Tag: USA

Federal Reserve Board announced a $131m penalty against HSBC North America

The Federal Reserve Board on Friday announced a $131 million penalty against HSBC North America Holdings, Inc. and HSBC Finance Corporation for deficiencies in residential mortgage loan servicing and foreclosure processing. The penalty is being assessed in conjunction with an agreement involving similar deficiencies that HSBC announced Friday with the U.S. Department of Justice, other federal agencies, and the state attorneys general.

The penalty assessed by the Board is the maximum amount allowed under the law, taking into account the circumstances of HSBC’s unsafe and unsound practices and foreclosure activities. The penalty may be satisfied by providing borrower assistance or remediation in conjunction with the Department of Justice settlement, or by providing funding for nonprofit housing counseling organizations. If HSBC does not satisfy the full penalty amount within two years, the remaining amount must be paid to the U.S. Department of Treasury. The Board will closely monitor compliance by HSBC with the requirements of the order.

The terms of the monetary assessment against HSBC are similar to those that were part of the penalties issued by the Board in February 2012 and July 2014 against six other mortgage servicing organizations that reached similar agreements with the U.S. Department of Justice and the state attorneys general.

The Board previously issued an enforcement action in April 2011 requiring HSBC to correct its servicing and foreclosure-related deficiencies. That action was among 14 corrective actions issued against Board-supervised mortgage servicers or their parent holding companies for unsafe and unsound practices in residential mortgage loan servicing and foreclosure processing.

Fed Holds Rate

The latest release from the Fed highlights that any further lift in rates will be slow.

Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed. A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

The US Market fell 1.5% in response.

Fed December Minutes Signal Further Rate Rises … Later

The minutes of the December 2015 Federal Open Market Committee have been published, and outlines the discussions which underpinned the decision to lift the US federal funds rate. Here is an extract:

Regarding the medium-term outlook, inflation was projected to increase gradually as energy prices and prices of non-energy imports stabilized and the labor market strengthened. Overall, taking into account economic developments and the outlook for economic activity and the labor market, the Committee was now reasonably confident in its expectation that inflation would rise, over the medium term, to its 2 percent objective. However, for some members, the risks attending their inflation forecasts remained considerable. Among those risks was the possibility that additional downward shocks to prices of oil and other commodities or a sustained rise in the exchange value of the dollar could delay or diminish the expected upturn in inflation. A couple also worried that a further strengthening of the labor market might not prove sufficient to offset the downward pressures from global disinflationary forces. And several expressed unease with indications that inflation expectations may have moved down slightly. In view of these risks and the shortfall of inflation from 2 percent, members expressed their intention to carefully monitor actual and expected progress toward the Committee’s inflation goal.

After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, members agreed to raise the target range for the federal funds rate to ¼ to ½ percent at this meeting. A number of members commented that it was appropriate to begin policy normalization in response to the substantial progress in the labor market toward achieving the Committee’s objective of maximum employment and their reasonable confidence that inflation would move to 2 percent over the medium term. Members agreed that the post meeting statement should report that the Committee’s decision reflected both the economic outlook and the time it takes for policy actions to affect future economic outcomes. If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity. Members observed that after this initial increase in the federal funds rate, the stance of monetary policy would remain accommodative.

However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely.

Members also discussed their expectations for the size and timing of adjustments in the target range for the federal funds rate going forward. Based on their current forecasts for economic activity, the labor market, and inflation, as well as their expectation that the neutral shortterm real interest rate will rise slowly over the next few years, members expected economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate. However, they also recognized that the appropriate path for the federal funds rate would depend on the economic outlook as informed by incoming data. Members stressed the potential need to accelerate or slow the pace of normalization as the economic outlook evolved. In the current situation, because of their significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook, they agreed to indicate that the Committee would carefully monitor actual and expected progress toward its inflation goal. In determining the size and timing of further adjustments to monetary policy, some members emphasized the importance of confirming that inflation would rise as projected and of maintaining the credibility of the Committee’s inflation objective. Based on their current economic outlook, they continued to anticipate that the federal funds rate was likely to remain, for some time, below levels that the
Committee expected to prevail in the longer run.

The Committee also maintained its policy of reinvesting principal payments from agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. In view of members’ outlook for moderate growth in economic activity, inflation moving toward its target only gradually, and the asymmetric risks posed by the continued proximity of short-term interest rates to their effective lower bound, the Committee anticipated retaining this policy until normalization of the level of the federal funds rate was well under way. This policy, by keeping the Committee’s holdings of longer term securities at sizable levels, should help maintain accommodative
financial conditions.

 

Monetary Policy, Financial Stability, and the Zero Lower Bound

Fed Vice Chairman Stanley Fischer spoke about three related issues associated with the zero lower bound (ZLB) on nominal interest rates and the nexus between monetary policy and financial stability: first, whether we are moving toward a permanently lower long-run equilibrium real interest rate; second, what steps can be taken to mitigate the constraints imposed by the ZLB on the short-term interest rate; and, third, whether and how central banks should incorporate financial stability considerations in the conduct of monetary policy. The experience of the past several years in the United States and many other countries has taught us that conducting monetary policy effectively at the ZLB is challenging, to say the least. And while unconventional policy tools such as forward guidance and asset purchases have been extremely helpful, there are many uncertainties associated with the use of such tools.

Are We Moving Toward a World With a Permanently Lower Long-Run Equilibrium Real Interest Rate?
We start with a key question of the day: Are we moving toward a world with a permanently lower long-run equilibrium real interest rate? The equilibrium real interest rate–more conveniently known as r*–is the level of the short-term real rate that is consistent with full utilization of resources. It is often measured as the hypothetical real rate that would prevail in the long-run once all of the shocks affecting the economy die down. In terms of the Federal Reserve’s approach to monetary policy, it is the real interest rate at which the economy would settle at full employment and with inflation at 2 percent–provided the economy is not at the ZLB.

Recent interest in estimates of r* has been strengthened by the secular stagnation hypothesis, forcefully put forward by Larry Summers in a number of papers, in which the value of r* plays a central role. Research that was motivated in part by attempts that began some time ago to specify the constant term in standard versions of the Taylor rule has shown a declining trend in estimates of r*. That finding has become more firmly established since the start of the Great Recession and the global financial crisis.

A variety of models and statistical approaches suggest that the current level of short-run r* may be close to zero. Moreover, the level of short-run r* seems likely to rise only gradually to a longer-run level that is still quite low by historical standards. For example, the median long-run real federal funds rate reported in the Federal Reserve’s Summary of Economic Projections prepared in connection with the December 2015 meeting of the Federal Open Market Committee has been revised down about 1/2 percentage point over the past three years to a level of 1-1/2 percent. As shown in the figure below, a decline in the value of r* seems consistent with the decline in the level of longer-term real rates observed in the United States and other countries.

fischer20160103aWhat determines r*? Fundamentally, the balance of saving and investment demands does so. A very clear systematic exposition of the theory of r* is presented in a 2015 paper from the Council of Economic Advisers. Several trends have been cited as possible factors contributing to a decline in the long-run equilibrium real rate. One a priori likely factor is persistent weakness in aggregate demand. Among the many reasons for that, as Larry Summers has noted, is that the amount of physical capital that the revolutionary IT firms with high stock market valuations have needed is remarkably small. The slowdown of productivity growth, which has been a prominent and deeply concerning feature of the past four years, is another factor reducing r*. Others have pointed to demographic trends resulting in there being a larger share of the population in age cohorts with high saving rates.7 Some have also pointed to high saving rates in many emerging market countries, coupled with a lack of suitable domestic investment opportunities in those countries, as putting downward pressure on rates in advanced economies–the global savings glut hypothesis advanced by Ben Bernanke and others at the Fed about a decade ago.

Whatever the cause, other things being equal, a lower level of the long-run equilibrium real rate suggests that the frequency and duration of future episodes in which monetary policy is constrained by the ZLB will be higher than in the past. Prior to the crisis, some research suggested that such episodes were likely to be relatively infrequent and generally short lived.  The past several years certainly require us to reconsider that basic assumption.

Moreover, the experience of the past several years in the United States and many other countries has taught us that conducting monetary policy effectively at the ZLB is challenging, to say the least. And while unconventional policy tools such as forward guidance and asset purchases have been extremely helpful, there are many uncertainties associated with the use of such tools.

I would note in passing that one possible concern about our unconventional policies has eased recently, as the Federal Reserve’s normalization tools proved effective in raising the federal funds rate following our December meeting. Of course, issues may yet arise during normalization that could call for adjustments to our tools, and we stand ready to do that.

The answer to the question “Will r* remain at today’s low levels permanently?” is that we do not know. Many of the factors that determine r*, particularly productivity growth, are extremely difficult to forecast. At present, it looks likely that r* will remain low for the policy-relevant future, but there have in the past been both long swings and short-term changes in what can be thought of as equilibrium real rates Eventually, history will give the answer.

But it is critical to emphasize that history’s answer will depend also on future policies, monetary and other, notably including fiscal policy.

Debt Overhang and Deleveraging

What is the relationship between high consume debt levels, and consumption? This is an important question for Australia, given the current record levels of personal debt, and sluggish consumer activity. Also, what will happen should house prices slip back, and households shift to a deleveraging mentality? The short answer is it will have a significant depressive economic impact – if insights from a newly published paper are true.

In a Bank of Canada Staff Working Paper, “Debt Overhang and Deleveraging in the US Household Sector: Gauging the Impact on Consumption” they use a dataset for the US states to examine whether household debt and the protracted debt deleveraging helps to explain the dismal performance of US consumption since 2007, in the aftermath of the housing bubble. By separating the concepts of
deleveraging and debt overhang—a flow and stock effect—they conclude that excessive indebtedness exerted a meaningful drag on consumption over and beyond income and wealth effects.

The leveraging and subsequent deleveraging cycle in the US household sector had a signifi cant impact on the performance of economic activity in the years around the Great Recession of 2007-09. A growing body of theoretical and empirical studies has therefore focused on explaining to what extent and through which channels the excessive buildup of debt and the deleveraging phase might have contributed to depressing economic activity and consumption growth.

They use panel regression techniques applied to a novel data set with prototype estimates of personal consumption expenditures at the state-level for the 51 US states (including the District of Columbia) over the period from 1999Q1 to 2012Q4. They include the main determinants as used in traditional consumption functions, but add in debt and its misalignment from equilibrium. They conclude that excessive indebtedness of US households and the balance-sheet adjustment that followed have had a meaningful negative impact on consumption growth over and beyond the traditional effects from wealth and income around the time of the Great Recession and the early years of the recovery. The e ffect is mostly driven by the states with particularly large imbalances in their household
sector. This might be indicative of non-linearities, whereby indebtedness begins to bite only when there is a sizable misalignment from the debt level dictated by economic fundamentals. They show that some states experienced significant deleveraging and a fall in household wealth.

Canada1Canada2 They argue that the nature of the indebtedness determines the ultimate impact of debt on consumption. The drag on US consumption growth from the adjustments in household debt appears to be driven by a group of states where debt imbalances in the household sector were the greatest. This suggests that the adverse e ffects of debt on consumption might be felt in a non-linear fashion and only
when misalignments of household debt leverage away from sustainable levels – as justfi ed by economic fundamentals – become excessive. Against the background of the ongoing recovery in the United States, where the deleveraging process appears to be already over at the national level, one might expect house-hold debt to support consumption growth going forward as long as the increase in debt does not lead to a widening of the debt gap.

Note that Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank’s Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank of Canada, the European Central Bank or the Eurosystem.

Fed Warns On Commercial Real Estate Lending

US Banks are increasing their exposure to commercial real estate and increased competitive pressures are contributing significantly to historically low capitalization rates and rising property values.  Influenced in part by the continuing strong demand for such credit and the reassuring trends in asset-quality metrics many institutions’ CRE concentration levels have been rising.

A CRE loan refers to a loan where the use of funds is to acquire, develop, construct, improve, or refinance real property and where the primary source of repayment is the sale of the real property or the revenues from third-party rent or lease payments. CRE loans do not include ordinary business loans and lines of credit in which real estate is taken as collateral. Financial institutions with concentrations in owner-occupied CRE loans also should implement appropriate risk management processes.

Between 2011 and 2015, multi-family loans at insured depository institutions increased 45 percent and comprised 17 percent of all CRE loans held by financial institutions, and prices for multi-family properties rose to record levels while capitalization rates fell to record lows. At the same time, other indicators of CRE market conditions (such as vacancy and absorption rates) and portfolio asset quality indicators (such as non-performing loan and charge-off rates) do not currently indicate weaknesses in the quality of CRE portfolios.

During 2016, supervisors from the banking agencies will continue to pay special attention to potential risks associated with CRE lending.

The regualtors have  jointly issued a statement to remind financial institutions of existing regulatory guidance on prudent risk management practices for commercial real estate (CRE) lending activity through economic cycles. They say that historical evidence demonstrates that financial institutions with weak risk management and high CRE credit concentrations are exposed to a greater risk of loss and failure. In general, financial institutions that succeeded during difficult economic cycles took the following actions, which are consistent with supervisory expectations:

  1. established adequate and appropriate loan policies, underwriting standards, credit risk management practices, and concentration limits that were approved by the board or a designated committee; lending strategies, such as plans to increase lending in a particular market or property type, limits for credit and other asset concentrations, and processes for assessing whether lending strategies and policies continued to be appropriate in light of changing market conditions; and  strategies to ensure capital adequacy and allowance for loan losses that supported an institution’s lending strategy and were consistent with the level and nature of inherent risk in the CRE portfolio.
  2. conducted global cash flow analyses based on reasonable (not speculative) rental rates, sales projections, and operating expenses to ensure the borrower had sufficient repayment capacity to service all loan obligations.
  3. performed market and scenario analyses of their CRE loan portfolio to quantify the potential impact of changing economic conditions on asset quality, earnings, and capital.
  4. provided their boards and management with information to assess whether the lending strategy and policies continued to be appropriate in light of changes in market conditions.
  5. assessed the ongoing ability of the borrower and the project to service all debt as loans converted from interest-only to amortizing payments or during periods of rising interest rates.
  6. implemented procedures to monitor the potential volatility in the supply and demand for lots, retail and office space, and multi-family units during business cycles.
  7. maintained management information systems that provided the board and management with sufficient information to identify, measure, monitor, and manage concentration risk.
  8. implemented processes for reviewing appraisal reports for sufficient information to support an appropriate market value conclusion based on reasonable market rental rates, absorption periods, and expenses.

Fed Lifts Rates For The First Time in Years

Just Announced.

The Federal Reserve raised the Fed funds rate by 25 basis points to 0.25 percent – 0.5 percent, during its FOMC meeting held on December 16th. While the Fed said is “reasonably confident that inflation will rise, over the medium term, to its 2 percent objective” , Fed Governors were also carefully to point that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”. It was the first hike since June 2006 when Ben Bernanke increased the benchmark rate from 5 to 5.25 percent. From 1971 until 2015, Interest Rate in the United States averaged 5.93 percent, reaching an all time high of 20 percent in March of 1980 and a record low of 0.25 percent in December of 2008.

FED-Rate

Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Federal Reserve Announces Sixth Triennial Study to Examine U.S. Payments Usage

The Federal Reserve today announced plans to conduct its sixth triennial study to determine the current aggregate volume and composition of electronic and check payments in the United States. The study builds upon research begun by the Federal Reserve in 2001 to provide the public and the payments industry with estimates and trend information about the evolving nature of the nation’s payments system. A public report containing initial topline estimates is expected to be published in December 2016.

“Over the 15-year life of the study, the survey instruments have been adapted and updated to keep pace with the dynamic change in the U.S. payments system,” said Mary Kepler, senior vice president of the Federal Reserve Bank of Atlanta and the study’s executive sponsor. “Not surprisingly, the 2016 study will incorporate a number of significant enhancements, including an expansion of fraud-related information and an increase in the number of depository and financial institutions sampled. These improvements will strengthen the value of the trend information and insights to be presented with the study’s findings,” Kepler said.

The 2016 Federal Reserve Payments Study consists of three complimentary survey efforts commissioned to estimate the number, dollar value and composition of retail noncash payments in the United States for calendar year 2015. The study will request full-year 2015 payments data for various payment types from respondents to two of the three survey components; the third component involves a random sampling of checks processed in 2015 to determine distribution of party, counterparty and purpose. Results from all three survey components will be used to estimate current trends in the use of payment instruments by U.S. consumers and businesses. Previous studies have revealed significant changes in the U.S. payments system over time, most recently the increasing preference for debit, credit and stored-value cards among consumers and a leveling in growth of other electronic payment types such as the Automated Clearing House network. The Federal Reserve will work with McKinsey & Company and Blueflame Consulting, LLC to conduct this research study.

Additionally, the Federal Reserve plans to supplement its triennial research with two smaller annual research efforts to provide key payments volume and trends estimates in 2017 and 2018. “The industry’s participation and willingness to provide the full scope of the data requested is paramount to our ability to publish the timely and relevant results the industry has come to rely on to help objectively evaluate changes in the nation’s payments landscape,” Kepler said.

More information about Federal Reserve Financial Services can be found at www.frbservices.org. The website also contains links to the five previous Payments Studies.

The Financial Services Policy Committee (FSPC) is responsible for the overall direction of financial services and related support functions for the Federal Reserve Banks, as well as for providing Federal Reserve leadership in dealing with the evolving U.S. payments system. The FSPC is composed of three Reserve Bank presidents and two Reserve Bank first vice presidents.

US Banking Supervision, More To Do

Fed Chair Janet L. Yellen addressed the Committee on Financial Services, U.S. House of Representatives on Banking Sector Supervision. She said that before the crisis, their primary goal was to ensure the safety and soundness of individual financial institutions. A key shortcoming of that approach was that they did not focus sufficiently on shared vulnerabilities across firms or the systemic consequences of the distress or failure of the largest, most complex firms. Although changes have been made, substantial compliance and risk-management issues remain.

There has since been a significant shift in focus has led to a comprehensive change in the regulation and supervision of large financial institutions. These reforms are designed to reduce the probability that large financial institutions will fail by requiring those institutions to make themselves more resilient to stress. However, recognising that the possibility of a large financial institution’s failing cannot be eliminated, a second aim of the post-crisis reforms has been to limit the systemic damage that would result if a large financial institution does fail. This effort has involved taking steps to help ensure that authorities would have the ability to resolve a failed firm in an orderly manner while its critical operations continue to function.

They created the Large Institution Supervision Coordinating Committee (LISCC). The LISCC is charged with the supervision of the firms that pose elevated risk to U.S. financial stability. Those firms include the eight U.S. banking organizations that have been identified as GSIBs, four foreign banking organizations with large and complex U.S. operations, and the four nonbank financial institutions that have been designated as systemically important by the Financial Stability Oversight Council (FSOC).

With regard to capital adequacy, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) is designed to ensure that large U.S. bank holding companies, including the LISCC firms, have rigorous, forward-looking capital planning processes and have sufficient levels of capital to operate through times of stress, as defined by the Federal Reserve’s supervisory stress scenario. The program enables regulators to make a quantitative and qualitative assessment of the resilience and capital planning abilities of the largest banking firms on an annual basis and to limit capital distributions for firms that exhibit weaknesses.

The financial condition of the firms in the LISCC portfolio has strengthened considerably since the crisis. Common equity capital at the eight U.S. GSIBs alone has more than doubled since 2008, representing an increase of almost $500 billion. Moreover, these firms generally have much more stable funding positions. The amount of high-quality liquid assets held by the eight U.S. GSIBs has increased by roughly two-thirds since 2012, and their reliance on short-term wholesale funding has dropped considerably. The new regulatory and supervisory approaches are aimed at helping ensure these firms remain strong. Requiring these firms to plan for an orderly resolution has forced them to think more carefully about the sustainability of their business models and corporate structures.

Nevertheless, while they have seen some evidence of improved risk management, internal controls, and governance at the LISCC firms, they continue to have substantial compliance and risk-management issues. Compliance breakdowns in recent years have undermined confidence in the LISCC firms’ risk management and controls and could have implications for financial stability, given the firms’ size, complexity, and interconnectedness. The LISCC firms must address these issues directly and comprehensively.

Their examinations have found large and regional banks to be well capitalized. Both large and regional banking organizations experienced dramatic improvements in profitability since the financial crisis, although these banks have also faced challenges in recent years due to weak growth in interest and noninterest income. Both large and regional institutions have seen robust growth in commercial and industrial lending.

Finally, community banks are significantly healthier. More than 95 percent are now profitable, and capital lost during the crisis has been largely replenished. Loan growth is picking up, and problem loans are now at levels last seen early in the financial crisis.

America’s rental affordability crisis is about to go from bad to worse

From The Conversation.

We just learned America’s rental affordability crisis is as bad as it’s ever been. Unfortunately, it’s about to get a whole lot worse.

The American Community Survey for 2014, released a few weeks ago, found that the number of renters paying 30% or more of their income on housing – the standard benchmark for what’s considered affordable – reached a new record high of 20.7 million households, up nearly a half-million from the year before. Despite the improving economy, the increase was nearly five times bigger than last year’s gain.

That means about half of all renters live in housing considered unaffordable. And the latest increase comes on top of substantial growth since 2000 that has seen this number climb by roughly six million households over the period, an increase of about 41%.

Worse still are the more than 11 million households with severe cost burdens, paying more than half their income for housing, up from seven million at the start of the century.

Having so many families and individuals struggling to pay their monthly rent is a clear cause for concern. Renters in this situation are forced to make difficult trade-offs to make ends meet, including opting for housing in distressed neighborhoods or in poor condition. In fact, in an analysis of consumer expenditure data we undertook at the Harvard Joint Center for Housing Studies, we found that renters in this situation largely accommodate their high housing costs by spending substantially less on such basic needs as food and health care.

This growing problem needs to be addressed because having a stable, decent home has been found to produce a wide variety of benefits, from better health outcomes to improved school performance among children. There is also growing evidence that providing permanent affordable housing for homeless individuals and families is much more cost effective than paying for temporary housing.

With the housing crash receding from the headlines and prices on the rise again, it is all too easy to believe that as the economy heals, the housing affordability crisis will naturally ebb without the need for greater efforts by our public leaders.

Unfortunately, this is wishful thinking.

US-Rentals-1

Prospects for improvement

The rising tide of cost-burdened renters has its roots both in the real (inflation-adjusted) growth in the cost of rental housing and in falling renter incomes.

Since 2001, the median monthly rental price in the US has climbed significantly faster than inflation, while the typical renter’s pretax income has fallen by 11%. These trends were evident even before the recession and housing bust, but have certainly been exacerbated by the economic travails since.

Now that the economy is nearing full employment and holding out the prospect of a rebound in incomes and construction of new apartments is reaching levels not seen since the 1980s, there would seem to be some hope that the extent of rental cost burdens would start to abate. But at the same time, there are also demographic forces at work that are likely to make matters worse.

The two fastest-growing segments of the population in coming years will be those over age 65 and Hispanics, both of which are more likely to experience cost burdens.

In collaboration with researchers at the affordable housing nonprofit Enterprise Community Partners, the Joint Center for Housing Studies set out to simulate future trends for cost-burdened renters based on our household projections for the next decade under different scenarios in which rents continue to outpace incomes, or, alternatively, where we see a turnaround in current conditions and incomes grow faster than rents.

As we document in our recent report, we found that demographic forces alone will push up the number of renters with severe rent burdens by 11% to more than 13 million by 2025, with a large share of the growth among the elderly and Latinos. That’s assuming incomes and rents both grow in line with overall inflation.

If we do get lucky enough to see gains in income outpace the rise in rents by 1% annually over the next decade, we would see a modest decline of some 200,000 renters with severe burdens. That’s some improvement but not nearly enough to appreciably change the current challenge. And this modest net improvement would mask a still-significant growth in rent burdens among Hispanics of 12%.

US-Rentals-2But alternatively, if rents continue to grow faster than incomes at a pace similar to what we see today, we could see the number of renters spending more than half their income on housing reach 14.8 million, an increase of 25% over today’s record levels. That would mean 31% of US renters – and most likely at least a few of your family and friends – would be desperately struggling to get by.

What can we do about it?

So what do we need to do to address this situation?

Since falling incomes are a key part of the problem, efforts to raise take-home pay will have to be part of the solution. Increases in the minimum wages will help to some extent. Improvements in education and job training that prepare people for decent paying jobs are also needed.

On the housing front, there is also a strong case for an expansion of assistance for the nation’s lowest-income households. About 28% of renters earn less than US$20,000 a year. At that income, monthly housing costs have to be $500 or less to be affordable.

The private market simply can’t supply housing at such low rents. Public assistance is needed to close the gap. However, at present only about one out of four households who would qualify for this federal housing assistance based on their income is able to secure one of these units. Unlike other programs in the social safety net, housing assistance is not an entitlement. And we simply don’t come anywhere close to fully funding housing assistance to help all those eligible.

The vast majority of those who are left out face so-called worst-case housing needs, paying more than half their income for housing or living in severely inadequate housing.

Solving the housing problem

There are two main ways in which we have extended housing assistance in recent decades: 1) by providing housing choice vouchers that subsidize monthly costs for homes the tenant finds in the private market or 2) by subsidizing the cost of new housing or the rehabilitation of existing housing with support of the Low Income Housing Tax Credit.

Both programs have their place. In markets where modestly priced housing in a range of neighborhoods is not in short supply, vouchers make sense as a means of taking advantage of housing that already exists. Vouchers also have the potential for giving greater choice about where residents want to live in a metro area.

The housing credit program also plays an important role in helping to preserve existing subsidized housing that needs new investment, in helping to turn around neighborhoods where new housing can have a positive impact and in adding affordable housing in neighborhoods where it would not otherwise be provided.

Still, both programs could benefit from reforms to ensure that funds are used efficiently and that the housing opportunities provided are not concentrated in distressed neighborhoods.

For example, the Department of Housing and Urban Development recently started a pilot program that factors the variability of market rental prices across neighborhoods into the maximum rent its vouchers cover. Currently, the limit it is set at is the same for an entire metropolitan area. The new approach would allow that limit to vary across neighborhoods, giving beneficiaries more choice in where to live and also keep HUD from overpaying in distressed areas.

There are also proposals for reforming the housing tax credit program to allow it to serve a broader range of income levels and make it easier for people to get aid in high-cost markets like New York, San Francisco and Boston, where rental burdens are increasingly a problem among moderate-income households and not just the poor.

The grass roots

Beyond these federal efforts, state and local governments also have an important role to play in fostering a greater supply of affordable housing.

In addition to providing public funds for this purpose, these levels of government set land use regulations and policies that have the potential to spur affordable housing production. But all too often, they deter affordable housing production through complex and costly approval processes as well as limits on the types of housing that can be built.

With both demographic and economic trends likely to keep the number of cost-burdened renters at record levels for years to come, the issue is not going to go away. But we still lack the political urgency to take the steps needed to do something about the problem; housing affordability hasn’t even come up in any of the presidential debates.

It may be because it has historically been borne by the nation’s most disadvantaged families and individuals. But with the number of cost-burdened renters reaching highs each year, the challenge of paying the rent each month is becoming a significant concern for a broader swath of the country with each passing year.

It’s time our political leaders take notice and take action.

Author: Chris Herbert, Managing Director of the Joint Center for Housing Studies, Harvard University, Andrew Jakabovics, senior director for policy development and research at affordable-housing nonprofit Enterprise Community Partners.