Big Banks' Effort to Seize Mortgage Business from GSEs

New York Times

Big banks have been working behind the scenes, and making considerable progress, in taking over the home loan market from Fannie Mae and Freddie Mac, Gretchen Morgenson writes in the Times. The effort has been led by a group of professionals who have walked the revolving door between the private sector and public sector; including Michael Berman, a consultant to real estate lenders and David Stevens, head of the Mortgage Bankers Association.

Their attempt to help banks take over the business of providing mortgage backstops has been "largely embraced" by the Obama administration; and government regulators are being forced to put elements into effect. One of the group's top goals is to create a "new line of mortgage-backed securities" as the centerpiece of federal support for the secondary mortgage market.

The revelation is based on a Times investigation that includes reviews of "lobbying records, legal filings, internal emails and memorandums, housing officials' calendars and White House and Treasury visitor logs." Giving the biggest banks more control of the mortgage market would probably increase costs for borrowers, Morgenson writes, citing officials including the former chief counsel to the Senate Permanent Subcommittee on Investigations, who oversaw an investigation into the causes of the financial crisis.

Wall Street Journal

The Silicon Valley social clique extends to Silicon Valley Bank. Borrowers at Silicon Valley Bank are all on each other's boards and so when one startup gets in a bit of a pickle, they can rely on their directors to bail them out. Or so it would seem. TinyCo (yes, apparently this is the real name of this startup) was going to be late on a loan payment; its CEO broke out in hives, he was so worried. But venture capital mensch Marc Andreessen is a TinyCo director and a Silicon Valley Bank borrower. Andreessen rang up the bank, asked them to give TinyCo a six-month extension, and TinyCo was able to find enough spare change under seat cushions in the interim to make its next payment.

It's nice to have friends in the right places. And that's how Silicon Valley Bank's stock has been able to significantly outperform the Nasdaq Bank Index, the Wall Street Journal posits. Want a mortgage from Silicon Valley Bank. You can get one, but only if the bank invites you. Even the bank's CEO uses startup-world lingo in his quotes to the press.

"It's a whole ecosystem we are building," Gregory Becker said. The flipside is that startups can fail, too. Like TinyCo, which found itself on the brink, other Silicon Valley Bank customers have struggled, including Jet.com and Square. SVB also faces potential competition from the likes of JPMorgan Chase, which is angling for the same kind of business.

But then there are those valuable relationships. Mamasource, another startup, was experiencing negative cash flow. A simple call from Silicon Valley Bank to Mamasource's venture-capital sugar daddies persuaded them to hold off on placing the startup in default. Again, buying time paid off for the bank, as the loan was later paid off.

Crowdfunding for tech startups isn't all it's cracked up to be. At least not for the Joe Sixpacks that are being allowed to invest in startups. The reason is the Securities and Exchange Commission included a rule in the official code section allowing such crowdfunding that essentially puts a clamp on regular, working Americans' ability to invest in startups.

The concept of "regulated crowdfunding" disincentivizes high-growth startups from using crowdfunding. How? By requiring startups to engage in the evil practice of filing financial-disclosure documents with the SEC. "It is all the pain of an IPO without the benefits of the IPO," the paper said. So much for allowing regular Americans to invest in a pre-IPO Facebook.

Has the time come for underwriting requirements for student loans? Anyone with a pulse has been able to take out $57,500 in college years, with no investigation into ability to repay. This has been the case for decades. Now comes the time to slam that door shut. With default rates soaring, academics associated with the conservative and libertarian think tanks Cato Institute and Hoover Institution want to place underwriting standards on college loan applications. In other words, time to put into policy the concept of "somebody's got to cook the french fries."

PNC Financial Services Group and SunTrust Banks both said their cards were affected by an outage at First Data that started on Friday morning. The outage lasted less than an hour, First Data said. It's unknown how many cards or transactions were affected. The outage wasn't caused by a cyberattack.

The Fed will change how it handles stress tests, after its internal watchdog said the Fed wasn't as demanding on itself as it is on the banks it examines. In one of most significant changes, the Fed was found deficient in how it validates its computer models that set capital requirements for the largest banks. But the Fed would have reprimanded a bank for being deficient in the same way. Part of the problem with the validation process is that the Fed didn't assign enough staff to the matter. The Fed has now devoted a full-time team to validations.

Financial Times

Here's another call to reinstate Glass-Steagall, this one from Financial Times columnist John Dizard. The U.S. should "completely [separate] the capital structures, managements, directors, personnel and even premises of commercial and investment banking. That may be an immediate expense for the shareholders and the economy, but it is better than the possible alternatives," Dizard wrote. The alternatives include banks not being able to accept flight-to-safety deposits in a financial crisis, or extending credit.