Back in June, Capitol Bancorp, Ltd., once the holding company that held more separately chartered community banks than any other company in the United States, was forced to close four of its 11 banks. The other seven were on the unofficial Problem Bank List and are operating under Prompt Corrective Action notices.
Why? Many of its banks faced huge losses as loan defaults soared during the financial collapse and ensuing recession. And what does this mean for the mortgage lending industry as a whole?
Hopefully, the news out of Washington earlier this month points to a positive direction for housing finance. The Federal Reserve favors a final Basel III rule that will pave the way for completion of the qualified residential mortgage rule. If the OCC and FDIC agree, banking and capital markets should be able to pursue expanded mortgage lending when interest rates and profitability rise with the improving economy.
The goal of the new Basel III rule is to reduce systemic risk to the financial system—especially the largest banks—by bolstering the amount of shareholder equity banks must maintain. Banks will need to maintain a total capital ratio of eight percent of risk-weighted assets. This will hopefully mitigate the risks—and failures—faced by the banking system during and after the most recent recession.
Under Basel III, the eight banks called “systemically important” or “too big to fail”—Goldman Sachs, Bank of America, J.P. Morgan Chase, Citigroup, State Street, Bank of New York Mellon, Wells Fargo, and Morgan Stanley—will face the same overall capital requirements. Smaller banks and community lenders will be for the most part exempt from the more difficult regulations which are brought against larger banks.
One issue that might affect residential mortgages: Banks will be restricted in the amount of mortgage servicing rights that they can hold. This change will likely shift much of mortgage servicing—collecting payments and passing them onto investors—to non-bank financial companies and to smaller banks.
What about housing prices?
While some experts are already warning that the rapid run-up in housing prices this past year will lead to another housing “bubble,” most are not concerned—yet. Yes, U.S. home prices rose 10.9% in the 12 months ending in March 2013 for their largest annual gain in seven years, but they’re still about 28% off their 2006 peaks.
Home prices are expected to continue rising into 2014, which is good news for home owners who saw their values drop the last few years. This may be just the boost the housing market needs to help homeowners once again see solid equity in their homes.
And, by 2014, home sales are expected to grow by about 14 percent. The supply/demand equation in the housing market will begin to stabilize and spark some healthy growth.
Contact Smith Hanley Associates any time you would like to discuss the needs of the evolving financial industry. Our Financial Strategies Group specializes in identifying and recruiting the industry’s top talent and placing them in our client’s available positions.