Fannie, Freddie to buy nonbank mortgages; the varying approaches to PPP

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PPP hustle

As we now know, the national rollout of the Paycheck Protection Program for small businesses wasn’t smooth. “Some large banks were slow to start lending, while others left applicants hanging without funding for weeks. But one bright spot emerged, small businesses say: local banks that hustled to disburse loans to their communities as fast as they could. They did this by planning round-the-clock, shifting hundreds of employees to the effort, and cranking out approvals as soon as the program opened, even as the government was still clarifying the rules.”

One such bank was Union Bank & Trust, a family-owned bank in Lincoln, Nebraska. Just “72 hours into the emergency lending program, it ranked second in the nation for number of loans approved, according to the Small Business Administration.”

Banks made more than $10 billion in fees during the first round of the PPP, “processing loans that required less vetting than regular bank loans and had little risk for the banks,” National Public Radio reported. “For every transaction made, banks took in 1% to 5% in fees, depending on the amount of the loan, according to government figures. Loans worth less than $350,000 brought in 5% in fees while loans worth anywhere from $2 million to $10 million brought in 1% in fees.”

“For example, on April 7, RCSH Operations LLC, the parent company of Ruth's Chris Steak House, received a loan of $10 million. JPMorgan Chase & Co., acting as the lender, took a $100,000 fee on the one-time transaction for which it assumed no risk and could pass through with fewer requirements than for a regular loan.”

“Hotels, luxury resorts and management companies that funnel money back to a single company” got about $53 million in PPP loans intended for small businesses, the New York Times reports. Ashford Inc. and the real estate investment trusts it oversees, which include “Ritz Carltons and other hotel holdings,” got loans through Key Bank.

“Some of the nation’s biggest banks, including JPMorgan Chase, Citibank and U.S. Bank, prioritized the applications of their wealthiest clients before turning to other loan seekers, according to half a dozen bank employees and financial industry executives,” the New York Times also reports. “At Chase, nearly all private and commercial banking clients who applied for a small-business loan got one, whereas only one out of every 15 retail banking customers who sought loans was successful. Some banks provided highly personalized, so-called concierge service to their richest clients by enlisting representatives to walk them through every step and submit their paperwork.”

Fallen angels welcome

The European Central Bank said it will allow banks in the eurozone to post as collateral bonds that have lost their investment-grade credit rating in order to maintain access to the ECB’s “ultra-cheap” liquidity facilities. “The move, which was approved by an unscheduled call of the ECB’s governing council on Wednesday, is designed to limit the financial turmoil that might otherwise be caused by an expected wave of credit rating downgrades in response to the pandemic,” the Financial Times said.

“About $275 billion of non-financial corporate bonds could become fallen angels by being downgraded below the triple-B level minimum required for investment grade status within the next year,” the FT said. “The loosened collateral rules will remain until September 2021.”

“The decision means banks could continue to use government bonds of Italy or Spain as collateral for ECB loans, even if those countries’ credit ratings were to be downgraded,” the Wall Street Journal said. “To qualify as collateral, the bonds must have been rated as investment grade on April 7, the ECB said.”

Wall Street Journal

Pricey rescue

The Federal Housing Finance Agency said Wednesday that “cash-starved” mortgage firms that are having trouble selling the loans they originate can sell some of them to Fannie Mae and Freddie Mac – but at a price. “Industry officials praised the regulator’s move but suggested that fees Fannie and Freddie will charge for the purchases—from 5% to 7% of a loan’s value—were high and should be subject to negotiation.”

“Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending,” FHFA Director Mark Calabria said in a statement, adding that the fees are meant to “to mitigate the heightened risk of loss” to Fannie and Freddie. But Dan Berger, CEO of the National Association of Federally Insured Credit Unions, said “the new fees attached to the sale of loans may be cost-prohibitive for many credit unions and limit affordable loan options for home buyers.”

Difference of opinion

Three New York City pension funds have “joined the call for the ouster” of former Exxon Mobil CEO Lee Raymond from JPMorgan Chase’s board of directors, saying Raymond’s “background conflicts with his responsibilities as lead independent director for JPMorgan, the world’s biggest lender and underwriter to the fossil-fuel sector.” The bank’s annual meeting is scheduled for May 19.

“In its proxy material, JPMorgan said it declined an offer by Mr. Raymond not to stand for re-election, saying he possesses the capability, judgment, and other skills and attributes the board looks for in a director, and that his continued service is in the best interests of shareholders.” Raymond has been the lead independent director since 2001 and a board member for 33 years.

Financial Times

Another delay

For the second time in six weeks, Wirecard, the German payments company, “has postponed the publication of a report that it has long said will clear the swirl of controversies surrounding its practices and financial statements. Wirecard commissioned the inquiry last October after the Financial Times reported that sales and profits appeared to have been fraudulently inflated at Wirecard businesses in Dubai and Ireland.”

“Last month the company told investors that KPMG needed more time to investigate the German group’s relationships with third-party business partners, and said it was expecting the results by April 22 ‘at the latest.’” Wirecard “now expects to receive the results next Monday.” The company also “postponed the publication of its annual results to April 30, a date it confirmed on Wednesday night.”

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Paycheck Protection Program Corporate finance FHFA Fannie Mae Freddie Mac Servicing