that would double, to 16 weeks, the amount of time businesses have to spend PPP loans. Backers say the proposal has bipartisan support.”

“Demand for the program has cooled considerably in recent weeks, with new funds approved at a rate of roughly $1 billion a day. According to Small Business Administration data, a total of $513 billion had been approved under the program by Tuesday, leaving about $130 billion still available after accounting for lender fees. The government pays fees to banks for issuing the PPP loans, which are guaranteed 100% by the government.”

Mounting bills

Nearly 15 million credit card accounts and almost three million auto loans are in “financial hardship” programs, or more than 3% of all such accounts it tracks, according to estimates by credit bureau TransUnion. That’s up sharply from a year ago, “when 0.03% of credit cards and about 0.5% of auto loans were in financial hardship programs.”

“The stakes are high for borrowers and lenders alike. Consumers who can’t pay could be sent to collections. Lenders could face a reckoning, too. Lenders hope that being flexible with borrowers will buy time for the economy to recover and for consumers to get back on track with payments. But lenders can shoulder the unpaid loans for only so long, and many are bracing for a mountain of defaults that they’ll eventually write off as a loss.”

Financial Times

Final act

As expected, the U.S. Comptroller of the Currency “has finalized controversial changes to rules on bank lending in poor communities, just as comptroller Joseph Otting was reported to be stepping down from his post. The reform was one of Mr. Otting’s key regulatory priorities.”

“The OCC’s changes to the CRA are meant, in part, to update it for an era where branchless banking is more prevalent. But the law has long been treated as untouchable by Democratic lawmakers.”

“The OCC's final plan waters down proposed number-based measurements of CRA activity that community groups had blasted, returning some discretion to examiners to judge a bank's overall compliance,” American Banker’s Brendan Pedersen says.

Call to arms

Kristalina Georgieva, managing director of the IMF, is calling on banks to halt dividends and buybacks. “Having in place strong capital and liquidity positions to support fresh credit will be essential,” she writes in an op-ed. “This year they should retain earnings to build capital in the system. Of course, this has unpleasant implications for shareholders, including retail and small institutional investors, for whom bank dividends may be an important source of regular income. Nonetheless, in the face of the abrupt economic contraction, there is a strong case for further strengthening banks’ capital base.”


“We must chart a course for the [companies] toward a sound capital footing so they can help all Americans in times of stress. More capital means a stronger foundation on which to weather crises.” — FHFA Director Mark Calabria in a statement announcing new proposed capital requirements for Fannie Mae and Freddie Mac.

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Capital requirements GSEs Work from home Paycheck Protection Program Delinquencies CRA Joseph Otting