12.21.2016 The OCC Will Begin Considering Fintech Charter Applications

Last October, the Office of the Comptroller of the Currency (OCC) announced that it planned to establish a new Office of Innovation that would be dedicated to responsible innovation in the financial technology, or fintech, sector.

When the office begins operations sometime during the first quarter of the year, it will begin considering charter applications from fintech firms to become special purpose national banks. Doing so will create a national regulatory framework for fintech companies.

In the Public’s Interest

In announcing its intention to consider fintech charter applications, the OCC said it believes doing so will be in the best interest of the public. “It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters,” said Comptroller of the Currency Thomas J. Curry in a speech at the Georgetown University Law Center in December.

By considering applications for charters from fintech firms on a case-by-case basis, the firms will have a choice rather than being required to seek a charter, Curry noted. “Companies that seek a charter are evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection and strong capital and liquidity,” he said during the speech at Georgetown University.

Granting a national charter for fintech firms will shift supervision and oversight of fintechs from the state to the federal level. So it’s not too surprising that state regulators have come out in opposition to this plan.

“Rather than adapting our financial system to the possibilities enabled by technology, the OCC would put a stop sign on innovation through a regulatory regime that favors the entrenched over the emerging, circumvents consumer protection, and weakens the dual banking system,” said the President and CEO of the Conference of State Bank Supervisors (CSBS) John W. Ryan in a recent press release.

The CSBS cited specific concerns about the OCC’s fintech charter plans in a formal comment letter it submitted to the OCC last fall. Among these concerns are distortion of the marketplace through centralization of regulatory authority for non-depository activities and the fact that it believes state regulation of fintech firms better supports financial services innovation.

Banks Also Object

Commercial banks have also voiced opposition to the OCC’s fintech charter plans. Their main concern is that this would create an uneven playing field between nonbank online lenders and traditional commercial banks. For example, some experts believe that fintech firms would not be subject to many laws and regulations that traditional banks are subject to, including the Community Reinvestment Act (CRA).

In a recent press release, the President and CEO of the Independent Community Bankers of America (ICBA) Camden R. Fine stated: “ICBA continues to have serious concerns with the establishment of a limited ‘fintech’ charter for nonbank online lenders. ICBA has been deeply concerned that nonbank online lenders’ lack of oversight has provided them with regulatory advantages over other institutions — such as highly regulated community banks — while putting consumers and the financial system at risk.”

Meanwhile, many in the virtual currency industry have voiced support for the OCC’s fintech charter plans. The Coin Center, a nonprofit organization that focuses on policy issues surrounding virtual currencies, praised the OCC in a comment letter it submitted to the OCC.

“We have too much overlapping and incongruous regulation thanks to our state-by-state approach to money transmission licensing,” wrote the Coin Center’s Director of Research Peter Van Valkenburgh in an article published on the Coin Center’s website. He pointed out that there’s only one regulator in the UK. “That’s a lot easier than some 53 states and territories along with a handful of federal agencies,” he wrote in the article.

Learn More or Comment

The OCC has published a whitepaper on its website that explains the issue of a national fintech charter in more detail — you can download it here. The OCC is accepting comments through January 15, 2017, which you can send to specialpurposecharter@occ.treas.gov.

We’re interested in hearing from you. What do you think about the OCC’s plans to begin considering charter applications from fintech firms? Send me an email at steven@lendtrade.com.

12.15.2016 Consumer Confidence and Stock Market Are Soaring

Remember before the election when many pundits were saying that if Donald Trump were elected President, the economy and financial markets would go into a tailspin? A little over a month after the election, the exact opposite has occurred.

Consumer Sentiment Index Rises This Month

The latest evidence of the strong bump that Trump’s election has given to the economy and markets (at least so far) came when the University of Michigan’s Consumer Sentiment Index was released on December 9.

The Index rose from 93.8 in November to 98 this month, its highest level since January of 2015. Economists had projected that it would only rise to 94.5, so the Index beat these projections handily. During the first 11 months of this year, the Index averaged a reading of just 91.3.

A record share of survey respondents this month “spontaneously mentioned” that they expect a positive impact from new policies to be implemented by the Trump administration and for the economy and job market to strengthen next year. The gauge of consumer expectations six months out rose from 85.2 to 88.9, its highest level since January of 2015.

In addition, the Current Conditions Index increased this month by 4.8 points to 112.1, its highest level in over a decade. This index measures peoples’ perceptions about their personal finances.

Dow Is Closing in on 20,000

These strong consumer confidence numbers are being recorded at the same time that the stock markets are setting new records on almost a daily basis. The Dow Jones Industrial Average is starting to close in on the 20,000 mark — a level that was unthinkable back when the Dow sank to below 7,000 in the aftermath of the financial crisis.

Of course, Trump hasn’t even been inaugurated yet, so all of this enthusiasm is based on people’s hopeful expectations of what his Presidency might mean for the U.S. economy and investment markets. The director of the Consumer Sentiment Index survey, Richard Curtin, pointed out that Presidential honeymoons typically don’t last very long, petering out in a few months if the new President doesn’t deliver results quickly.

“President-elect Trump must provide early evidence of positive economic growth as well as act to keep positive consumer expectations aligned with performance,” commented Curtain in a statement accompanying the release. “Either too-slow growth or too-high expectations represent barriers to maintaining high levels of consumer confidence.”

High Consumer Confidence = Healthy Consumer Spending

If these high levels of consumer confidence are sustained throughout next year and beyond, this will likely drive up consumer spending, which tends to have a positive ripple effect all throughout the economy. For his part, Curtain is leaving his forecast for consumption growth next year unchanged at 2.5 percent until he sees more specifics about what the new administration’s economic and fiscal policies will be.

We’re interested in hearing from you. What are your observations about consumer confidence in your local market area? Send me an email at steven@lendtrade.com.

12.8.2016 How Might the Election Impact the Mortgage Market?

In a recent article we talked about some of the changes that could be forthcoming with a Trump administration, including the possible dismantling of Dodd-Frank. In addition, it would appear that Trump’s election could have a major impact on the residential mortgage as well.

Many experts believe that mortgage market changes are likely to come about due to two main factors: rising interest rates and decreased regulation. These factors could impact the course and strength of the housing recovery, the availability of credit to homebuyers and the risk aversion of lenders.

The recent trend of banks focusing mainly on standardized and jumbo loans while leaving exotic mortgages and risky borrowers to nonbanks could also be affected by these two factors.

Bond Yields and Mortgages Rates Surging

It didn’t take long for bond yields to rise in the aftermath of the election, with mortgage rates following close behind. The average rate on a 30-year fixed-rate mortgage rose by a quarter of a percentage point in the two days following the election to 3.87%, and it topped 4% by early December.

Of course, this is still a very attractive rate from a historical perspective. According to Freddie Mac, the average 30-year fixed-interest mortgage rate over the past 45 years is 8.26% — or more than double current rates — and it wasn’t until 2009 that mortgage rates dropped below 5%. But the speed at which rates have risen after the election has some worried that mortgage rates could go up further and faster than many expected.

If this happens, the recovery in home prices we’ve seen since the depths of the housing crash could be jeopardized. Low mortgage rates have served as a lid helping keep monthly payments low. This has enabled buyers to buy more expensive homes, which in turn has allowed home prices to steadily increase in many parts of the country.

Note that the rise in interest rates on a 30-year fixed-rate mortgage from 3.62% on Election Day to 4% would raise the monthly payment on a $400,000 home (with a 20% down payment by about $67.  A recent Wall Street Journal article noted that one mortgage research firm anticipates that rising rates will contribute to declining home values in one-third of U.S. markets by the end of next year.

Going forward, the pace and size of mortgage interest rate increases will be driven as much by market expectations with regard to Trump’s fiscal policies as by the actions of the Federal Reserve. In particular, markets will be keeping a close eye on whether or not fiscal policy leads to higher inflation.

Will Banking Regulations Be Relaxed?

The second factor that could lead to big changes in the mortgage market has to do with whether or not banking regulations will be relaxed. The biggie, of course, is Dodd-Frank, which President-elect Trump has pledged to “get rid of or make smaller.” Due to Dodd-Frank requirements, many banks have become more risk-averse by primarily targeting the most creditworthy borrowers or focusing on jumbo mortgages.

A more regulatory friendly environment for banks would likely lead to more mortgage approvals and increased mortgage volume but also possibly more home foreclosures down the road. However, many industry experts believe that most banks have learned their lesson about risky lending practices like making low-doc and no-doc loans and aren’t likely to return to these practices, regardless of what happens to Dodd-Frank.

In addition to increased regulatory risk, banks have also faced higher legal risks related to mortgage lending in recent years. For example, big banks have paid out tens of billions of dollars in settlements and fines.

Banks will be watching how the new Attorney General and Justice Department approach lending transgressions very closely to assess their legal risk going forward. As the president of the Mortgage Bankers Association put it in The Wall Street Journal article: “A more reasonable attorney general would be a great outcome.”

We’re interested in hearing from you. What do you think about the potential impact of the election on the mortgage market? Send me an email at steven@lendtrade.com.

12.6.2016 Surprise! Arizona and California Are Leading the Way In Home Equity Lending Rebound

Arizona and California were two areas of the country where the housing market was hit hardest by the financial crisis and recession. Home values plunged and foreclosures skyrocketed in these two states, making them the poster children for the housing bust.

So it’s especially noteworthy that these two states are now leading the way in the origination of home equity loans and HELOCs.

In Phoenix, home equity lending is up 28 percent from a year ago — this is the third-highest jump in home equity lending volume in the country, behind only Dallas, Texas, and Birmingham, Ala. And in California, HELOC and home equity loan origination is up 15 percent.

It Starts With Rising Prices

Rising prices are pushing up home values and increasing homeowners’ equity in both states. In California, 93 percent of all mortgaged properties now have positive equity. Or in other words, the percentage of homeowners who are underwater has fallen to just seven percent. In Phoenix, the underwater mortgage rate has fallen from almost 50 percent in 2011 to 12 percent today.

Home prices are rising so fast in California that many potential homebuyers are facing an affordability crisis. Nearly two-thirds of all Californians can’t afford to buy a home. This reality is reflected in the 10 percent drop in first-mortgage originations in the state during the second quarter.

Remodeling, Renovations and Repairs

In both states, borrowers are tapping into their equity primarily to remodel, renovate and repair their homes. As we noted in a previous blog, Americans are expected to spend more than $300 billion this year on home remodeling and repairs which would surpass the 2007 record of $285 billion spent on home remodeling and repairs.

What’s more, spending on home renovation projects is projected to continue growing faster than new home construction through 2019.

In an article recently posted on HousingWire.com, the chief economist of the California Credit Union League stated: “The local surge in home-equity lending and cash-out refis reflects a strong national trend in homeowners increasingly remodeling their homes and enhancing their properties.”

Home Equity Lending Has Legs

Of course, California is a huge state and not all areas are seeing rapid price appreciation. In some areas, a relatively large percentage of homeowners are still underwater or have very little equity.

“As more of these homeowners see the light of day with values rising, we’ll see more of this remodeling trend,” noted the chief economist in the HouseingWire.com article. “Pulling out home equity seems to have legs and is here to stay, especially since job growth across California remains strong and is supporting household stability.”

We’re interested in hearing from you. What are you seeing in your marketplace in terms of home equity lending activity? Send me an email at steven@lendtrade.com.