Fed revamps Main Street loan program; debit beating credit in payments war

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Let’s try this again

The Federal Reserve Friday announced “its latest round of changes to boost participation” in the $600 billion Main Street Lending Program for small and midsize businesses, the Wall Street Journal reported. “Friday’s changes reduced, for the third time, the minimum loan amount under the program—to $100,000, from $250,000. The changes also revamped the fees banks can charge borrowers to encourage greater production of smaller loans. For loans below $250,000, the Fed will waive the one percentage point fee it collects, and it will allow banks to double to two percentage points the fees it charges borrowers to make these smaller loans.”

“The Fed and Treasury also updated guidance to banks that will allow borrowers to exclude Paycheck Protection Program loans of up to $2 million under certain circumstances when determining the maximum loan amount under the Main Street Lending Program.”

“The Main Street lending program, which has the capacity to issue up to $600 billion in loans, has so far made almost 400 loans totaling $3.7 billion,” the Washington Post noted. “The program has been widely criticized for having onerous loan terms, and there are ongoing debates about how much risk the program should take on given that losses are ultimately covered by taxpayer dollars. But even now, hundreds of billions of dollars set aside by lawmakers to cover losses from the Fed’s emergency facilities are going untapped.”

Don’t think about tomorrow

“In 50 years I have not seen a bust-to-boom to foreshadowed doom as dramatic as that in the U.S. independent mortgage banking trade over the past six months,” an FT op-ed says. U.S. mortgage banks “have booked enormous six-month profits, but could have many months, or even years, of drains on cash” ahead of them. “How? Basically, by doing all the good stuff (house building, cheap mortgages) now and putting off the bad stuff (evictions, foreclosures, job losses from industry consolidation) for later. Genius.”

“The problem, as industry analysts could see, was going to be the mortgage originators’ requirement to cover months of principal and interest payments, as well as property taxes and insurance, on homes that would either receive forbearance under the pandemic-bailout Cares Act, or were simply delinquent.” Eventually that bill will have to be paid.

“Mortgage lenders hoping to take advantage” of the current good times by going public “are facing a big challenge: rising market turbulence,” the Wall Street Journal reports. “For much of 2020, healthy demand for mortgages and a surge in public listings created ideal conditions for nonbank mortgage lenders to raise capital through public listings. But a volatile autumn in the markets underscores the risks still looming over the mortgage sector.”

Two fast-growing U.S. home lenders — Caliber Home Loans and AmeriHome — have postponed their IPOs,” the FT said.

“The delays are surprising inasmuch as it is an excellent time to be a mortgage lender,” the paper said. “However, investors are concerned that the good times for mortgage lenders are at their peak, with only downside from here.”

Wall Street Journal

Debit preferred

Debit is winning the payments battle against credit hands down during the pandemic, which could be bad news for banks that rely on the latter. “At Visa and Mastercard, U.S. debit-card dollar payment and purchase volume collectively rose 23% year over year in the quarter ended in September, more than double the pre-Covid-19 growth rate; the same measure for credit cards was down 8%.”

“Most payment providers won’t mind if the debit habit sticks—so long as people are using their networks in some form. But it could become a long-term drag for banks and lenders that provide credit. For now, lenders and investors may be OK with limiting their credit risk. But eventually they will really need those high-yielding card loans to grow in a low-interest-rate world.”

Returning to society

“Programs to help former inmates have won widespread support. Big corporations including JPMorgan Chase have committed to hiring applicants with criminal records. But there has been little attention on how to get ex-prisoners into the mainstream financial system. After a summer of national debate on systemic racism and criminal-justice reforms, the nation’s biggest banks have pledged billions of dollars of loans to and investments in minority communities. None have publicly mentioned getting former inmates banking products, but some are quietly discussing plans, advocates say.”

“Each year, more than 600,000 people are released from U.S. prisons. It can be hard for them to get checking accounts and nearly impossible to get loans. Most banks say they don’t outright reject applications for minor issues, but the flags can trigger more questions, including a background check. There is no banking standard on how to deal with criminal convictions, especially for nonfinancial crimes.”

Digital hedge

Bitcoin is back. “The price of the digital currency has surged about 90% in 2020 and traded as high as $13,848 last Tuesday. That is the highest level since January 2018, when bitcoin was coming down from its record high of $19,783 set in the previous month.”

“Many investors agree the renewed surge of interest is tied to bitcoin’s potential as a hedge against inflation. Some of them include publicly traded companies. Square Inc., which allows users to buy bitcoin on its Cash App, bought $50 million worth of the digital currency in October to use as a hedging instrument in its corporate treasury.”

Financial Times

Too good to be true?

“Top executives at lenders including HSBC, Santander and Lloyds were almost universally upbeat about their own prospects as they announced quarterly earnings” recently even “as the second wave of the coronavirus pandemic gathers pace and governments unveil new lockdowns. Mirroring the same trends on Wall Street, charges for bad loans slumped in the third quarter and trading revenues boomed, prompting many European lenders to upgrade their earnings forecasts.”

“This has set up a tension between executives openly lobbying for shareholder payouts to restart, with those who warn the true pain is yet to come. Meanwhile, as bankers look ahead to year-end bonuses, they are facing a need to reconcile blowout performance in some areas with a political imperative to show restraint at a time when the pandemic continues to ravage global economies.”

Washington Post

Happy trails

“Few know the European and U.S. banking industry from the inside” as well as UBS CEO Sergio Ermotti, who retired Sunday “after a four-decade career spanning a stint at Citibank; 16 years at Merrill Lynch, where he eventually ran the equities unit; the de facto No. 2 job at Italy’s UniCredit SpA; and finally UBS, where he was promoted to chief executive officer after a rogue trader cost the bank billions.”

Bloomberg talked to Ermotti “to discuss what lies ahead for banking. In the past, he has worried about too much regulation stifling banks. Now he’s not sure lenders will be able to endure another economic downturn, especially in Europe where they remain ‘quite vulnerable’ to the low interest-rate and growth environment.”