Morning Scan: 'Gentler' Stress Tests?; Mortgage Trouble Brewing

Receiving Wide Coverage ...

Kid gloves: The Government Accountability Office released its review of the Federal Reserve's annual bank stress tests, which the Financial Times said "may pave the way towards gentler treatment" of banks. "The report recommended that the Fed share more information on the models it uses and its reasons for failing big banks, while working more closely with other agencies including the FDIC and the OCC."

The GAO said the stress tests help improve oversight of the banking system, "but said the Fed should better evaluate the tests' impact on credit in the economy, be more transparent about the reasons banks fail the tests, and improve its oversight of the mathematical models used in the program," the Wall Street Journal reported.

"The GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed's regulatory oversight or the integrity of the tests' findings," said House Financial Services Committee Chairman Jeb Hensarling, R-Texas, who requested the report. Putting the GAO proposals into action would be his top priority in the next Congress, said Hensarling, who is under consideration to be Treasury secretary in the incoming Trump administration. Wall Street Journal, Financial Times, American Banker

Wall Street Journal

Trouble in mortgage land: A perfect storm is gathering in the commercial real estate debt market. Interest rates are going up at the same time defaults are rising, the result of loose lending before the financial crisis. Ten-year loans made in 2006 and 2007 are now coming due, and many borrowers can't pay them off. Now the market is bracing for new risk-retention rules that go into effect on Christmas Eve that require issuers of commercial mortgage-backed securities to hold at least 5% of the securities they create. "You couldn't have planned worse timing," said Tad Philipp, director of commercial real-estate research at Moody's.

Not surprisingly, some investment firms are getting out of the commercial loan securitization business as volatility and risk have increased.

Things don't look so great in the residential mortgage business, either. The recent spike in Treasury bond yields has driven up mortgage rates by nearly 50 basis points since last week's presidential election, pushing rates on 30-year fixed-rate mortgages above 4%. The could put a damper on mortgage refinances as well as purchase originations.

But the news isn't all bleak. The FHA said Tuesday that its capital reserve ratio for its portfolio on single-family homes has risen to 3.28%, compared to 3% in 2008, before the brunt of the housing crisis hit, and that its overall capital reserve ratio, which it is required by law to stay above 2%, rose to 2.32% at the end of September from 2.07% a year earlier. The FHA also said its ratio of seriously delinquent loans fell to a 10-year low.

Growth stocks: The increase in bank stock prices since Donald Trump's election "has given rise to something new: a belief that banks, which investors had come to view as akin to utilities, will once again be able to go for growth," the Journal enthuses. "If so, some investors reckon, bank stocks may deserve valuations more in line with those of the overall stock market, rather than trading at a discount to it."

The Journal cites four midsize lenders whose stocks still have some upside: Regions Financial, Citizens Financial, Zions Bancorp and CIT Group.

Financial Times

Cashless boost: Prime Minister Narendra Modi's decision to void 86% of India's cash by value has been a boon to the country's digital payments industry. "We have seen unprecedented growth over the past few days," said an executive at one electronic wallet company.

Quotable ...

"I can paint a picture that it could be disastrous, with runaway inflation and high interest rates" – Charlie Bendit, co-chief executive of Taconic Investment Partners, discussing the commercial real estate debt market.