Interview with Aaron Pitterman, Director of Banking Operations of American Union Financial Services
American Union Financial Services mainly provides Credit Union and Lending activities to labor organizations.
Notes from the interview:
- interest rates are determined by the market (the 10 year treasury yield)
- most banks don’t keep loans on their books for more than 180 days
o banks move the debt to the secondary market for investors to purchase
o most loans are moved to the secondary market in 30 to 60 days
o the loans are packaged by bondsmen into CDO (collateralized debt obligations) or CMO (collateralized mortgage obligations)
- banks have a predetermined amount of loans they need to provide to the bondsman depending on contract obligations
o fees and penalties are incurred if minimums are not met
o dependent on the contract
§ “best effort” does not involve penalties (basically on a consignment basis)
· With “best effort” loans the bank can try to arrange sale of the loan to another bondsman or bank and receive a better deal from changes in the point spread
- Investors (many foreign) purchase the CDOs and CMOs because of the attractive yields (riskier loans such as sub-prime and fully adjustable are preferred by investors)
o Banks will mostly likely keep full-adjustable loans on their own books because they generate a cash flow from the spread – if the spread becomes unfavorable they can easily sell the loan
o Foreign investors find the loans currently find the CDOs and COMs very attractive because of the low yields available in their home markets
- Hedging can be done with inverse bonds so that when short-term rates fall the yield and bond price appreciates
o Not common practice in mortgage lending
- The bigger money centers (Lehman, Bear, etc.) are the major players in packaging bonds and putting them into the secondary markets
- In the event of problems with certain loans the banker may incur fees or penalties to adjust for the lower yield and payments
o Most resellers don’t work with the banker to accommodate for problems they just want their fees or they fill follow legal action (there is no personal vested interest in this business – everyone is just looking out for themselves)
§ Indymac Bank is slightly different – they personally work with mortgage lender if they need to readjust the loan
· They are looking to build a relationship that can go through ups and downs, so they can prosper in the longer run
· With problem loans Indymac will repackage them and sell them on the secondary market at a discount and only charge the lender the difference of the loss (others will make the lender deal with it themselves which will usually result in a greater loss because they do not have the leverage and market availability that Indymac does)
-I have some more thoughts from the interview just need to figure it out a little better
