The Financial Stability Oversight Council (FSOC) was created out of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in order to bring the financial regulatory community together to respond to risks to the financial system in order to prevent another financial crisis.
“Unfortunately, there is legislation pending in both houses of Congress that would heavily tip the scales back in Wall Street's favor and leave our country vulnerable to another crisis,” Pinschmidt said. “These changes would take the council's methodical process and mire it in a series of protracted, bureaucratic steps that would require the council to spend as many as four years studying a company before it could take any action. Some of these proposals would also raise the standard for action by the council to a dangerously high threshold, all but ensuring inaction despite the risk to financial stability.”
Proponents of these proposals contend that if passed, these proposals would make the FSOC more effective; however, Pinschmidt argues that they would have the opposite effect, impeding the Council’s ability to identify risks to the financial system.
The FSOC has broken down barriers between agencies created a culture of regulatory cooperation and interagency information sharing in the five years since its creation, which has served to make the financial system safer and more resilient, according to Pinschmidt. The Council has also responded to potential weaknesses in the financial system and helped regulators focus on critical issues that include cybersecurity vulnerabilities and structural weaknesses in short-term funding markets.
“We need a body with a single-minded focus on protecting U.S. financial stability and identifying new threats on the horizon—and that's exactly what the council is doing.”
One of the major reasons why the financial crisis occurred back in 2008 is that the country was ill-equipped to address risks to the financial system; the regulatory structure could not keep up with the changing U.S. financial marketplace and the country lacked single entity that was accountable for protecting the stability of the entire financial system, Pinschmidt said. Not only that, but certain large nonbank financial companies such as AIG were not subject to adequate oversight. One of the FSOC’s main responsibilities is to provide such oversight for these nonbank financial firms by addressing risk these companies face that could put the entire financial system at risk.
“This isn't a judgment that a company is on the verge of failure,” Pinschmidt said. “Rather, it is a recognition that if one of these designated companies were to experience distress, there could be significant consequences for the broader financial system and economy. This was a clear lesson from the financial crisis.”
Those opposing the FSOC say that the Council's designation of certain firms as "systemically important financial institutions" (SIFIs), or in other words, designating them as posing a threat to the stability of the country's entire financial system if they were to fail, equates to naming institutions as "Too Big to Fail," thus perpetuating what Dodd-Frank was meant to end. One such institution is MetLife, the insurance provider designated as a nonbank SIFI in December 2014 by the FSOC. In January, MetLife sued the FSOC a month later in an attempt to have the SIFI tag removed. MetLife claims that as a nonbank SIFI, it is subject to heightened regulation which the company says will increase compliance costs, hence increasing costs to consumers without any added safety benefit for the financial system. The case is still pending.
Pinschmidt said in order to prevent another crisis, it is important to remember what caused the last one and how the country reached that point.
“We must remain vigilant,” he said. “We need a body with a single-minded focus on protecting U.S. financial stability and identifying new threats on the horizon—and that's exactly what the council is doing.”
In a speech at the RMA Annual Risk Management Conference in Boston, Curry stated that the topic of credit risk was muted as recently as 2012 because banks were still in a post-crisis state of recovery and were being extremely cautious with lending—some believe too cautious. Three years ago, however, the need to discuss credit risk was minimal because loan demand was soft, consumer confidence was down, and businesses were reluctant to make loans to only the most creditworthy borrowers.
In the last 18 months, however, banks have generally become profitable as economic conditions have improved, unemployment is down, and loan demand has increased, leading Curry to ask: “Where do we go from here? What will it take to ensure that banks remain solvent, stable, and secure in their role in the payments and credit system?”
Curry pointed out that the increased regulation of today is designed to prevent another financial crisis similar to the one in 2008; however, he said, things do not need to get to that point if the right decisions are made today in the financial system, particularly in the area of credit risk by banks.
While banks are prospering, however, they have created some credit risk concern by loaning to customers who almost certainly would not have qualified four or five years ago because of the risk they pose, Curry said.
“Many banks have made a conscious decision to increase their risk appetite and take on additional credit risk,” Curry said. “They are doing this in part because in times of economic growth banks feel confident that they can. But they are also targeting less creditworthy customers and offering easier terms and conditions because they feel that they must, in order to hold their own against the competition for loan growth, market share, and revenue.”
“We can ensure a safe and sound banking system and avoid crises if we take sensible and toughminded steps now to address the emerging risks I’ve discussed today.”—Thomas Curry
Credit risk is showing up now in banks in two classic forms, according to Curry: that of relaxed underwriting and increased loan concentrations. While banks with increased loan concentrations and eased underwriting standards always prosper for a time, there will eventually be a “day of reckoning,” Curry said. As a regulator, Curry said, his job is to raise awareness of the credit risk these conditions pose before things reach that point.
“At present, these concentrations flash yellow lights rather than red ones, and, as I’ve noted, credit quality has not suffered significantly as a result,” Curry said. “Our job as supervisors is to ensure that things stay that way.”
Curry said he would like to see banks take the initiative to address concentration risk on their own, without supervisory action, and stated that the OCC has provided tools to help them do so. He urged risk managers to carefully examine their respective banks’ loan loss allowance to see if it is appropriate for the level of risk their bank is taking on.
“We’ve been through a long period in which banks have been steadily reducing reserves,” Curry said. “Just over the last two years, the key ratio of the loan loss allowance to total loans dipped by more than 40 percent. Although banks have argued, with some justice—and please note the qualification—that improvements in loan quality justified those reserve releases, drawdowns of that magnitude are clearly disproportionate.”
Curry stated it was clear to him that the reserves needed to be raised in order to account for the increasing credit risk in the financial system today
“We can ensure a safe and sound banking system and avoid crises if we take sensible and toughminded steps now to address the emerging risks I’ve discussed today,” Curry said.
As the number of defaults and foreclosures continues to head toward pre-crisis levels, what effect do you think that will have on the housing industry?
One, it’s a step toward normal. Millions of people lost their homes during the foreclosure crisis, and that really took a toll on homeowners, neighborhoods, and home equity. It’s not just people who lost their homes, but people who lost equity and now are underwater. We’re starting to see that rebound, and those numbers are starting to improve, which means folks who were underwater and couldn’t afford to sell are starting to be in a position to sell. That is good news for a housing market that needs inventory. You would think all those foreclosures hitting the market would help inventory, and it did at first. But it kept prices down too much. It depressed prices significantly. But what we saw in 2012 and 2013 is a lot of investors scooped up those foreclosures and turned them into rental housing. They either bought low, flipped it, and sold high, or they bought low and rented the properties out, since the rental market was so high. Both of those things mean there was less affordable inventory available for regular, traditional homebuyers. Now that demand has come back, there is not that supply that people can use to buy. I think the improvement in the foreclosure rate and the improvement in equity will help inventory in the coming year.
Were September’s surprising month-over-month declines in home sales an aberration or a trend? T
hat is what happens in the fall—you see a slowdown in the housing market. This is a cyclical trend. Overall, the housing market is still quite healthy. Year-over-year, compared with last September, the housing market is up 9 percent, so that’s strong. We think it’s going to be strong for the remainder of the year. What we do see weakening a bit is prices. Prices are starting to slow, and that’s also good news for buyers.
Do you expect GDP growth to pick up for the remainder of the year?
I do think the GDP will be a little bit stronger in the fourth quarter than it was in the third quarter. I think even though we expected it to slow down in the third quarter, it was still a bit lower (1.5 percent) than we expected. We had that strong labor report last week (271,000 jobs added), and I think that’s made everybody look at where the economy is right now. I do feel more confident about a stronger fourth quarter, but we’ve had these first quarters that have been a real drag in the last couple of years (0.6 percent in Q1 of 2015). I think it will be another lousy first quarter in 2016 to make up. So basically, we’re treading water. We have a bad first quarter, bad third quarter, and hopefully a rebound in the second and fourth. That doesn’t make for a sustained trend of growth. We just keep going backward and going forward a little bit. I don’t know how long this is going to last for the economy. I don’t think 2016 is going to be that liftoff year, though.
What needs to happen for us to see that sustained recovery?
Wage growth. We’re not seeing that. That’s been the spoiler in the party. If you saw wage growth, a lot of other good things would happen. One of them is that incomes would keep up with house prices. That’s my biggest concern—that prices, even though they’re slowing, they’re still so high that a number of first-time buyers just can’t afford to participate. NAR reported that the first-time buyer percentage is the lowest it’s been in a really long time. One other thing we’re not seeing is fiscal investments of any kind, not just in housing. Corporate investment has been far too low even at record low interest rates. Our whole fiscal policy has relied on the Fed, which should never happen. From the corporate and the fiscal side, we’re still missing investments, and on the labor side, we need more wage growth.
The Bureau of Labor Statistics’ October jobs report released last week far exceeded expectations, generating widespread speculation that the Federal Reserve will raise short-term rates in the Federal Open Market Committee’s final meeting of the year in December.
San Francisco Fed President and CEO John C. Williams stated in an address Friday that in the past, data that drives economic decisions clearly supported a “patient” approach when it comes to raising rates. That same data, he said, will ultimately determine when the Fed decides to raise rates this time around.
Speaking to the Arizona Council on Economic Education in Tempe, Arizona, on Saturday, Williams presented arguments for both sides, and concluded that the data will determine when the rates are raised.
On the side of the argument for exercising patience, Williams said there are two main concerns: One, the constraint of the “zero lower bound,” which is to say rates can’t go any lower than zero and there will not be room to lower the rates if there is another economic downturn or if inflation drops further; and two, the inflation has been “stubbornly” below the Fed’s target rate of 2 percent for almost three and a half years.
“And while we can ultimately control our own inflationary destiny, as it were, there’s no question that globally low inflation, and the policies other countries have adopted to combat it, has contributed to downward pressure in the U.S.,” Williams said. “As I said, I see inflation bouncing back. But forecasts aren’t guarantees, and there is always the risk that it could take longer than I expect.”
“Given the progress we continue to make on our goals, I view the next appropriate step as the start of a process of gradually raising interest rates.”
John C. Williams, President and CEO, San Francisco Fed
On the other side of the issue—raising rates sooner than later—Williams presented a few arguments in favor. One, the economy is a moving target—according to research, it takes a year or two for monetary policy to take full effect, so the decisions the Fed makes have to be based on where the economy is going and not where it is at present; two, raising rates “would also allow a smoother, more gradual process of policy normalization, giving us space to fine-tune our responses to any surprise changes in economic conditions”; and finally, an economy that runs too hot for too long can result in imbalances that lead to either excessive inflation (as was the case in the 1960s and 1970s) or economic correction and recession (such as in the burst of the “dot com” bubble in the early 2000s or the housing market in 2008).
“And in the first half of the 2000s, the economy was propelled by irrational exuberance over housing, sending house prices spiraling far beyond fundamentals and leading to massive overbuilding,” Williams said. “If we wait too long to remove monetary accommodation, we hazard allowing these imbalances to grow, at great cost to our economy.”
While Williams stated that his economic views are data-driven and that the arguments in the past for patience far outweighed the “raise rates more sooner than later” approach, he also stated that his forecast is “[W]e’ll reach our maximum employment mandate in the near future and I’m increasingly confident that inflation will gradually move back to our 2 percent goal. . . Given the progress we continue to make on our goals, I view the next appropriate step as the start of a process of gradually raising interest rates. That’s the ‘how’; as I said, the data will determine the ‘when.’”
In a perfect World you have some capital set aside to flip houses. However, you can also use other people's money to flip houses and use only a fraction of your own money.
This strategy is called using "Hard Money." Hard Money Lenders issue short-term loans for rehabbing houses.
Getting a hard money loan is easier than getting a loan from a bank. There is less paperwork and your credit history is not as big of a factor. Often you can receive the funds in 48 to 72 hours.
Some Hard Money Lenders issue “No Doc” loans. They do not check your credit. They do not look at your income. However, a No-Doc lender requires a larger down payment than most other Hard Money Lenders.
Keep in mind this is a brief overview of how “Hard Money” works. Every Hard Money Lender has its own terms, conditions, and policies. Each state has its unique laws, rules, and regulations.
How to Find Cheap Houses
New investors often get discouraged because of a lack of inventory in their area.
Have you ever thought to yourself: “My town is too small to flip houses…” or “My town is too big and too competitive to flip houses…”
While every market is different, you can almost always find good properties to flip. Here are some of our favorite places to look for cheap real estate:
Bank Owned/REO Properties – Major U.S. Banks are motivated to sell their foreclosure properties. Why are banks so motivated to sell their houses?
Banks have “carrying costs” each month for any house in its inventory. Carrying costs include property tax, insurance, and maintenance such as landscaping and/or snowplowing services.
There is also the added risk that squatters will vandalize a property. In inner cities it is common for people to break into vacant properties and steal copper plumbing. This causes thousands of dollars in damage that the bank is forced to pay for.
Banks further lose out because an unsold house represents cash that is tied up. Banks prefer that their money is “out on the street” earning them interest.
All of these factors create opportunity for you to purchase bank owned properties at a deep discount.
HUD/VA Properties – HUD and VA Homes are also referred to as government foreclosures. A HUD property is a house with an FHA-backed mortgage that went into foreclosure. A VA property is a house with a VA-backed mortgage that went into foreclosure.
You can often pick up cheap HUD and VA properties. On the Free DVD you will discover where to find HUD houses with incredible potential priced between $10,000 and $20,000.
Off-Market Distressed Properties – These are homeowners who need to sell quickly. If you move quickly you can get houses for 30% - 50% on the dollar.
One example is a property where back taxes are owed. Homeowners who default on property taxes find themselves in a precarious situation. They must sell quick even if it means accepting a low offer.
Buying a property for 30 cents on the dollar for example, gives you lots of equity in a deal.
Want to see real life examples? Complete the form at the top of this page to get the Free DVD.
What Repairs Should I Make to Get Top Dollar?
Some people get carried away and do too many renovations. They find themselves trying to sell the equivalent of the “Taj Mahal” in a blue-collar neighborhood.
You don’t want to flip the most expensive house on the block. Do renovations that bring a house up to standards on par with other houses in the neighborhood.
Kitchen and bathrooms: redo them from top to bottom. If you are not sure what materials to use, look at homes that have sold for top dollar per square foot in your area and copy them.
Flooring: in most flips, use laminate hardwood flooring in the major living areas, and carpet in the bedrooms. Laminate hardwood flooring is
difficult to tell apart from real hard wood. It is not only much more durable, and scratch resistant; it is also less expensive.
Paint: Paint every room in the home. If the walls have a lot of minor flaws in them, use flat paint. Otherwise, use eggshell. And always use earth-tones.
Landscaping: Donald Trump himself stated that you get a $10,000 return for every $1,000 you spend on landscaping. It is amazing what rocks, trees, and shrubs can do to increase the perceived value of a property. A good rule of thumb is to budget 1% to 2% of the final expected sale price of your home for landscaping.
Plant a couple flats of fresh flowers the day before putting the house on the market. This simple, inexpensive final step will put a ton of extra cash in your pocket.
Roof: if the home needs a new roof, replace it. But factor this into your costs before you purchase the home.
HVAC: Make sure the home has a working heating and cooling system. In some areas air conditioning is now mandatory.
Garage: Other than paint, do not spend much money here.
Back patio: this is an often overlooked but very important area. A simple $1500 deck with two chairs, a small table in between them, and a couple wine glasses sitting on the table paints an awesome picture in the head of the potential buyer.
Make sure your general contractor has addressed each of these items in his quote. If you make these simple improvements, you will be able
to sell your property for top dollar and maximize your profits.
Justin Lee Thayer is Lane counties expert in market analysis for real estate investors.