More than 650,000 mortgage modifications were under way by the end of October under the Making Home Affordable Program, the Treasury Department said in its latest monthly report on the program. That figure represents 20 percent of the borrowers who are eligible to participate, up from 16 percent a month earlier.

Data on lenders in the October report showed that most had made progress in starting new trial modifications since September. CitiMortgage increased the percentage of its potentially eligible delinquent borrowers who had been given a loan modification from 33 percent through September to 40 percent by the end of October. Bayview Loan Servicing increased its ratio from 2 percent to 22 percent, and the figures reported by Litton Loan Servicing showed an increase from 12 percent to 22 percent over the same period.

Saxon Mortgage Services continued to lead the way, getting 44 percent of eligible borrowers into a trial modification. In raw numbers, Bank of America posted the most activity with nearly 137,000 modifications, but that number represented only 14 percent of its eligible borrowers.

A new feature in the October report is a state-by-state breakdown of active trial modifications, which showed that California had the most activity with more than 134,000 modifications under way, ahead of Florida where more than 82,000 were reported. Arizona, Illinois, and New York were also among the top five.

The Treasury Department announced that it had reached “a new milestone of more than 500,000 trial loan modifications in progress under the Making Home Affordable program.” The October 8 announcement included a report (pdf, 103kb) on mortgage lender performance data through September 30.

The figures provided a breakdown by lender of the percentage of potentially eligible delinquent borrowers who had been given a loan modification. Figures for lenders with more than 70,000 potentially eligible borrowers:

Saxon Mortgage Services 41%
CitiMortgage 33%
Aurora Loan Services 33%
JP Morgan Chase 27%
GMAC Mortgage 26%
Wells Fargo 20%
Bank of America 11%
OneWest Bank 5%
Wachovia Mortgage 3%
Litton Loan Servicing 2%
American Home Mortgage Servicing < 1%

Background on the Making Home Affordable program, including monthly lender data from July and August, is available on the Treasury Department website.

In a July 30 report (pdf, 8.6mb) sent to the House Oversight and Government Reform Committee highlighting a study of executive compensation in the banking industry, New York State Attorney General Andrew Cuomo said his investigation found that there is “no clear rhyme or reason to the way banks compensate and reward their employees.” Under economic conditions establishing “a virtual laboratory in which to test the hypothesis that compensation in the financial industry was performance-based,” the data indicated that “compensation for bank employees has become unmoored from the banks’ financial performance,” the report said.

Citigroup and Merrill Lynch paid out $9 billion in bonuses in 2008 despite combined losses of $54 billion and TARP bailouts totaling $55 billion, according to the report. At three other firms – Goldman Sachs, Morgan Stanley, and J.P. Morgan Chase – combined bonuses of nearly $18 billion were nearly double the combined earnings of $9.6 billion, even while the three firms took in a combined $45 billion in TARP funds.

“At many banks … compensation and benefits steadily increased during the bull market years between 2003 and 2006. However, when the sub-prime crisis emerged in 2007, followed by the current recession, compensation and benefits stayed at bull-market levels even though bank performance plummeted,” the report said.

In a letter to Cuomo, House Oversight and Government Reform Committee Chairman Edolphus Towns invited Cuomo to appear at a hearing after the August recess “to review executive pay regulations for the Troubled Asset Relief Program recipients and the work of Ken Feinberg,” who was named by the Obama administration in June to the post of Special Master for TARP Executive Compensation.

On July 31, the House passed HR 3269, the Corporate and Financial Institution Compensation Fairness Act of 2009, by a vote of 237-185. The Congressional Budget Office released its summary of the bill (pdf, 23kb) a day earlier. The bill “would require all companies whose stock is traded on public exchanges to allow shareholders to approve, in nonbinding votes, the compensation received by executives and certain compensation agreements between executives and an acquiring entity,” CBO’s summary said. It would also require disclosure to federal regulators of “the structure of any employee compensation agreements that include performance incentives.”

Separately, on August 3, Bank of America settled a Securities and Exchange Commission complaint alleging that the company misled investors about having agreed to up to $5.8 billion in bonuses for Merrill Lynch employees while negotiating its year-end acquisition of Merrill. Cuomo’s report had asserted that at Merrill Lynch, “the compensation structures in the boom years did not account for long-term risk, and huge paydays continued while the firm faced extinction.”

Ten of the 19 largest US bank holding companies (BHCs) will need to raise additional capital to be prepared to weather the more adverse of two scenarios projected for the economy through next year by the Supervisory Capital Assessment Program (SCAP), also known as the bank “stress test.” The results of the SCAP, a joint program conducted by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, were announced May 7. A Federal Reserve press release links to the full overview of results, as well as an earlier program design summary and statements by Fed, Treasury, FDIC and OCC officials.

As the design summary (pdf, 287kb) explains,

“SCAP is a forward-looking exercise designed to estimate losses, revenues, and reserve needs for BHCs in 2009 and 2010 under two macroeconomic scenarios, including one that is more adverse than expected. Should the assessment indicate the need for a BHC to raise capital or improve the quality of its capital to better withstand losses that could occur under more stressful-than-expected conditions, supervisors will expect that firm to augment its capital to create a buffer…

All domestic BHCs with year-end 2008 assets exceeding $100 billion were required to participate in the SCAP as part of the ongoing supervisory process. These 19 firms collectively hold two-thirds of the assets and more than one-half of the loans in the U.S. banking system, and support a very significant portion of the credit intermediation done by the banking sector. The firms were asked to project their credit losses and revenues for the two years 2009 and 2010, including the level of reserves that would be needed at the end of 2010 to cover expected losses in 2011, under two alternative economic scenarios. The baseline scenario reflected the consensus expectation in February 2009 among professional forecasters on the depth and duration of the recession, while the more adverse scenario was designed to characterize a recession that is longer and more severe than the consensus expectation.”

The design summary emphasized that “the more adverse alternative is not, and is not intended to be a ‘worst case’ scenario. To be most useful, stress tests should reflect conditions that are severe but plausible.” Under the more adverse scenario, GDP would fall by 3.3 percent this year and rise by only 0.5 percent in 2010, unemployment would reach 10.3 percent by next year, and housing prices would decline 22 percent over the two-year period.

The overview of results (pdf, 333kb) concluded that “if the economy were to track the more adverse scenario, losses at the 19 firms during 2009 and 2010 could be $600 billion … The estimated two‐year cumulative losses on total loans under the more adverse scenario is 9.1 percent at the 19 participating BHCs; for comparison, this two‐year rate is higher than during the historical peak loss years of the 1930s.” Coupled with the losses already suffered since mid-2007, total losses could reach nearly $950 billion by the end of 2010 if the economy were to follow the course of the more adverse scenario.

The test results indicated that nine of the 19 firms do not need to raise additional capital to weather the more adverse scenario. The other 10 need to raise a total of $75 billion. The largest obligations were assigned to Bank of America, which needs to raise $33.9 billion, Wells Fargo $13.7 billion, GMAC $9.1 billion, and Citigroup which needs to raise an additional $5.5 billion.

In a separate statement, Comptroller of the Currency John Dugan said “the stress test criteria were appropriately conservative; this was a severe test, and high capital requirements were used to measure success.” But he cautioned that “while we have some good news today, credit losses in banks are likely to increase in the coming months across all asset classes. Supervisors are very focused on this concern. Banks will need strong capital to weather these losses while continuing to make loans to creditworthy borrowers – which is exactly what the stress test is designed to ensure.”

The International Monetary Fund downgraded its projections for the global economy in two new reports. In the April edition of its World Economic Outlook, the IMF projected that the global economy will shrink by 1.3 percent in 2009, a dropoff from the 0.5 percent growth forecast in its January update and a figure that “would represent by far the deepest post-World War II recession.” Growth will rebound only to a modest 1.9 percent in 2010, according to the new projections.

And in its April Global Financial Stability Report, the IMF said total write-downs by all financial institutions could reach slightly higher than $4 trillion over the 2007-2010 period.

“Without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems will continue to exert downward pressure on economic activity. Though subject to a number of assumptions, our best estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreak of the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial Stability Report Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth. In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks.”

Internal Revenue Service (IRS) data obtained by an independent monitoring organization showed that firms in the financial services sector were audited much less frequently in 2008 than other large corporations, and when they were conducted, audits of financial services sector firms were much less thorough than those of large corporations in other categories.

In the second report of a two-part series examining IRS data obtained through Freedom of Information Act (FOIA) requests, the Transactional Records Access Clearinghouse (TRAC) said that “looking at the largest corporations with assets of $250 million or more, nearly two out of every three returns (64%) filed by large corporations outside of the financial services sector were audited by the IRS. In contrast, for the more than 10,000 of large financial services companies, only 15% of them were audited in FY 2008.”

Furthermore, “focusing only on the largest companies audited — those with $20 billion or more in assets — the audit for companies not in the financial sector averaged 3,145 hours of direct examiner time. Despite the unique challenge of understanding derivatives and the like, however, the audits for financial services giants averaged 1,695 hours, about half the time the typical audit took for all behemoths.”

The report raised the question of whether “the unannounced decision of the IRS more than five years ago to place a much lower priority on examining large and mid-size financial services companies than it was devoting to the financial records of other business sectors may have undermined the ability of the specialized regulatory agencies to identify and deal with the questionable activities of some of these companies as the American economy slipped into a serious recession.”

The Congressional Oversight Panel (COP) charged with measuring the success of the Treasury Department’s efforts to stabilize the economy released its sixth monthly report on April 7: Assessing Treasury’s Strategy: Six Months of TARP (pdf, 1.4mb). Although earlier reports expressed difficulty in identifying a clearly articulated strategy for the use of TARP funds, the panel said its April report “return(s) to the issue of strategy as a new Administration begins to announce its intentions in detail for the TARP.”

One key assumption that underlies Treasury’s approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from nonfunctioning markets for troubled assets. The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two.

If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis. Current prices may, in fact, prove not to be explainable without the liquidity factor… On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.

Later, the panel addresses the option of bank liquidation and says it could offer taxpayers a more palatable “exit strategy.”

While the total cost of the various options is open to doubt, liquidation provides clarity relatively quickly. In that sense, allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal. Liquidation is less likely to be open-ended and stretch over years… Liquidation is also the option least likely to sap the patience of taxpayers. It is noteworthy how little controversy has been associated with the FDIC’s windup of numerous banks and thrifts over the last year.

The report includes alternative views, including the dissenting opinion of panel member John Sununu that in its April report the panel goes “too far from its core mission of monitoring and assessing the performance of existing programs and making recommendations for improvement… [T]he central parts of the April Report of the Congressional Oversight Panel is consumed with discussion which, although interesting to many readers, is at the edge of - and outside – the core mission of the Panel. Expending resources to develop this analysis has precluded a more detailed assessment of the performance of TARP programs to date. Furthermore, the prominence of alternate approaches could be used incorrectly to suggest that the Panel believes that existing programs have failed, or that it has concluded that the Administration Plan is not viable.”

The report also includes several pieces of correspondence between the panel and Treasury Secretary Tim Geithner, including an April 2 letter in which Geithner tells the panel that the administration’s Financial Stability Plan (pdf, 71.5kb) “maintained a focus on the root causes of the financial crisis… At its core, this crisis began because – due to both economic changes and regulatory weaknesses – we borrowed too much and we took on irresponsible levels of risk.”

Treasury Secretary Timothy Geithner presented the Obama Administration’s Financial Stability Plan to address the financial crisis on February 10. Treasury is also developing a new website, FinancialStability.gov, which hosts text and webcast resources on the financial crisis, including a fact sheet (pdf, 72kb) on the plan.

In a joint statement with Federal Reserve Chairman Ben Bernanke and others, Geithner said Treasury and the Federal Reserve would team to “dramatically expand – up to $1 trillion – the existing Term Asset-Backed Securities Lending Facility (TALF) in order to reduce credit spreads and restart the securitized credit markets that in recent years supported a substantial portion of lending to households, students, small businesses, and others.” Information on TALF, dating back to its unveiling in November 2008, is provided on the Federal Reserve Board website.

The Treasury Department has improved its oversight of the $700 billion bailout program, but “additional action is needed to better ensure that all participating institutions are accountable for their use of the funds,” the Government Accountability Office (GAO) said in its second report on the Troubled Asset Relief Program (TARP). GAO cited progress on some of the nine recommendations made in its first report in December, including steps to ensure a smooth transition to the new administration and to improve hiring and other administrative performance in Treasury’s Office of Financial Stability (OFS).

But the report warned that without better and more frequent information from the institutions receiving funds through the program, Treasury may not have enough information “to analyze how the infusions are being used by the institutions and the effectiveness of the program.” Although Treasury has taken steps to improve its oversight of compliance with rules about executive compensation and limitations on dividends and stock repurchases, “[w]ithout a more structured mechanism in place to ensure compliance with all [Capital Purchase Program] requirements, including limitations on dividends and stock repurchases—and as more institutions continue to participate in the program— ensuring compliance with these aspects of the program will become increasingly important and challenging.”

Acknowledging the difficulty of assessing the program’s effectiveness, particularly at this early date, the report said that “some indicators demonstrate that since our last report, the cost of credit has declined in interbank, mortgage, and corporate debt markets. Conversely, while perceptions of risk (as measured by premiums over Treasury bonds) have declined in interbank markets, they appear to have changed little in the corporate bond and mortgage markets. Attributing any of these changes directly to TARP continues to be problematic because of the range of actions that have been and are being taken to address the current crisis. For example, a large drop in mortgage rates occurred shortly after the Federal Reserve announced it would purchase up to $500 billion in mortgage-backed securities, highlighting that policies outside of TARP may have important effects on credit markets. While these indicators may be suggestive of TARP’s ongoing impact, no single indicator or set of indicators will provide a definitive determination of the program’s impact.”

The Congressional Oversight Panel on the Troubled Asset Relief Program published its second accountability report on January 9. In the report, the Panel “highlights four specific areas that it believes deserve special attention:”

1) Bank Accountability. The Panel still does not know what banks are doing with the taxpayer money. . .
2) Transparency and Asset Evaluation. The need for transparency is closely related to the issue of accountability. The confidence that Treasury seeks can be restored only when information is completely transparent and reliable. Currently, Treasury’s strategy appears to involve allocating the majority of the $700 billion to “healthy banks,” banks that have been assessed by their regulators as viable without federal assistance. Of course, whether a bank is “healthy” depends critically on the valuation of the bank’s assets. If the banks have not yet recognized losses associated with over-valued assets, then their balance sheets – and Treasury’s assessment of their health – may be suspect. . .
3) Foreclosures. The crisis in the housing sector continues to affect any efforts at recovery. . . When Congress authorized the Panel, it specifically requested that the Panel evaluate “the effectiveness of foreclosure mitigation efforts.” While the statute contemplates that foreclosure mitigation would be accomplished through the purchase of mortgage-related assets, many believe that Treasury has clear authority to use a portion of the $700 billion to address mortgage foreclosures in other ways. For Treasury to take no steps to use any of this money to alleviate the foreclosure crisis raises questions about whether Treasury has complied with Congress’s intent that Treasury develop a “plan that seeks to maximize assistance for homeowners. . .”
4) Strategy. The Panel’s initial concerns about the TARP have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury. It is not enough to say that the goal is the stabilization of the financial markets and the broader economy. That goal is widely accepted. The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards. It would be constructive for Treasury to clearly identify the types of institutions it believes fall under the purview of EESA and which do not and the appropriate uses of TARP funds. The need for Treasury to address these fundamental issues of strategy has only intensified since our last report. . .