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The BAN Report: The $765MM MSR Portfolio / Work from Home Study / Green Shoots from Retail Woes? / Mortgage Rates Drop Below 5% / Vin Scully

The $765MM MSR Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 765MM MSR Portfolio” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • $765,774,695 of mortgage servicing rights

  • Portfolio is comprised of mortgage loans serviced on behalf of Freddie Mac and Fannie Mae, as well as loans held and serviced by the seller

  • The seller is a well-capitalized Midwest bank

  • WAC of 3.78%

  • 9,518 loans originated primarily through retail channels

  • Servicing fee of 25 basis points

  • Predominantly mortgage loans in Indiana (60%), Illinois (19.6%), and Kentucky (16%)

  • Potential annual flow relationship of approximately $250MM

For more information, please execute the confidentiality agreement. Potential purchasers will be evaluated based on price, financial strength, reputation, and status with Freddie Mac and Fannie Mae. 


Sale Announcement: Wednesday, August 3, 2022

Bid Date: Tuesday, August 16, 2022

Closing Date: Friday, September 30, 2022

Transfer Date: Monday, October 31, 2022

Work from Home Study

With a grim title (“Work From Home and the Office Real Estate Apocalypse”), three academics researched how work from home was impacting the New York City commercial office center.    

What the researchers found: Analyzing shifting lease revenues, office occupancy, lease renewal rates, lease durations, and market rents during the pandemic, the researchers determined that:

  • In the NYC office market, there was a 32% decline in the values of offices in 2020, and a 28% decline in future values.

  • Higher quality office buildings (those that are built more recently and have more amenities) were somewhat protected against the declines, while lower quality buildings saw dramatic swings in valuation.

  • Extrapolating their estimates to the rest of the country, as hybrid work options continue to take hold and lease revenues continue to decrease, office values could be cut by nearly $500 billion in the next decade.

An interesting insight is physical office occupancy, which is measured from turnstile data provided by Kastle.

In the initial wave of the pandemic, physical office occupancy rates fell to just 20%. Average occupancy recovered to about 30% among the top-10 largest office markets by the end of 2020. It saw several more dips as the pandemic intensified in early 2021.The recovery continued in the second half of 2021 to about 50%, before falling sharply due to the rise of the Omicron variant at the end of 2021. The latest data as of May 2022 show a 50% occupancy rate among the largest 10 office markets. Occupancy rates are lower in several large metros such as New York City and Washington DC highlighted in the other panels of this figure. Occupancy stands at 38.8% in NY MSA, 40.0% in DC, and 34.6% in SF on May 11, 2022. With two years of remote work experience, many employers and employees have formed new habits and expectations, which may permanently affect where work is done.

One would think that actual occupancy and physical occupancy should converge. After all, why wouldn’t firms reduce office space if they aren’t using all of it? The paper noted that the volume of newly signed leases is running about a third of what it was pre-pandemic. However, physical occupancy is likely to get better as more companies put pressure on workers to return. WeWork, which has exclusively Class A space, has seen growth in office occupancy.

The company said its occupancy rate rose to 72 percent during the quarter, and memberships grew 33 percent from a year earlier to 658,000.

“As we head into the second half of the year, we remain confident in our proven ability to execute against our goals of growing revenue, increasing occupancy and continuing to drive towards profitability,” Sandeep Mathrani, WeWork’s chief executive, said in a statement on Thursday.

WeWork can capitalize on a shift to hybrid work, which has become a challenge for companies that usually sign long-term leases on office space, said Vikram Malhotra, a senior equity research analyst at Mizuho Americas, because its offices are in central business districts, and it can serve large and small tenants.

But, the return to office has still been slow and tepid. As I’ve walked throughout Chicago’s Loop and NYC’s Midtown in the past couple weeks, the energy isn’t what it used to be. Shake Shack noted the stalling of the downtown recovery.

Shake Shack Inc. said that the pace of workers returning to offices in cities, including New York, stalled last quarter and hampered the restaurant chain’s growth. 

The weakening of return to office has left the chain “cautious” about the timing of a “full urban recovery,” Shake Shack Chief Executive Officer Randy Garutti said on conference call with analysts. “There is still a long way to go.”

If companies start laying off workers and disproportionately let go of remote workers, perhaps more workers will see the benefit of being visible in an office. But, as of now, the office recovery has trailed the strong recoveries in hotels, travel, restaurants, and concerts.

Green Shoots from Retail Woes?

As retailers shed excessive inventory, retail liquidators have never been busier.

Once upon a time, when parents were scrambling to occupy their children during pandemic lockdowns, bicycles were hard to find. But today, in a giant warehouse in northeastern Pennsylvania, there are shiny new Huffys and Schwinns available at big discounts.

The same goes for patio furniture, garden hoses and portable pizza ovens. There are home spas, Rachael Ray’s nonstick pans and a backyard firepit, which promises to make “memories every day.”

The warehouse is run by Liquidity Services, a company that collects surplus and returned goods from major retailers like Target and Amazon and resells them, often for cents on the dollar. The facility opened last November and is operating at exceptionally high volumes for this time of year.

The warehouse offers a window into a reckoning across the retail industry and the broader economy: After a two-year binge of consumer spending — fueled by government checks and the ease of e-commerce — a nasty hangover is taking hold.

With consumers cutting down on discretionary purchases because of high inflation, retailers are now stuck with more inventory than they need. While overall spending rebounded last month, some major retailers say shoppers are buying less clothing, gardening equipment and electronics and focusing instead on basics like food and gas.

Adding to that glut are all the things people bought during the pandemic — often online — and then returned. In 2021, shoppers returned an average of 16.6 percent of their purchases, up from 10.6 percent in 2020 and more than double the rate in 2019, according to an analysis by the National Retail Federation, a trade group, and Appriss Retail, a software and analytics firm.

Last year’s returns, which retailers are not always able to resell themselves, totaled $761 billion in lost sales. That, the retail federation noted, is more than the annual budget for the U.S. Department of Defense.

This suggests that retailers are taking their lumps, moving excessive inventory, and reducing prices in the process, thus reducing inflation. Consumers are showing restraint by curbing spending on goods, especially on those that have risen dramatically. It is possible that the inflation has moderately already, but it just hasn’t shown up yet in the data.

Mortgage Rates Drop Below 5%


While the increase in mortgage rates has been short and dramatic, the decrease has been sharp as well, with mortgage rates dropping to their lowest level since April.

The average rate on a 30-year fixed-rate mortgage is 4.99% this week, down from 5.30% a week earlier, according to a survey by mortgage giant Freddie Mac published Thursday. Though rates remain well above their levels from a year ago, they have fallen swiftly in recent weeks from their 13-year high of 5.81% in June.

Mortgage rates and other measures of the cost of borrowing tend to rise and fall with expectations about the trajectory of the economy. Recently, fears that the U.S. is heading into a downturn have lowered expectations of the pace of rate rises.

Until the past few weeks, rising mortgage rates had been a key factor driving up the cost of home buying this year, adding hundreds of dollars or more to buyers’ monthly payments. That, on top of double-digit home-price growth, has helped drive buyers out of the market in recent months.

Sales of previously owned homes fell for a fifth straight month in June, according to the most recent data from the National Association of Realtors.

The chart below (courtesy of Tommy Esposito at VBC) shows how the Mortgage Affordability Index is at a low not seen since June 2006. Only if prices and/or rates drop can this improve affordability. But, an 82 basis point improvement in rates will certainly help bridge the gap.






Vin Scully

Let's celebrate the late and great Vin Scully with two of the best sports calls of all time.  For those who communicate for a living, his ability to listen and allow us to hear the sights and sounds was unmatched. And, after a lengthy pause, he nailed the moment with the perfect line.

World Series Game 6, Red Sox @ Mets, 1986

"Little roller up along first.... behind the bag! It gets through Buckner! Here comes Knight and the Mets win it! (90 second pause)
"If one picture is worth a thousand words, you have seen about a million words."

World Series Game 1, A’s @ Dodgers, 1988

“High fly ball into right field. She is gone! (70 second pause)

In a year that has been so improbable, the impossible has happened!”

Two excellent examples of a communicator telling the story and knowing when to keep their mouth closed.

The BAN Report: Inflation Cools / Atypical "Recession" / Mortgage Industry Shakeout / Bank M&A Cools / Gladwell Slams WFH / The $765MM MSR Portfolio

Inflation Cools

Yesterday’s CPI report showed that inflation, while still high, may be easing.   

Prices that consumers pay for a variety of goods and services rose 8.5% in July from a year ago, a slowing pace from the previous month due largely to a drop in gasoline prices.

On a monthly basis, the consumer price index was flat as energy prices broadly declined 4.6% and gasoline fell 7.7%, according to the Bureau of Labor Statistics. That offset a 1.1% monthly gain in food prices and a 0.5% increase in shelter costs.

Economists surveyed by Dow Jones were expecting headline CPI to increase 8.7% on an annual basis and 0.2% monthly.

Excluding volatile food and energy prices, so-called core CPI rose 5.9% annually and 0.3% monthly, compared with respective estimates of 6.1% and 0.5%.

Even with the lower-than-expected numbers, inflation pressures remained strong.

The jump in the food index put the 12-month increase to 10.9%, the fastest pace since May 1979. Butter is up 26.4% over the past year, eggs have surged 38% and coffee is up more than 20%.

Despite the monthly drop in the energy index, electricity prices rose 1.6% and were up 15.2% from a year ago. The energy index rose 32.9% from a year ago.

Used vehicle prices posted a 0.4% monthly decline, while apparel prices also fell, easing 0.1%, and transportation services were off 0.5% as airline fares fell 1.8% for the month and 7.8% from a year ago.

Gas prices, for example, have fallen for 58 consecutive days and are now below $4.

The national average cost of a gallon of regular gasoline now stands at $3.99, according to AAA, after 58 consecutive daily declines. That’s higher than it was a year ago but still well below a peak of nearly $5.02 in mid-June. Energy costs feed into broad measures of inflation, so the drop is also good news for policymakers who have struggled to contain the price increases and for President Biden, who has pledged to lower gas costs.

The national average includes a wide range of prices, from nearly $5 a gallon in Oregon and Nevada to about $3.50 in Texas and Oklahoma. But, broadly speaking, the drop reflects a number of factors: weaker demand, because high costs have kept some drivers off the roads; a sharp decline in global oil prices in recent months; and the fact that a handful of states have suspended taxes on gasoline.

However, the peak inflation narrative may be premature, and there is no evidence that the Fed is going to reverse course anytime soon.

The Cleveland Fed calculates a median consumer-price index and one that trims off the prices that moved the most. This is meant to try to get a sense of how broad-based price rises are—and both rose more than core prices last month. To add to the confusion, both were higher year-over-year in July than in June, even as the month-on-month rate fell back from the extreme reached earlier in the summer.

The Atlanta Fed’s index of “sticky” prices, those that are changed less often and are thought to provide a better guide to what businesses expect, fell. But it still rose at a worryingly high 5.4% annualized in July.

Finally, the New York Fed’s Underlying Inflation Gauge, which incorporates economic data as well as prices to try to get at the inflation trend, hardly dropped at all—putting it in a range of 4.7% to 5.9%.

The Fed will watch the data closely and react accordingly. But, so long as unemployment remains low, they will likely keep raising rates until inflation gets below at least 5%. 


Atypical “Recession”

If we are in a recession, then this would be the most unusual one yet. The author compared our current climate to a North Dakota oil town back a decade ago and there are some interesting similarities.

Economists and politicians have spent weeks arguing about whether the United States is in a recession. If it is, the recession is unlike any previous one. Employers added more than half a million jobs in July, and the unemployment rate is at a half-century low.

Typically, in recessions, the problem is that businesses don’t want to hire and consumers don’t want to spend. Right now, businesses want to hire, but can’t find the workers to fill open jobs. Consumers want to spend, but can’t find cars to buy or flights to book.

Recessions, in other words, are about too much supply and too little demand. What the U.S. economy is facing is the opposite. Just like North Dakota in 2010.

The underlying causes are different, of course. Williston was hit by a surge in demand as companies and workers flooded into what had been a small city in the Northern Plains. The United States was hit by a pandemic, which caused a shift in demand and disrupted supply chains around the world. And the comparison goes only so far: Williston’s population roughly doubled from 2010 to 2020. No one expects that to happen to the country as a whole.

Still, whether local or national, the most obvious consequence is the same: inflation. When demand outstrips supply — whether for steel-toe boots in an oil boomtown or for restaurant seats in the aftermath of a pandemic — prices rise. Mr. Flynn recalled going out to eat during the boom and discovering that hamburgers cost $20, a feeling of sticker shock familiar to practically any American these days.

There is also a subtler consequence: uncertainty. No one knows how long the boom will last, or what the economy will look like on the other side of it, which makes it hard for workers, businesses, and governments to adapt. In Williston, companies and governments were reluctant to invest in the apartment buildings, elementary schools, and sewage-treatment plants that the community suddenly needed — but might not need by the time they were complete.

Consumer confidence is at record lows, yet so is unemployment. The culprit is likely inflation, which has a way of making everyone feel less wealthy.

Mortgage Industry Shakeout

As refinance activity and the profits available for mortgage lenders during the last refi boom, the universe of mortgage lenders is likely to shrink. Santander, for example, exited mortgages early this year. The tend of mortgage lending and servicing shifting from banks to non-banks will likely accelerate.

More recently, the largest banks in home loans, JPMorgan Chase, and Wells Fargo, have cut mortgage staffing levels to adjust to the lower volumes. And smaller nonbank providers are reportedly scrambling to sell loan servicing rights or even considering merging or partnering with rivals.

“The sector was as good as it gets” last year, said Wennes, a three-decade banking veteran who served at firms including Union Bank, Wells Fargo and Countrywide.

“We looked at the returns through the cycle, saw where we were headed with higher interest rates, and made the decision to exit,” he said.

While banks used to dominate the American mortgage business, they have played a diminished role since the 2008 financial crisis in which home loans played a central role. Instead, nonbank players like Rocket Mortgage have soaked up market share, less encumbered by regulations that fall more heavily on large banks.

Out of the top ten mortgage providers by loan volume, only three are traditional banks: Wells Fargo, JPMorgan, and Bank of America.

The rest are newer players with names like United Wholesale Mortgage and Freedom Mortgage. Many of the firms took advantage of the pandemic boom to go public.Their shares are now deeply underwater, which could spark consolidation in the sector.  

Complicating matters, banks have to plow money into technology platforms to streamline the document-intensive application process to keep up with customer expectations.

And firms including JPMorgan have said that increasingly onerous capital rules will force it to purge mortgages from its balance sheet, making the business less attractive.

The dynamic could have some banks deciding to offer mortgages via partners, which is what Santander now does; it lists Rocket Mortgage on its website.

“Banks will ultimately need to ask themselves if they consider this a core product they are offering,” Wennes said.

On a call with one of the largest non-bank mortgage originators, the President noted that they can underwrite a mortgage for $5,000, while it costs JP Morgan Chase $12,000. It has become too expensive for many banks to offer mortgages to their clients. Additionally, we are seeing surprising interest in our $765MM MSR pool from mortgage originators that historically have not bought MSRs, but now wish to make up for slower organic growth in their servicing portfolios.

Bank M&A Cools

Bank M&A has slowed in 2022 due to a variety of factors, including depressed stock valuations and higher rates caused by higher inflation.

Only 35 banks decided to sell during the second quarter. That was down from 49 the prior quarter and well below the 66 transactions announced a year earlier, according to a Raymond James analysis.

"Bankers are pretty conservative, but a lot of banks are getting even more conservative now," said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates. "They see a lot of uncertainty out there, and that makes it difficult to make big decisions."

Daniel Goerlich, banking, and capital markets deals leader at PwC, said that aside from prolific acquirers that are highly confident in their dealmaking abilities, more banks are leery about M&A this year.

"There is a general sense of caution about going into spending mode versus cost savings mode" with the specter of recession looming, he said. That noted, even while being more cautious, he said many banks remain interested in potential M&A to expand their geographic footprints, acquire talent, and gain new business lines.

CVB Financial Corp. in Ontario, California, is among them. The $16.8 billion-asset company's CEO, David Brager, said deal talks have "definitely slowed," but "conversations are still there."

He said on the company's earnings call that he remains interested in a deal but would approach one with a healthy level of skepticism.

"Any due diligence that we would do going forward" on a potential target, the possible impacts of an "economic slowdown and the credit quality would be an enormous part," Brager said. "It always is, but it might even be bigger now."

Bank M&A is cyclical and there’s been considerable consolidation in the past few years. Since the financial crisis, we have lost more than half of the banking charters and that trend is not reversing at any point. Some of our clients have asked us to review portfolios of potential acquirers, as they are concerned about increased NPAs due to higher rates.

Gladwell Slams WFH

Author Malcom Gladwell slammed remote work, believing it is harming society in a podcast this week. 

The bestselling author of “Blink” and “The Tipping Point” grew emotional and shed tears as he told the “Diary of a CEO” podcast hosted by Steven Bartlett that people need to come into the office in order to regain a “sense of belonging” and to feel part of something larger than themselves.

“It’s very hard to feel necessary when you’re physically disconnected,” the Canadian writer said.

“As we face the battle that all organizations are facing now in getting people back into the office, it’s really hard to explain this core psychological truth, which is we want you to have a feeling of belonging and to feel necessary.”

“And we want you to join our team,” Gladwell continued. “And if you’re not here it’s really hard to do that.”

“It’s not in your best interest to work at home,” he said. “I know it’s a hassle to come into the office, but if you’re just sitting in your pajamas in your bedroom, is that the work life you want to live?”

“Don’t you want to feel part of something?”

Gladwell added: “I’m really getting very frustrated with the inability of people in positions of leadership to explain this effectively to their employees.”

“If we don’t feel like we’re part of something important, what’s the point?” he said. “If it’s just a paycheck, then it’s like what have you reduced your life to?”

Well said and a provocative point. However, there will not be a major return to the office anytime soon, unless there is strong evidence that remote workers underperform. Perhaps, a recession and job cuts in which remote workers are disproportionately fired could scare workers straight.

The $765MM MSR Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 765MM MSR Portfolio” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • $765,774,695 of mortgage servicing rights

  • Portfolio is comprised of mortgage loans serviced on behalf of Freddie Mac and Fannie Mae, as well as loans held and serviced by the seller

  • The seller is a well-capitalized Midwest bank

  • WAC of 3.78%

  • 9,518 loans originated primarily through retail channels

  • Servicing fee of 25 basis points

  • Predominantly mortgage loans in Indiana (60%), Illinois (19.6%), and Kentucky (16%)

  • Potential annual flow relationship of approximately $250MM

For more information, please execute the confidentiality agreement. Potential purchasers will be evaluated based on price, financial strength, reputation, and status with Freddie Mac and Fannie Mae. 


Sale Announcement: Wednesday, August 3, 2022

Bid Date: Tuesday, August 16, 2022

Closing Date: Friday, September 30, 2022

Transfer Date: Monday, October 31, 2022

Housing Turns / Bank Stocks Rally / B of A's Overdraft Fees Plunge / FinTech's Squeezed / Pandemic Fraud Catch-Up

Housing Turns

In today’s report for July, existing home sales fell for the sixth straight month. 


Sales of previously owned homes slid 5.9% in July from the prior month to a seasonally adjusted annual rate of 4.81 million, the weakest rate since November 2015, not counting the pandemic-related drop in 2020, the National Association of Realtors said Thursday. July sales fell 20.2% from a year earlier.

The last time sales declined for six consecutive months was between August 2013 and January 2014, according to NAR.

Sellers in many markets are cutting list prices, but prices are still up significantly from year-ago levels. The median existing-home price rose 10.8% in July from a year earlier to $403,800, NAR said. That is lower than June’s revised record price of $413,800. Prices tend to drop in July, said Lawrence Yun, NAR’s chief economist.

A measure of U.S. home-builder confidence fell for the eighth straight month in August to the lowest level since May 2020, the National Association of Home Builders said this week. About one-fifth of builders surveyed said they had reduced prices in the past month, NAHB said.

Mortgage applications fell 2.3% last week from the preceding week, the Mortgage Bankers Association said Wednesday.

While home prices are still increasing on year-over-year comparisons, the drop in prices from June’s record to July was noteworthy. Additionally, mortgage demand is at a 22-year low. Where do we go from here? Fitch Ratings opined on the likelihood of a housing downturn this week.

Fitch Ratings says the likelihood of a severe downturn in US housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024. Although we recently affirmed the ratings and Stable Outlooks for our US homebuilder portfolio, ratings could face pressure under a more pronounced downturn scenario that would likely include housing activity falling roughly 30%, or more, over a multi-year period and 10% to 15% declines in home prices.

Our rating case assumes housing activity will fall mid-single digits in 2023 and low-single digits in 2024, leading to revenue contraction in the mid-to-high-single digits in 2023 and low-to-mid-single digits in 2024, with EBITDA margins contracting 600bps during the two-year period.



















Ok, let’s say prices decline by 15%, which is the most adverse scenario modeled by Fitch. That would basically take us back to home prices from June 2021. This is hardly a catastrophe. Nevertheless, we do believe that there are certain markets that, in an adverse scenario, could see 25-30% declines, but these are also markets that saw the highest appreciation.

Bank Stocks Rally

2022 has been disappointing for bank stocks, as many expected 2022 to be the best of times with strong loan demand and increasing margins. However, since the end of June, bank stocks have been outperforming.

Since the end of June, five of the six largest U.S. banks have outperformed the S&P 500’s 13% gain. Shares of Morgan Stanley and Goldman Sachs Group Inc. are up 20% and 19%, respectively. Wells Fargo  & Co. is up 18%, while Citigroup Inc. and Bank of America Corp. each have gained about 17%.

JPMorgan Chase & Co. shares are up about 9% so far in the third quarter.

Bank stocks sold off sharply in the first half of 2022 after two years of significant gains, pushed lower by a number of factors. Russia’s war in Ukraine upended commodities markets. Investors worried that the Federal Reserve rate-raising campaign against inflation would push the U.S. into recession. Corporate chiefs, unnerved by the uncertainty, moved to the sidelines, drying up the deal-making boom that buoyed banks throughout the pandemic.

Some analysts say that now, much of the bad news is baked in, both for banks and the broader market. Stocks have climbed across the board since June.

The rally could reverse if the Fed proves unsuccessful at lowering inflation, said Steven Chubak, analyst at Wolfe Research. “Most people don’t believe we’re out of the woods quite yet,” he said. “We are in this sort of purgatory state.”

Bank stocks tend to move up and down with expectations for the economy, and the rally has coincided with some signs that the economy is improving. U.S. employers continued to add jobs in July, inflation slipped and gas prices have been falling. Consumer sentiment has improved for the past two months as a result, after setting a record low in June.

“It seems like inflation is coming down, but is it going to settle at a high level? If that’s the case, the risk is higher that we get more bumps,” said Christopher McGratty, analyst at Stifel Financial Corp. unit KBW.

We are not surprised to see the rebound as the sell-off relative to the broader market seemed overdone. While mortgages and credit quality are headwinds, there are far more tailwinds with higher rates and strong loan demand.

B of A's Overdraft Fees Plunge

Due to pressure from the CFPB and others, a significant amount of fee income has been lost from banks recently.  

Bank of America said overdraft-service fees plummeted 90% after it took steps to ease off on the charges, which have been under fire from lawmakers.

The decline from a year earlier came in June and July, the first two months after the second-largest U.S. bank implemented sweeping changes related to overdraft services for its more than 35 million consumer checking accounts, according to a statement Wednesday.

he Charlotte, North Carolina-based lender eliminated nonsufficient-funds fees and reduced overdraft charges to $10 from $35."It's a pretty dramatic shift for our clients, which is what we intended to do," Holly O'Neill, president of retail banking, said in an interview.

Baffa in January announced it would cut back on the fees it charges customers for failing to have enough money in their accounts to cover checks and debit card charges. Lawmakers and consumer activists have criticized the fees, with Democratic Sen. Elizabeth Warren saying that they "snatch billions from struggling families" and that "big banks raked in billions from this abusive practice" during the COVID-19 pandemic.

Firms including Capital One Financial and Ally Financial have responded, in some cases, by cutting overdraft fees entirely. Citigroup became the first major U.S. bank to eliminate the charges, and said it will count payments it receives from person-to-person services like Venmo and Cash App as direct deposits that allow customers to avoid monthly fees on checking accounts.

Bank of America and rival Wells Fargo didn't completely eliminate overdraft fees, but took some steps to alleviate the impact on consumers. BofA got rid of the transfer fee associated with its Balance Connect for overdraft protection service and cut its overdraft fees. The lender considered removing overdraft charges completely, but ultimately opted for a reduced fee, O'Neill said.

However, while overdraft fees have plummeted, the impact on banks earnings appears to be modest. We asked Christopher Marinac, Director of Research at Janney Montgomery Scott, LLC, for his thoughts. According to Chris:

“Banks’ total overdraft fees (which are disclosed quarterly via FDIC call report filings) have dropped from 1.9% of Large Banks’ Total Operating Revenues in 1Q-2016 to just 1.0% of Total Revenues in 1Q-2022. On the other hand, Banks’ Total Service Fees (including overdraft, ATM, debit card, and most importantly commercial Deposit account service charges) have contracted from 5.1% of Large Banks’ Total Revenues in 2016 to 3.6% in mid-2022 (latest FDIC disclosures available this month).

Keep in mind that Banks’ revenues exploded the past 5 years on capital markets and investment banking, so the relative decline in the percentages here are minor compared to actual dollar growth in Service Charges (which has been positive). We think the Overdraft elimination is really just noise and that Banks make it up by charging more for commercial deposit account fees and of course ongoing use of debit cards (albeit at a lower basis points thanks to Dodd Frank over a decade ago).”

Thank you, Chris, that was some great color on the topic. Earlier this year, he published an analysis of the impact on bank earnings.    ​

FinTech’s Squeezed

Fintech lenders are feeling the squeeze of higher interest rates, which are both increasing their funding costs and causing increased delinquencies.

Finance companies such as Upstart Holdings Inc. and Mosaic lend money to people for purchases such as cars, solar panels, and home electronics. But they have to borrow the money they lend out to consumers—and that is becoming increasingly expensive as the Federal Reserve continues to raise interest rates aggressively. 

As borrowing costs for the companies rise, bad loans are going up too. With red-hot inflation pushing up prices for food and rent, more customers are starting to fall behind on payments.

The lenders’ use of artificial intelligence to find and approve large numbers of borrowers quickly made them popular among stock and bond buyers when markets soared last year. Now they are falling out of favor.

Investors have been selling out of asset-backed bonds issued by the finance companies, and some banks and credit unions have stopped buying the loans they make. That has pushed funding costs even higher. Shares of Upstart and Carvana Co., the online used-car dealer that also makes auto loans, are down nearly 80% this year.

The financing squeeze is another example of how the Fed’s rate-hiking campaign is affecting all corners of the economy. While these lenders don’t have the size or name recognition of a JPMorgan Chase & Co. or a Bank of America Corp., they are an important part of the consumer ecosystem, often lending to borrowers who might not qualify for loans from traditional lenders. Because they aren’t banks, they can’t fund themselves with deposits.

Tighter financing conditions forced the consumer-loan originator Upstart to slow lending in the second quarter, helping to push the company into a quarterly loss. Upstart plans to start using cash reserves to buy some of its own asset-backed bonds, company executives said on an earnings call last week.

Over the past few weeks, we have received a number of calls from both fintech lenders and non-bank lenders that are feeling the squeeze of higher interest rates. Moreover, we remain skeptical of whether algorithmic lending models will hold up well during an economic slowdown.

Pandemic Fraud Catch-Up

While no one likes to talk about fraud, the fraud in the pandemic relief programs is staggering and should not be ignored.   

There are currently 500 people working on pandemic-fraud cases across the offices of 21 inspectors general, plus investigators from the F.B.I., the Secret Service, the Postal Inspection Service and the Internal Revenue Service.

The federal government has already charged 1,500 people with defrauding pandemic-aid programs, and more than 450 people have been convicted so far. But those figures are dwarfed by the mountain of tips and leads that investigators still have to chase.

Agents in the inspector general’s office at the Labor Department have 39,000 investigations going. About 50 agents in a Small Business Administration office are sorting through two million potentially fraudulent loan applications.

Officials already concede that the sheer number of cases means that some small-dollar thefts may never be prosecuted. This month, Mr. Biden signed bills extending the statute of limitations for some pandemic-related fraud to 10 years from five, a move aimed at giving the government more time to pursue cases. “My message to those cheats out there is this: You can’t hide. We’re going to find you,” Mr. Biden said during the signing at the White House.

All three of those programs are now over. There is no official estimate for the amount of money that was stolen from them — or from pandemic-relief programs in general. The Justice Department has charged people with about $1 billion in fraud so far, and is investigating other cases involving $6 billion more, investigators said.

But other reports have suggested the real number could be much higher. One official said the total of “improper” unemployment payments could be more than $163 billion, as first reported by The Washington Post. In the Economic Injury Disaster Loan program, a watchdog found that $58 billion had been paid to companies that shared the same addresses, phone numbers, bank accounts or other data as other applicants — a sign of potential fraud.

“It’s clear there’s tens of billions in fraud,” said Michael Horowitz, the chairman of the Pandemic Response Accountability Committee, which includes 21 agency inspectors general working on fraud cases. “Would it surprise me if it exceeded $100 billion? No.”

342 PPP loans to businesses with a borrower name of N/A? Are you kidding me? Never again can we insist on rushing money for another crisis without screening out even basic fraud. A simple google search by a minimum wage worker could have screened out thousands of fraudulent PPP loans, for example.

The BAN Report: The 40MM NNN Portfolio / Student Loan Forgiveness / More Recession Debate / The Cost of Social Investing / Lagging Downtowns

The 40MM NNN Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $40MM NNN Loan Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $39,775,197 comprised of 13 loans

  • 1st mortgages on retail buildings leased to credit tenants including Walgreens, CVS, and 7-Eleven

  • Tenant pays bank directly (“direct rent capture”)

  • Properties are located in 13 states across the South (62%), Midwest (20%), and West (18%)

  • Weighted average coupon of 4.15%

  • Low leverage with a weighted average LTV of 55% with all LTVs less than 63%

  • Weighted average seasoning of ten months and a weighted average maturity of 11.5 years; lease terms always exceed maturities

  • All loans have prepayment penalties

  • Since the program’s inception over a decade ago, the seller has never had a 30-day delinquency 

  • Potential flow relationship of $100MM annually

  • Servicing-retained (preferred) or released; seller will also entertain keeping a 10% participation interest

  • This portfolio will trade for a premium, and any bids under par are unlikely to be entertained  

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely. 


Student Loan Forgiveness

President Biden this week announced a plan to forgive up to $20K in student loan debt.   

President Biden announced on Wednesday that the federal government would cancel up to $20,000 worth of federal student loans for millions of people. But not everyone with debt will qualify.

The action includes rules that will maintain the balances of debtors who currently have high incomes.

Those who do qualify will need to navigate the balky federal loan servicing system and keep a close eye on their accounts and credit reports for any mistakes.

It also extends the pause on monthly student loan payments, which means that borrowers won’t have to resume payments until at least January, and provides details on a new proposal to create a more affordable income-driven repayment plan.

Who qualifies for loan cancellation?

Individuals who are single and earn under $125,000 will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is under $250,000.

Eligibility will be based on your adjusted gross income. Income figures from either 2020 or 2021 can render you eligible, but 2022 income will not.

If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in cancellation.

Loans obtained after June 30 are not eligible for relief.

According to an earlier report in the Wall Street Journal, losses in the student loan program could exceed $500 billion.

The federal budget assumes the government will recover 96 cents of every dollar borrowers default on. That sounded high to Mr. Courtney because in the private sector 20 cents would be more appropriate for defaulted consumer loans that aren’t backed by an asset.

He asked Education Department budget officials how they calculated that number. They told him that when borrowers default, the government often puts them into new loans. These pay off the old loans, and this is considered a recovery, even though in many cases the borrowers haven’t repaid anything and default on the new loans as well.

In reality, the government is likely to recover just 51% to 63% of defaulted amounts, according to Mr. Courtney’s forecast in a 144-page report of his findings, which was reviewed by The Wall Street Journal.

The United States has the greatest credit oversight regime ever created. Instead of letting the Education Department oversee its own portfolio, which has performed badly by any measure, why don’t we put the OCC, Federal Reserve or FDIC in charge? And, why are we allowing colleges that benefit from student loans raise tuition at rates that far exceed the inflation rate?   

More Recession Debate

In the “this is the strangest recession ever camp,” new data from the Commerce Department suggests a divergence between GDP and GDI.

Inflation-adjusted gross domestic product, or the total value of all goods and services produced in the economy, decreased at a 0.6% annualized rate in the April to June period, Commerce Department data showed Thursday. That reflects an upward revision to consumer spending and compares with a previously reported 0.9% contraction.

However, the other, lesser-known official measure of economic growth -- known as gross domestic income -- climbed at a 1.4% rate in the second quarter after increasing 1.8% in the first three months of the year. It measures activity by calculating all income generated from producing those goods and services, like compensation and company profits.

Theoretically, GDP and GDI should be roughly equal, but in reality, they tend to differ, especially in early estimates. But the current gap is particularly large.

The GDP figures suggest an abrupt slowdown in economic momentum in the first half of the year. Under the surface, there’s more at play, including the impact of volatile categories like imports and inventories, but overall, consumer spending has decelerated. The back-to-back negative quarters, a common rule of thumb for recessions, have not only fueled fears of an imminent downturn but also led some to believe it was already under way.

GDI, however, points to a more gradual cooling. It paints a picture of an economy supported by a robust labor market and resilient consumer spending, though one that’s starting to feel the pinch of the worst inflation in a generation.

The official arbiter of recessions in the US, the National Bureau of Economic Research’s Business Cycle Dating Committee, uses the average of both measures, along with a range of other economic variables, when making its recession call. The average of GDP and GDI rose 0.4% in the second quarter after a 0.1% increase in the January to March period.

“We continue to think that the decline in real GDP across the first two quarters of the year does not meet the NBER’s definition of a recession, and if the GDP data are eventually revised up to be more consistent with the GDI data, the first half of the year may end up looking stronger (or at least less weak) than the data currently show,” JPMorgan Chase & Co. economist Daniel Silver said in a note.

The mixed data is going to embolden the Federal Reserve to continue to raise rates, especially as the unemployment data remains low. 

The Cost of Social Investing

Due to its investments in oil and natural gas, the endowment of the University of Texas will soon overtake Harvard University’s.

Every day, the University of Texas System makes about $6 million off a mineral-rich swath of land it manages in the US’s largest oil field. Crude and natural gas, not fundraising or investing prowess, have positioned the school’s endowment to overtake Harvard University’s as the richest in US higher education.

The University of Texas oversees 2.1 million acres—almost the size of Delaware and Rhode Island combined—in the Permian Basin. While other universities are shedding their fossil fuel holdings in the name of eco-consciousness, the Texas college system is leasing its land to drillers including  ConocoPhillips, Continental Resources, Inc. and nearly 250 other operators.

Land operated by the University of Texas System is on track to post its best-ever annual revenue in fiscal 2022 because of soaring oil prices and production on its property in the Permian Basin. Oil reached a high of $120 a barrel earlier this year as a result of a war-induced energy crunch. The revenue is expected to help narrow the gap between the Texas system’s $42.9 billion endowment and Harvard’s $53.2 billion as of June 2021.

“The University of Texas has a cash windfall when everyone is looking at a potential cash crunch,” said William Goetzmann, a professor of finance and management studies at Yale University’s School of Management. “Adjusting your portfolio for social concerns is not costless.”

The oil and gas revenue will help insulate the University of Texas System from all that. It’ll stem concerns about liquidity and help investment managers hunting deals in a down market. It also represents hard cash, instead of gains tied up in investments like private equity and venture capital, which is more typical for the richest college endowments and drove record returns in the prior year. Meanwhile, even if the Texas system shows negative investment returns, the revenue could help protect the endowment value.

It’s likely that Harvard’s endowment, like many other universities’ this year, will show losses. The school’s annualized 10-year returns as of June 2021 are among the lowest of its peers in the eight-school Ivy League, according to Bloomberg data. The University of Texas System last overtook Yale’s endowment in 2018 as the second-richest US university because of rising oil prices.

Harvard has less than 2% of its portfolio in investments in fossil-fuel holdings, which is in run-off mode. Harvard’s bet may turn out to be correct in the long-run, but, at least for now, the lack of exposure to fossil fuels is depressing returns. As Professor Goetzmann said, “Adjusting your portfolio for social concerns is not costless.”

Lagging Downtowns

The Institute of Governmental Studies at UC-Berkeley analyzed downtown and city recoveries from the pandemic. Unlike other studies that measure office vacancy rates, public transportation ridership, and retail spending, they used mobile phone data.  


We find wide variation in the extent of recovery, with activity ranging from a low of 31% of pre-pandemic levels in San Francisco to a high of 155% in Salt Lake City. The key factors influencing recovery rates for downtowns are population and business densities, commuter mode shares particularly high car use, along with presence of industry sectors that are continuing to support remote work (such as tech and finance). To survive in the new era of remote work, downtowns will need to diversify their economic activity and land uses.

Of the large cities, only Columbus, OH is exceeding pre-pandemic levels. Medium-size cities appear to be faring better, but most still lag pre-pandemic levels. Part of the problem is simply too many office buildings, especially in older cities. The WSJ argued this problem has been decades in the making.

The U.S. office glut traces its roots to a 1981 change in the tax code, brokers and analysts say. In a bid to boost the economy, the Reagan administration allowed investors to depreciate commercial real estate much more quickly than before, among other changes, lowering their tax bills. 

Savings-and-loan associations showered developers with easy loans, brokers say. That helped ignite an office-development boom in the 1980s that drove up vacancies to record levels and contributed to the savings-and-loan crisis, when many such institutions failed. Vacancy rates slowly fell in the 1990s, but surged again after the bursting of the dot-com bubble and the subprime mortgage crisis.

Vacancy rates are highest in older buildings, which lack modern amenities and are less environmentally efficient. In Milwaukee, 100 East Wisconsin Avenue was the second-tallest building in the state when it opened in 1989. Two blocks from a freeway exit ramp and with a 750-car garage, the 35-story tower was perfect for office workers commuting from far-flung suburbs. 

But in the years before the pandemic, developers built a number of glassy new office towers nearby that lured away 100 East Wisconsin’s biggest tenants. Today more than half the building sits empty and the two biggest remaining leases are set to expire next year, according to data from CoStar Group and a person familiar with the matter. Unable to pay the mortgage, owner Hertz Investment Group handed over the property to a receiver in early 2021.

For downtowns to remain vibrant, cities will need to convert office buildings into other uses, particularly for apartments and condominiums.

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