July 2012

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LOCAL EDITION SECONDARY MARKET a 23 percent increase relative to the institutions' aggregate common equity of $2.5 tril- lion. Though the new Basil III rules will not be implemented until 2018, Fitch noted that the global banks will likely face market and supervisory pres- sure to meet those targets before then. The pressure to raise money may restrict the ability of G-SIFIs to increase dividends or undertake share buybacks. Banks will probably use a mix The $566 billion figure reflects trillion. The Fitch study looked at financial reporting as of the end of 2011 in order to provide a current view of where the G-SIFI banks stand in relation to Basel III requirements. The report also looked at the increase reported in 16 months, according to DataQuick, a San Diego-based analytics firm. However, the market still G-SIFI entity as a whole and did not analyze the capital positions of any individual bank. home loans since 2000. Jumbo loans—loans for relies heavily on investors as credit remains tight. Previously common mortgage loan prod- ucts continue to make up a much smaller percentage of the market than they did over the amounts higher than the previous conforming loan limit, $417,000—made up a much higher percentage of loans than ARMs, and in fact, the 18.9 percent market share taken by jumbo loans in April was the highest share the loan type has claimed since December 2007. April's short-term high is less of strategies to address capital shortfalls, including retention of future earnings and selling or winding down exposures subject to higher Basel risk-weights. Without additional equity issu- ance, the median G-SIFI should be able to meet this shortfall with three years of retained earnings. The stricter Basel III capital tives to reduce expenses and increase pricing on borrowers and customers for banks that con- tinue to pursue returns on equity (ROE) between 12 percent and 15 percent. "Since it is impossible for rules could imply an estimated reduction in large banks' median return on equity from about 11 percent over the past few years to approximately 8 percent to 9 percent, a cutback of almost 20 percent. Basel III also creates incen- regulators to perfectly align capital requirements with risk exposure, some banks might seek to increase ROE through riskier activities that maximize yield on a given unit of Basel III capital, including new forms of regulatory arbitrage," Martin Hansen, senior director with Fitch Macro Credit Research, said in a statement. The report speculated that than half the average rate leading up to the housing crisis in August 2007 when jumbo loans made up 40 percent of home loans. FHA loans are also unchar- acteristically low, making up 29.3 percent of April home sales, which is the lowest rate recorded since August 2008. At the same time, DataQuick reports cash purchases are dou- ble their historic average rates. Absentee buyers, which DataQuick defines as "investors and some second-home purchasers, made up 27.8 percent of Southland home sales in April. This is down from the record high of 29.9 percent recorded in February 2011 but remains well above the 17 percent average recorded since 2000. The median home price in " tinued its painfully slow crawl back toward normalcy last month," said John Walsh, presi- dent of DataQuick. According to DataQuick, the Once Common Loan Products Not So Common for riskier activities subject to higher capital charges, Basel III could increase borrowing costs, promote a shift to securitization and capital markets funding, or cause a migration to less regulated segments of the financial system, including shadow banks. The 29 G-SIFIs collectively represent total assets of $47 WEST COAST MARKET EXPERIENCES UPTICK IN HOME SALES, ACCORDING TO STATISTICS FROM DATAQUICK. CALIFORNIA // The Southern California housing market contin- ues to inch slowly toward recov- ery with a 5.1 percent increase in home sales year-over-year in April and the first year-over-year price last several years, according to DataQuick. "Investor and cash buying are still unusually robust," said John Southern California rose 3.6 percent in April to $290,000, the highest recorded median price since December 2010. "The housing market con- rise in median price is indica- tive of a tapering off in the share of foreclosed home sales and a simultaneous increase in pur- chases in coastal markets, where prices are inherently higher. Sales in the high-end markets Walsh, president of DataQuick. "The jumbo loan market has yet to recover, and the use of plain- vanilla adjustable-rate mortgages, or ARMs, remains far below normal." ARMs made up just 7.1 per- cent of all Southland home loans for the month of April. While this is 6.4 percent higher than the previous month, ARMs have accounted for 36 percent of all of Los Angeles, Orange, San Diego, and Ventura counties in- creased from 68 percent in April 2011 to 71.5 percent in April 2012. Home sales appear to be improving, though they have remained 21 percent below their April average since 1988. April marked four consecutive months of home sales increases as well as increases in eight out of the past nine months. THE M REPORT | 79 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET

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