3/29 Market Update by Mark Sievewright Posted by AVCU on 9:30 PM

Market News

2010 bank failures rise to 41; credit union failures reach 5 - Four banks were closed last week bringing the year-to-date total to 41:

• Desert Hills Bank, Phoenix, Arizona - $497 million in assets
• Unity National Bank, Cartersville, Georgia - $292 million in assets
• McIntosh Commercial Bank, Carrollton, Georgia - $263 million in assets
• Key West Bank, Key West, Florida - $88 million in assets

Also on Friday, the NCUA took operational control (conservatorship) of Tracy Federal Credit Union of Tracy, California ($24 million in assets). Valley First Credit Union was called upon to assist in the day to day running of Tracy FCU. The NCUA assured members that the credit union will continue to operate "business as usual". Tracy FCU is the fifth credit union failure of 2010.

Bank of America unveils mortgage debt relief plan - Bank of America announced on Wednesday that it would begin forgiving some mortgage debt in an effort to keep distressed borrowers from losing their homes. The program, available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide. Bank of America's program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid. The program is aimed at borrowers who received subprime or other high-risk loans from Countrywide Financial, acquired by Bank of America in 2008. Bank of America officials said the maximum reduction would be 30% of the value of the loan. They said the program would work this way: a borrower might owe, say, $250,000 on a house whose value has fallen to $200,000. In such a case, $50,000 of that balance would be moved into a special interest-free account. As long as the owner continued to make payments on the $200,000 component, $10,000 of the balance held in the special account would be forgiven each year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity.

White Houses unveils $50 billion mortgage aid program - On Friday, the Obama Administration announced additional plans to help struggling home mortgage borrowers. The simplest component of the plan involves providing assistance to unemployed homeowners. Mortgage companies will be encouraged to reduce payments for at least three months (possibly six months) while the homeowner pursues a new job. The new payments will be 31% or less of their monthly income with the "gap" tacked onto the loan's principal. A second program will require that mortgage servicers consider writing off a portion of a borrower's loan to reduce it to a more manageable level. Borrowers in the government modification plan who owe more than 115% of the value of their home (and are paying more than 31% of their monthly income toward the mortgage) are eligible. The write-downs are to take three years, with borrowers "rewarded" for making their payments on time. The third program relates to borrowers with negative equity. They will have an opportunity to cut their debt providing the investor or bank who owns the loan agrees.

Financial overhaul is "the next priority" for Democrats - The Senate Banking Committee voted on Monday to send to the full Senate a Democratic bill to overhaul the nation's financial system. Although the vote was along party lines, with all 13 Democrats voting yes and all 10 Republicans voting no, senators said the decision would give both sides more time to shape a compromise that could attract broad support on the Senate floor. Buoyed by passage of landmark health care legislation, the Obama administration and Democrats in Congress said Wednesday that an overhaul of financial regulations was the next legislative priority. The legislation appeared to be gaining momentum, as two crucial Republicans on the Senate Banking Committee - Judd Gregg of New Hampshire and Bob Corker of Tennessee - said they expected the overhaul to pass this year even though they had concerns about some provisions. However, according to the top Republican on the Banking Committee, Senator Richard Shelby, the proposals would not end the "too big to fail" phenomenon or adequately protect taxpayers from having to bail out large companies. Shelby said that the bill would leave the Federal Reserve with emergency lending powers that could be abused, and that the FDIC and the Treasury Department would be given the ability to provide broad debt guarantees.

NCUA to announce legacy assets plan for corporate credit unions - National Credit Union Administration (NCUA) Chairman, Debbie Matz, last week said NCUA will announce a plan to remove corporate credit unions' "legacy assets" by the end of June. Chairman Matz revealed that after months of effort, NCUA is close to proposing a plan that would remove the riskiest legacy assets from ongoing corporates, while carrying forward the most valuable pieces of the corporate system. The plan would empower retail credit unions to choose which corporates they will support and would ensure that those corporates begin with clean balance sheets.

SEC to review use of derivatives - The Securities and Exchange Commission (SEC) announced last week that it was reviewing the use of swaps and other derivatives by mutual funds, exchange-traded funds and other investment products that are often marketed to individual investors. The review has been prompted by what appears to be a growing number of funds, particularly exchange-traded funds (ETFs) that have sought to use derivatives to provide outsize returns rather than simply track the performance of a market index.

Economic News

Q4 '09 growth revised slightly lower - Economic growth in the fourth quarter of 2009 was slightly less robust than previously thought, the government said on Friday. But corporate profit in the quarter rose significantly, providing hope that businesses might begin hiring again. GDP expanded at an annual rate of 5.6% in the fourth quarter versus the previously announced 5.9%. Even with the revision, the quarterly growth rate was the fastest in more than six years. But economists expect the pace will slow again, given chronic unemployment and struggling real estate markets. After-tax corporate profit, considered a harbinger of business spending, rose 6.5% in the quarter, signaling that businesses might soon begin hiring in greater numbers.

New home sales dampen enthusiasm - The Commerce Department published data last week showing that sales of new homes weakened to a record low in February, dimming prospects for a swift recovery for the housing market. Over all, sales were down 2.2% from a month earlier, the department said.