In the aftermath of the last financial crisis, the Federal Reserve somehow managed to come away with its reputation mostly intact. Big commercial and investment banks took most of the blame for the mayhem. And rightly so. But the impetus for the crisis was born of a prolonged period of Fed engineered ultra-low interest rates. Bernanke & Co., held rates far below normalized levels in an attempt to ward off the deflation Bogeyman (just as Yellen & Co., are doing today).
Investors responded by reaching for return. There was an insatiable demand for yield. With rates so low, every basis points counted. Wall Street banks met the demand for return by issuing commercial paper backed by junk loans, sub-prime mortgage backed securities, collateralized debt obligations, and many other such securities. But if risk-free interest rates were at more normal levels during this period, would investors have reached for a couple more basis points in return? I doubt it very much.
Publicly the Fed maintains that its interest rate policies had nothing to do with the financial crisis. That is of course the public response one would expect from the Fed. But we would have hoped that internally Yellen & Co., would have taken an objective and candid look at the role the Fed’s polices played in the real estate bubble. Unfortunately, if the current stance of monetary policy is any guide, there was no internal evaluation of policy. The Fed continues to hold interest rates far below normalized levels in a futile attempt to fix structural problems in the labor market and to boost low measured inflation that poses no threat to the economy.
And so Ben Bernanke & Janet Yellen have laid the foundation for yet another systemic financial crisis in America. The Wall Street Journal has the scoop. Apparently the Fed’s prolonged period of zero-percent interest rates is pushing credit unions to reach for returns. They are lowering lending standards and piling into long bonds. To Wit:
Credit unions’ net holdings of long-term assets, a measure of exposure to rising interest rates, rose to an all-time high at the end of 2013 to 35.85% of total assets, according to the NCUA. The increase comes as some credit unions are adopting lax standards for mortgage and home-equity loans and lines of credit reminiscent of those leading up to the financial crisis, according to interviews. Credit unions also are extending the duration on investments like mortgage bonds, regulatory data show.
Navy Federal Credit Union, the largest credit union in the U.S. with more than $58 billion in assets, began allowing members in January to borrow up to 100% of the value of their home using a home-equity loan. Pentagon Federal Credit Union, the third-largest credit union, said it is raising the maximum amount homeowners can borrow using a home-equity loan from 85% to 90% of a home’s value.
Down payments elsewhere are declining. Last month, Arlington Community Federal Credit Union, based in Arlington, Va., began accepting down payments of 3%, down from a minimum of 5% for loans of up to $417,000.
Some lenders are rolling out marketing campaigns similar to those of the last housing boom. “Just because the words home equity are there doesn’t mean you have to use it for your home,” said John Garner, vice president of lending at 3Rivers Federal Credit Union, which lends in northeast Indiana and northwest Ohio. The credit union said it recently began marketing home-equity lines of credit on regional radio and television programs that can be used to pay for a vacation, buy a car or pay off credit-card debt.
If credit unions’ reach for yield ends like the last reach for yield, will we blame the credit unions or will the Fed finally get its comeuppance? You can read the full article here.
Jeremy Jones, CFA
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