March ’18

The BAN Report: Possible Trade War? / Housing Loses Steam / Senate Debates Regulatory Relief / Racial Discrimination in Mortgage Lending-3/8/18

Possible Trade War?

Today, President Trump is expected to announce at 25% percent tariff on imported steel and a 10% tariff on aluminum, igniting possible retaliatory measures from the European Union and China, thus worrying markets about a possible trade war.   The step is so controversial that Gary Cohn, the President’s chief economic advisor, used this proposed action to submit his resignation.    The Washington Post had a good analysis of the winners and losers of this controversial action.   Winners include:

Aluminum and steelworkers. In parts of Pennsylvania, Ohio and elsewhere in the Rust Belt, celebrations are going on as workers who lost their jobs think they might be able to get them back. The United States had 216,400 steelworkers in 1998. That fell by about a third to 139,800 in 2016, according to the Commerce Department. The aluminum-related job losses have been even more precipitous: About 13,000 people were employed in making raw aluminum in 2013. Now only about 5,000 work in the industry.

Steel companies. U.S. steel companies are also smiling at the prospect of tariffs by the end of the week. Steel stocks jumped at the end of last week, with U.S. Steel, for example, surging about 8 percent Thursday. Higher prices mean fatter profits for these companies. U.S. manufacturers that use steel would also have to buy a lot more domestically, another boon for American steel companies. The Commerce Department says about 30 percent of the steel America uses comes from overseas. It’s not as big a percentage as aluminum, but raising that percentage even a little would mean larger profits.

Losers include:

Canada. America’s neighbor to the north is by far the largest source of foreign steel and aluminum coming into the United States. It stands to get hurt the most if Trump moves forward with the blanket tariff on all nations. Many businesses and the pro-free-trade faction in the White House are pushing for Canada to be exempted from the tariff. Canada accounts for about 40 percent of U.S. aluminum imports and about 16 percent of U.S. steel imports.

Ford and GM. There’s a lot of steel in American cars. As the price of steel rises, companies like Ford and GM either have to eat the costs or risk trying to pass them on to consumers. Goldman Sachs projects Ford and GM will both lose $1 billion each this year if Trump’s tariffs go through. Both stocks fell sharply Thursday, a potential harbinger of what’s to come.

How this plays out is anyone’s guess.     If it leads to modest retaliatory action and leads to a negotiated compromise, then it could be positive.    But, a full-fledged trade harms all.   The President is taking a gamble here with an uncertain outcome.

Housing Loses Steam

The housing market is losing its momentum so far this year, as it enders the critical spring selling season.     Pending home sales dipped 4.7% percent in January to their lowest level in more than three years, as did existing home sales as well.

The culprits: rising mortgage rates, a new tax law that reduces the incentives for homeownership and a growing weariness among first-time buyers being priced out of the market—all of which are expected to damp demand for homes this year.

The next few months are a critical test of the housing market, as buyers look to get into contract before summer vacations and the new school year. About 40% of the year’s sales take place from March through June, according to the National Association of Realtors.

Lawrence Yun, chief economist at the National Association of Realtors, said he expects sales to be flat this spring from a year earlier. About 2.06 million homes were sold between March and June 2017, up from about 2 million in the same period a year earlier, according to the National Association of Realtors.

Mr. Yun has predicted sales will remain flat for all of 2018 due to inventory shortages and eroding affordability, as both prices and mortgage rates rise.

The 30-year fixed rate is up about 50 basis points since early January, and tax reform certainly reduces the benefit of home ownership in high-end markets.    But, inventory is still fairly low, so sellers haven’t felt the need yet to lower prices yet.   Homebuilders entered 2018 with record optimism, so an increase in supply will only help, as it will put some pressure on prices.

Senate Debates Regulatory Relief

The United States Senate could vote on regulatory relief as early as this week, considering amendments today to a bi-partisan effort led by Senator Mike Crapo.    In the latest rewrite, some relief to custodial banks won’t be extended to other institutions.  According to the Summary, S.2155 does the following:

This bill amends the Truth in Lending Act to allow institutions with less than $10 billion in assets to waive ability-to-repay requirements for certain residential-mortgage loans. Other mortgage-lending provisions related to appraisals, mortgage data, employment of loan originators, manufactured homes, and transaction waiting periods are also modified.

The bill amends the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. Certain banks are also exempted by the bill from specified capital and leverage ratios, with federal banking agencies directed to promulgate new requirements.

The bill amends the United States Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.

Provisions relating to enhanced prudential regulation for financial institutions are modified, including those related to stress testing, leverage requirements, and the use of municipal bonds for purposes of meeting liquidity requirements.

The bill requires credit reporting agencies to provide credit-freeze alerts and includes consumer-credit provisions related to senior citizens, minors, and veterans.

We are supportive of this legislation, as it provides regulatory relief for smaller and mid-size banks without dismantling Dodd/Frank.

Racial Discrimination in Mortgage Lending

According to a recent study by the Center for Investigative Reporting, African-Americans and Latinos continue to face discrimination in obtaining residential mortgages, even after accounting for differences in income and credit worthiness.

An alarming new study by the Center for Investigative Reporting’s online publication Reveal found that African-Americans and Latinos were far more likely to be denied conventional mortgages than whites even when income, loan size and other factors were taken into account. The study examined 31 million mortgage records and found disturbing evidence in 61 metropolitan areas, including Atlanta, Detroit, Philadelphia, St. Louis and San Antonio. African-Americans faced their worst obstacles in the South — Mobile, Ala.; Greenville, N.C.; and Gainesville, Fla. — and Latinos in Iowa City.

Black applicants were disproportionately turned away, as compared to whites, in 48 metropolitan areas, Latinos in 25, Asian-Americans in nine and Native Americans in three areas. In Washington, D.C., the study found that all four groups were far more likely to be denied home loans than were whites.

Banks have subverted the purpose of the Community Reinvestment Act of 1977, which was supposed to get them to lend and invest more, and open more branches, in low- and moderate-income areas. This was to correct decades of damage the federal government caused by encouraging lenders to ignore black areas until the passage of the federal Fair Housing Act in 1968. The Reveal study found that affordable mortgages issued in historically black neighborhoods to comply with the reinvestment act were going to white newcomers instead of longtime black residents. This has accelerated a pattern of gentrification that forces out black residents.

These problems are rampant throughout the United States. Three years ago, for example, a striking study commissioned by the city of Richmond, Va., found that black applicants were less likely to receive home purchase loans or refinance loans regardless of their incomes.

Upper-income black people were even more likely to be denied loans, as compared to similarly situated whites, than lower income black people were to their white counterparts.

Studies like this are highly disappointing, but there may be other factors at play.   If home values are lower in minority communities, there is less incentive for lenders to make loans in those areas, as it is more profitable to make larger loans.   For example, take Detroit, Michigan, which is 82.7% African-American.   Back in 2016, there was an article entitled “Why there’s almost no mortgage lending in Detroit.”

And that’s common: in Detroit, where the median home value is still below $40,000, there were fewer than 500 home loans out of 7,700 home sales in 2014. Cash is king, and a lot of sellers push for cash-only transactions.

And just getting a mortgage in those markets has gotten more difficult. The result is that in markets where single-family houses are the cheapest, there’s hardly any lending going on. The Urban Institute in 2015 studied ten other, smaller markets where, as the number of inexpensive homes has gone up, the number of mortgages under $50,000 has nonetheless declined. In the lower-end markets — potentially a source of opportunity for first-time or low-income homebuyers — there appears to be virtually no lending going on.

No matter what the cause here is, we’d like to see a cooperative effort by the banking industry, housing, and the GSEs to address an obvious shortfall in lending to minority borrowers.

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