TheMReport

44 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ORIGINATION THE LATEST Stress Tests? No Problem for These Banks Thirty-three of the nation's biggest banks show improved strength against economic stress. T he Federal Reserve re- cently released results of the Dodd-Frank Act Stress Tests (DFAST) conducted on the nation's 33 largest bank holding companies, showing improved capital levels, credit quality, and a strength - ened ability to lend during times of severe economic stress. The 33 bank holding compa - nies tested hold more than 80 percent of domestic banking assets. The hypothetical severe economic scenario for which the banks were tested would result in about $385 billion in losses for the 33 firms tested. That scenario would include a severe global recession with an increase of five percentage points for the U.S. unemployment rate followed by a heightened period of financial stress. The scenario would also include negative yields for short- term U.S. Treasury securities, according to the Fed. "The changes we make in each year's stress scenarios allow supervisors, investors, and the public to assess the resiliency of the banking firms in different adverse economic circumstances," Governor Daniel K. Tarullo said. "This feature is key to a sound stress testing regime, since the nature of possible future stress episodes is inherently uncertain." Under the severely adverse economic scenario, the aggregate common equity tier 1 ratio, which compares high-quality capital to risk-weighted assets, for the 33 firms tested would fall from an ac - tual 12.3 percent in Q 4 2015 down to a minimum level of 8.4 percent. According to the Fed, the 33 firms have added a combined total of more than $700 billion in common equity capital. The Fed also tested the 33 bank holding companies for the ability to lend in an "adverse" scenario featuring a moderate recession, as opposed to a severe one. In the hypothetical adverse scenario, aggregate common equity capital ratio for the 33 companies would drop from an actual 12.3 percent in Q4 2015 down to a minimum level of 10.5 percent, according to the Fed. DFAST is one component of the Fed's Comprehensive Capital Analysis and Review (CCAR), an annual test to evaluate the largest bank holding companies' capital planning process and capital adequacy. Will Non-FHA Low Down Payment Programs Make a Splash? One expert says they could help LMI buyers, but they still can't compete with FHA's price points. W ith the announce- ments from Bank of America, Wells Fargo, JPMorgan Chase, and Quicken Loans for non-Federal Housing Admin - istration low-down payment programs, questions and thoughts have arisen about the programs themselves and what their effect on the mortgage industry may be. For some first-time buyers and low- to moderate-income (LMI) buyers, these programs may be beneficial while for others it may not be a viable substitute for FHA lending. From what is known about the individual programs from these four home lenders, potential first-time buyers and LMI buyers receive quite a few borrower-friendly features. For the Bank of America pay - ment program, Affordable Loan Solution, buyers gain the ability to combine down payments with gifts and grants, homebuyer counseling, consideration of non - traditional forms of credit, and no private mortgage insurance (PMI). For Wells Fargo's payment program, yourFirstMortgage, buyers are offered loan options that can work with or without PMI. Quicken Loans' payment program, Home Possible, offers borrowers a 2-percent grant and sells the loan to Freddie Mac and requires PMI. Finally, for JPMorgan Chase's program, Standard Agency, 97 percent, loans will be sold to Fannie Mae and it is not yet known publicly if PMI alternatives are available. According to Karan Kaul of the Urban Institute, first-time homebuyers and LMI buyers are heavily relying on FHA lending presently, but many home lend - ers have recently started to pull

• Cover