Have banks bottomed out?

Despite stock price jump for many this week, analysts see problems continuing

By Becky Yerak | Chicago Tribune reporter | July 19, 2008

Don’t break out the bubbly just yet.That’s the thinking of several bank watchers who, despite seeing financial services stocks end the week on a high note, say the worst probably isn’t over as the credit crisis approaches its one-year anniversary.

As the week started, many braced for the worst. IndyMac Bancorp Inc. had just been seized by U.S. banking regulators. And the federal government felt compelled to offer assurances that it would help out mortgage financiers Freddie Mac and Fannie Mae. The news drove down the KBW Bank Index by 8.5 percent on Monday.

But as the week wore on, megabanks Wells Fargo, JPMorgan Chase and, on Friday, Citigroup delivered better-than-expected results. Citigroup posted a $2.5 billion second-quarter loss, or 54 cents per share; analysts were expecting a 66-cent-per-share loss.

Meanwhile, of the four Chicago-area banks that have released second-quarter earnings, two got a bump in their stock price after numbers were released.

Could the worst be over?

Hardly, said BMO Financial Markets analyst Peter Winter.

“Analysts are falling over themselves to lower earnings estimates,” Winter said. Wells, Chase and Citigroup “beat very low expectations, and the quality of the earnings is not good.”

Also, the economy shows signs of weakening, he said.

“The feeling is that credit problems are contained now in residential mortgage areas, but there are signs that the problem is spreading to auto loans, credit cards and commercial lending,” Winter said.

By the end of the first quarter, many investors and analysts assumed banks had written off their bad loans and that profits would improve, said William Blair & Co. analyst David Long.

“That thesis proved wrong,” Long said. “While second-quarter earnings have been better than expected in some cases, the bar was set pretty low.”

And earnings could get worse.

“The peak for adjustable-rate-mortgage resets is the third quarter,” he said. “So many consumers current on their mortgages today will experience an increase in their monthly mortgage payments of several hundred dollars, which may lead to additional mortgage delinquencies in the second half of the year and into 2009.”

Another bank watcher also believes the uncertainty will continue into next year.

“The credit crunch will continue to be the significant wild card into 2009 and perhaps the most significant capital markets shock of the last two generations,” said Stephen Wood, Russell Investments senior portfolio strategist.

Keep your eye on closing fees

By Renae Merle | The Washington Post | July 20, 2008

You looked hard to find the right house. You negotiated the right price and shopped around for the best mortgage rate.

But you’re not done shopping yet.

Home buyers can squeeze out extra savings at the closing table if they negotiate on fees charged by lenders, closing companies and title insurers. Some buyers can push sellers to cover a portion of their closing costs, and the slow housing market also is giving them leverage to negotiate discounts from some of the professionals involved in settlement, experts say.

Closing costs vary by locality and loan size, with taxes the main difference, but they usually amount to 2 to 5 percent of the home’s price. Nationally, that translates to an average $3,681 on a $200,000 home loan, according to Bankrate.com.

But there are other variations in how much home buyers pay in closing costs, according to a report released this spring by the Department of Housing and Urban Development.

The report found that minorities and those without college degrees pay more in closing costs.

The study also found that borrowers who used mortgage brokers paid more in closing costs than those who didn’t, a finding the industry disputes.

To ensure that they are not being overcharged at closing, home buyers should eliminate junk fees and ask for discounts, housing experts said. Ask the lender for a written good-faith estimate, which is required after you apply for the loan, and then compare the closing costs with competitors’ charges. Some things are non-negotiable—county transfer taxes, for example.

But that shouldn’t stop buyers from challenging other costs, said Brian Sullivan, a HUD spokesman. “Shop until you drop. I know it’s easier said than done, but do it anyway,” he said.

The complexity of closing may inhibit some buyers. Nearly a quarter of homeowners interviewed in a Federal Trade Commission survey last year could not identify the total amount of their settlement costs.

“One of the main ways to save money is to be that person who is really, obviously on the ball. Otherwise, ask a lot of questions about the closing costs, and maybe every week or so, ask about the status of the loan,” said Holden Lewis, a reporter for Bankrate. “Ask: ‘Why am I paying a documentation fee and a processing fee? Why am I paying an application fee and a commitment fee?’ I have heard some places are charging e-mailing and PDF fees; what’s that?”

Making comparisons more difficult, some lenders bundle the cost of the settlement process, offering a flat-rate for the title insurance as well as other services. Buyers who do not opt for a bundled offering must wade through lenders’ disparate definitions of services to find savings.

“One lender may include a document preparation fee that the other doesn’t, but the second lender has a processing fee,” said Keith Gumbinger, vice president of HSH Associates, a New Jersey-based mortgage information company. “It all makes direct comparisons difficult.”

Making another attempt to simplify the closing process for consumers, HUD is developing a new standard form for lenders to use when giving consumers good-faith estimates.

The forms would specify which charges could change at settlement and by how much, giving customers a better opportunity to compare rates, Sullivan said. The agency is also pushing for lenders to lift requirements that buyers pay application fees before receiving good-faith estimates.

The agency anticipates completing the form by the end of the year. In the meantime, home buyers can look for excessive or unexplained fees under the current process.

A week or more before closing, a buyer should notify the lender that he or she wants the settlement statement that outlines final closing costs, also known as a HUD-1 form, at least a day before heading to the settlement table. Comparing that document to the good-faith estimate can help the borrower find discrepancies. “There are some common things you can look for, like a $50 courier fee when it only costs $16 to send something through UPS,” Gumbinger said.

“We want to limit the so-called fee creep,” Sullivan said, and protect consumers from “being offered one thing and paying another—those last-minute settlement surprises.”

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