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Posts Tagged ‘Henry Paulson’

[Getting Graphic] GDP Size Matters (Bailout-wise)

October 24, 2008 | 12:32 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Zubin Jelveh’s Odd Numbers blog at from has a terrifc chart that ranks countries with a bailout in place by percentage of GDP.

Staggering – it makes the US $700B bailout seem like a drop in the bucket relative to other countries. Of course, more drops are coming. Incidentally, those countries on the list have been on a US consumer buying spree, including real estate.

Check out the Paulson interview on Charlie Rose on Tuesday. Is it just me, or was US Treasury Secretary Paulson’s defense of the current administration’s handling of the credit crunch and his job exit strategy strange? I wonder why he would not consider remaining in office (assuming the new president wants him) to oversee the largest financial crisis since the Great Depression?

This just in: The evil man theory of failure.

UPDATE: If you are feeling a little upbeat today – confidence feeling better, likely because it is Friday, I have just the thing to knock you down. No I am not talking about the Dow Futures falling 500 points overnight. Next year, someone is predicting the Dow to drop another 41% over the next year because earnings estimates are too high.

Click here for original graphic.

At some point down the road, albeit later than sooner, won’t we see a surge in real estate activity? Stock market volatility is crazy and borrowers are restrained from financing now. Pent up demand and bloated inventory…

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[Choking] No Questions Allowed, Ramming 700 Billion Answers Down Our Throats

September 23, 2008 | 12:51 am | | Milestones |

I don’t know if have much fight left in me. I am now reading the novel Choke (same author as Fight Club, an all-time favorite), the transition to this book seems appropriate at the moment.

We are spinning around in circles wolfing down the information we are fed and I think we are slowly, painfully moving in a more productive direction. But it is going to cost us dearly, talk a while and we don’t really understand how to fix it or prevent it from happening again.

It’s not enough for Wall Street to be reinvented. Of the 5 big investment banks, Bear and Lehman are now gone, Merrill was bought by BofA and Morgan and Goldman decided it was better to be a commercial bank.

Still no answers yet.

And old habits die hard – commercial banks don’t want assets valued at market value just yet because it might hurt their books before the bailout.

The SEC has been MIA and Paulson and Bernanke are moving in on their turf.

Members of the economic far left and far right don’t like the $700B bailout without answers either:

From the left

“This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything,” said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington. “It’s almost amazing they can do this with a straight face. There is clearly skepticism and anger at the idea that we’d give this money to these guys, no questions asked.”

From the right

“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”

Perhaps, the dialog for a solution can finally begin. The Brookings Institute released a brief: A Brief Guide To Fixing Finance

It’s all pretty basic but lays it out cleanly.

  • Policy makers need to set priorities – the problem is too vast to fix at once.
  • Know What Went Wrong Before Beginning to Fix Anything
  • Act In Our Own Interest, While Consulting with Other Countries
  • Principles To Guide More Permanent Reforms

They recommend these reforms should be:

  • First, financial instruments and institutions should be more transparent.
  • Second, financial institutions should be less leveraged and more liquid.
  • Third, financial institutions should be supervised more effectively, with greater regard for systemic risks.

Is gagging better than choking?

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[Moral Hazard] No Atheists In Foxholes, No Ideologues In Financial Crises

September 22, 2008 | 12:01 am | | Milestones |

A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so – they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since – and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly – and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.

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Paulson Proposes Principles-based Instead Of Rules-based Approach

May 5, 2008 | 12:20 am |

It’s About Soccer, Not Football

Chalking this up to weird timing, but Treasury Secretary Paulson announced plans a few weeks ago to fix the financial markets. It would take a long time to legislate and would not likely be completed before President Bush finishes up his term. What the housing market really needed back then, was leadership on solutions covering the immediate problems such as the lack of credit availability or liquidity and a US economy teetering towards a recession.

In James Surowiecki’s excellent Parsing Paulson piece in the New Yorker, he notes:

As the press has noted, the plan would consolidate our myriad and overlapping regulators into fewer, bigger ones. But the most interesting thing about it is something subtler: a push to move from our current system of regulation—often known as “rules-based”—toward a “principles-based” approach. In a rules-based system, lawmakers and regulators try to prescribe in great detail exactly what companies must and must not do to meet their obligations to shareholders and clients. In principles-based systems, which are more common in the U.K. and elsewhere in Europe, regulators worry less about dotted “i”s and crossed “t”s, and instead evaluate companies’ behavior according to broad principles; the U.K.’s Financial Services Authority has eleven such principles, which are often deliberately vague (“A firm must observe proper standards of market conduct”). This approach gives companies more leeway in dealing with investors and customers—not every company needs to follow the same rules on, say, financial reporting—but it also gives regulators more leeway in judging whether a company is really acting in the best interests of shareholders and consumers.

Football (Rules-based)
In a rules-based environment like Wall Street has now, there a lot of rules that the financial institutions must follow and the regulators enforce the rules. Football, like most American sports, is heavily rule-bound. There’s an elaborate rulebook that sharply limits what players can and can’t do (down to where they have to stand on the field), and its dictates are followed with great care.

Soccer (Principles-based)
The regulators have more authority to interpret and pass judgement on the activities of Wall Street. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at game’s end has the discretion to add as many or as few minutes of extra time as he deems necessary. There’s also less obsession with precision—players making a free kick or throw-in don’t have to pinpoint exactly where it should be taken from. As long as it’s in the general vicinity of the right spot, it’s O.K.

Not surprisingly, Wall Street favors the principles-based approach rather than rules based (it’s likely to be less complex and less onerous to comply with). Paulson is an ex-Wall Streeter.

In Newsweek, one of Henry Paulson’s top Treasury Department aides spoke on how United States and world policymakers are responding to the fallout of the global credit crunch.

The short answer is that we are in the midst of a phenomenon painfully familiar to Americans. From the gold rush to the Internet bubble, cycles of innovation, excess, adaptation and recovery to a point of even greater prosperity have defined America’s economic progress. In the present situation, we are seeing the rough edges of the same recent financial innovation that has brought enormous benefits to many investors, businesses and consumers. But these net benefits are of little consolation to the Americans whose lives are being seriously disrupted by the current financial-market turmoil. In response, policymakers in the United States and around the world are taking aggressive and targeted actions to stabilize financial markets, reduce the impact of markets on the U.S. economy and protect against the same mistakes’ being repeated.

blah, blah, blah

But now, focus is shifting to correcting the problems on Wall Street with the adaptation of successful new financial products. Thats where the new solutions to the credit crisis will get interesting.

As the immediate remedies take effect, we have also begun to focus on the weaknesses in business practices of financial institutions that this experience has revealed, and on fragmented U.S. and European regulatory structures that had difficulties guarding against or responding to modern challenges. U.S. and international policymakers are acting in a targeted but comprehensive way to address the causes of current market instability with steps including strengthening the oversight of risk management and reporting practices of global financial institutions; enhancing disclosure of and the process for setting values for complex products; changing and clarifying the role and use of credit ratings; strengthening the process by which national authorities monitor and respond to risk, and reforming the mortgage-origination process. In each of these broad categories, the specific proposals are concrete, widely accepted and, in a number of cases, already being implemented by national or international authorities as well as by the private sector.

Charting the source: Where news happens… or, more accurately, where news is reported from [Reuters]

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[Federal Musak] Everything Is Beautiful, In Its Own Way

April 8, 2008 | 10:06 pm | |

Images of wood veneer inside a dingy elevator with musak playing in the background…

This is what passed through my mind when I saw this headline (and not to be the chicken little messenger of gloom and doom, but come on!):

Bush Says Economy Is Poised to Rebound.

Quick question: name one (or two) events that will lead an economic turn around in short order and overcome the twin issues of credit and housing.

Quicker answer: Nothing obvious.

The president, with all due respect, is sending a misleading message. What he should have said was: We don’t need a second stimulus package because the first one hasn’t had time to kick in. It’s tough to take the administration’s optimism seriously because they were largely asleep at the switch over the past two years with the disconnect from housing’s impact on the economy. So was Congress by the way.

And now, when threatened by Congressional legislation that may undercut the administration’s stance, they are finally taking action:

The Bush administration appears set to support a significant expansion of its assistance for struggling homeowners in a bid to forestall more-aggressive action being contemplated by Democrats in Congress.

U.S. Treasury Secretary Henry Paulson echoes the concern of the president, saying that the legislation in Congress will be damaging, not helpful to housing and credit.

“In terms of government intervention in housing and capital markets, I have seen a number of proposals calling for that. I haven’t seen any that wouldn’t do more harm than good. So, you will not find me or the Bush administration calling for government intervention,” he said. “U.S. policy is not for massive or more significant government intervention.”

Reality check:

The economy lost 76,000 jobs in February and 80,000 jobs in March. Mortgage rates are not moving downward and credit availability is limited.

The new jumbo conforming mortgage class has high fees associated with it and it’s rates are higher than jumbo mortgages themselves. That’ll all but eliminate the benefits of this new mortgage class. Old habits die hard: The credit crisis was partly the result of banking’s disrespect of investors and investor’s greed to accept reward without respect for risk. This new mortgage class does the same thing. A new mortgage product is being introduced so it’s not tested in the market and packagers of the new debt are telling investors: a mortgage of $729k has EXACTLY the same risk as a mortgage of $417k so the risk premiums should be the same. Good grief.

Consumers are pulling back spending as consumer debt (excluding mortgage debt) is at a record $2.539 trillion and are shifting debt to credit cards from home equity loans:

The slowdown reflected much weaker demand for auto loans and other type of non-revolving credit, which rose at a rate of 0.4 percent in February, much lower than the 3.6 percent growth rate in January. Credit card debt rose at a 5.9 percent rate.

Consumers have been moving to put more of their purchases on their credit cards as banks have tightened lending standards for home equity loans in response to the deepening credit crisis. The price of homes has fallen sharply in many parts of the country.

Meanwhile a Federal Reserve governor is not so rosy in his outlook.

Perhaps when the elevator musak starts playing Rage Against The Machine (closing credits music in The Matrix movie), we can feel better about the messages being delivered to us.

Or at least I can.

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[Liquid Mortgages] For Just 5 Minutes …Underwater

March 31, 2008 | 9:28 am | |

There’s an old joke that goes like this:

Man1 Seems like I’ve been married for five minutes.
Man2 Really? only 5 minutes?
Man1 Yeah, 5 minutes…

Judging by the booing the president got at opening day for the Nationals yesterday while throwing out the first pitch, the administration is starting to think it needs to do something about the stability of the financial markets, specifically credit/mortgages. We are starting to see some stirring (about a year too late , I suspect).

HUD has plans to specifically help borrowers whose home values are less than their outstanding mortgages.

The Department of Housing and Urban Development plan would enable homeowners who are “underwater” on their mortgages to qualify for a partial backstop through HUD’s Federal Housing Administration, these people said. HUD Secretary Alphonso Jackson “is examining the potential for FHA to be a solution for these borrowers,” Treasury Secretary Henry Paulson said Wednesday.

The FHA is central to multiple plans to revitalize the housing market and prevent foreclosures.

Meanwhile, Democrats are trying to pass legislation that would allow the FHA to insure up to an additional $400 billion in mortgages by requiring lenders to take partial losses on loans and refinance borrowers into more affordable products. HUD’s proposal is likely to be much smaller in scale and is expected to offer partial insurance for certain borrowers, leaving lenders on the hook for some losses.

The way of Washington (40 square miles surrounded by reality): HUD Secretary Alphonso Jackson announced program on a Friday, expected resignation on Monday

Housing and Urban Development Secretary Alphonso Jackson is expected to announce his resignation Monday, according to people familiar with the matter, a decision that will deal a blow to the Bush administration’s efforts to tackle the housing and mortgage mess.

The exact reasons for Mr. Jackson’s decision couldn’t be learned. The secretary has been beset recently by allegations of cronyism and favoritism.

That’s more like 10 minutes underwater.

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[Rebalancing Act] Always Look On The Bright Side Of Life Housing

February 12, 2008 | 2:12 pm | |

I love that Monty Python song!

Well, the Council of Economic Advisors presented their official forecast to Congress in a report and were optimistic (not surprising when you consider what their function is).

The White House stuck with the same, by now relatively optimistic, economic forecast it made last November when it released the annual Economic Report of the President to Congress on Monday.

‘I don’t think we’re in a recession,’ and the administration is not forecasting one, declared Edward Lazear, Chairman of the Council of Economic Advisers (CEA) and President George W. Bush’s chief economist.

Here’s the actual report.

Their basis is that the weak dollar offsets (higher growth of non-residential investment) offsets housing declines (lower rates of housing investment.) In fact, Treasury Secretary Henry Paulson has consistently stated that a strong dollar is a better scenario as representative of the administration’s view, yesterday the report suggests just the opposite.

I watched Edward Lazear’s appearance of CSPAN last night and he felt that the “1% of GDP” $168B stimulus plan was enough to get the economy moving again. Of course, there is already a second stimulus plan in the works so I don’t see this prediction as reliable. He feels the economy will bounce back this summer once the stimulus kicks in. After reading these excerpts, it doesn’t appear to be consistent with the discussion within the report itself:

Nationally, nominal house price appreciation slowed to a crawl in 2007, and house prices fell when corrected for inflation….

The deceleration of housing prices along with falling standards for subprime mortgages in 2005 and 2006 has led to a rising delinquency rate for subprime adjustable-rate mortgages (where the rate on the mortgages resets after an initial period), which severely disrupted the secondary market for nonconforming mortgages in 2007. In contrast, the market for conforming mortgages continued to function well.

Every major measure of housing activity dropped sharply during 2006 and 2007, and the drop in real residential construction was steeper than antici- pated in last year’s Report. Housing starts (the initiation of a homebuilding project), new building permits, and new home sales have fallen more than 40 percent since their annual peaks in 2005. The drop in home-construction activity subtracted an average of almost 1 percentage point at an annual rate from real GDP growth during the last three quarters of 2006 and the four quarters of 2007. Furthermore, even if housing starts level off at their current pace, lags between the beginning and completion of a construction project imply that residential investment will subtract from GDP growth during the first half of 2008.

During 2007, as in 2006, employment in residential construction fell, as did production of construction materials and products associated with new home sales (such as furniture, large appliances, and carpeting). Yet despite these housing sector declines, the overall economy continued to expand In addition to incomes and mortgage rates, the number of homes built is underpinned by demographics. Homebuilding during 2004 and 2005 aver- aged about 2.0 million units per year, in excess of the 1.8- or 1.9-million unit annual pace of housing starts that would be consistent with some demographic models for a decade-long period, leading to an excess supply of houses on the market. More recently, the 1.2 million unit pace during the fourth quarter of 2007 is well below this long-term demographic target. The pace of homebuilding has now been below this level for long enough that the above-trend production of 2004 and 2005 has been offset by the more recent below-trend production. Yet the construction of new homes continued to fall rapidly through year-end 2007, with the undershooting possibly reflecting uncertain prospects for house prices as well as elevated inventories of unsold new and existing homes. Once prices become firm and inventories return to normal levels, home construction should rebound, but it is difficult to pinpoint when this will occur. The residential sector is not epositive contributions to real GDP growth until 2009.

In fact, Federal Reserve governor William Poole thinks that our odds of a recession are higher but that we won’t actually enter a recession.

Jan Hatzius, chief United States economist at Goldman Sachs, wrote in a research note on Monday that he was convinced the economy was already in a recession and he warned that losses in the housing market could be even bigger than the $400 billion that Goldman predicted several months ago.

In other words, the credit crunch/housing market issues will be resolved in six months, there won’t be a recession and we won’t need a second stimulus plan.

I think more “rebalancing” is needed.

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No Silver Bullet: Lending Lip Service To Mortgage Service

December 7, 2007 | 10:55 am | |

I’ve been a AWOL for a few days so pardon the long post…I had a lot to get out of my system.

There was great anticipation for President Bush’s mortgage plan, which was unveiled at a press conference at 1:40 PM EST yesterday, which was largely fleshed out in the media already. Treasury Secretary Paulson has been able to arrange a deal with the mortgage industry to provide relief to some sub-prime homeowners. I was interviewed for this page 1 story but didn’t make the cut ;-(

the industry would voluntarily help as many as 1.2 million homeowners who are heading for trouble paying their subprime mortgages but aren’t yet lost causes. In some cases, loan-servicing companies will agree to freeze mortgages at their low introductory rates. In others, credit counselors or loan servicers will walk mortgage holders through refinancing processes.

Here’s a useful Q&A.

Treasury Secretary Henry M. Paulson Jr. said

“The approach announced today is not a silver bullet,” said Treasury Secretary Henry M. Paulson Jr., who hammered out the agreement. “We face a difficult problem for which there is no perfect solution.”

The 1.2M number that will be quoted repeatedly today is likely overstated 5x indicating this proposal will help a limited group of people, let along address the credit problem. I am also worried about litigation by investors since they are not getting the returns they thought they were paying for. In other words, the pricing didn’t reflect the risk. But then again, this may end up affecting very few borrowers relative to the 1.2M suggested.

One of the financial industry’s lead negotiators estimated that at most 20 percent of subprime borrowers whose payments will increase sharply over the next 18 months — 360,000 out of 1.8 million people — would qualify for rapid consideration of a special five-year freeze on interest rates.

Does this send the right message to mortgage investors that are already on the sidelines because they are jittery about what’s in the mortgage pools? This action seems to open a whole new area of concern. An investor buys a package of loans and forecasts how much the rate will rise in a certain period of time. Thats the basis of the price paid. What if the interest rate you thought you were going to get from your investment was frozen at a much lower rate. As an investor, would you buy more paper until you felt comfortable that this sort of thing wouldn’t happen again?

Limited availability of mortgages =

higher mortgage rates =

higher default rates =

more personal hardship

Here’s a contrarian viewpoint on the Bush plan called “The Mother of all Bad Ideas.”

Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan.

The FDIC chair’s statement on the loan modification plan, basically said that they haven’t had time to read it but thinks its probably good. Suggestion: delay comment until you’ve read it.

As I have said many times, I continue to be amazed at the disconnect between the impact of the housing market on the economy.

According to the Mortgage Bankers Association, the total number of loans that are delinquent (5.59%), in foreclosure (1.69%), or going into foreclosure (0.78%) are the highest since 1986.

In other words, consumers are uncomfortable.

Washington Post-ABC News Consumer Comfort Index Survey

This is a humanistic gesture by President Bush and a monumental effort by Treasury Secretary Paulson that only few people on the planet could have made happen. This action will make many feel good and give the impression that the problem will go away or is being resolved. However, by neglecting to address the larger issue of subprime mortgages popping up in nearly every type of mortgage pool, effectively scarring away investment, the credit situation will continue to erode and life will be more difficult for millions of homeowners with a gun to their head.

Odds & Ends

We should all remember that foreclosures also hurt their neighbors.

Why Paulson Needn’t Worry About Litigation Risk in His Mortgage Plan

Here’s the Bush Administration Plan as a flowchart.

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Mortgage Lenders Don’t Want The Bill For Mortgage Problems

November 17, 2007 | 6:38 pm |

Within the bill (H.R. 3915: Mortgage Reform and Anti-Predatory Lending Act of 2007) that appears headed for a lot of negotiation and work if it has a chance of being passed, the US House of Representatives is trying to prevent another mortgage and credit problem in the future by dealing with loose and deceptive loan practices.

One of the concerns with the legislation is its lack of precision, possibly inviting litigation every time a borrower falls behind on their payments. Yet the problems are real.

>Treasury Secretary Henry M. Paulson recently said there could be more than 1 million foreclosure proceedings started this year, with 620,000 of them dealing with sub-prime loans made to people with poor credit. Some analysts say a much larger number of mortgages is headed for trouble.

The White House objects to parts of the bill and the Senate does not have a bill in the works yet, delaying reforms on the mortgage market, which could be a year away. Hardly responsive to the problem. I wonder why the federal government can’t seem to get its act together on mortgage reform right now?

Holden Lewis of Bankrate breaks down H.R. 3915 nicely.

The “credit” card is played

>opponents said the bill would limit the availability of credit by hobbling lenders with red tape and filling them with a fear of running afoul of regulators or getting sued by borrowers.

The Mortgage Bankers Association objects to the bill because it places restrictions on its members, including selling mortgage products with interest rates above the what the borrower qualifies for. Another restriction they object to is the introduction of licensing to the profession.

While I agree with the intention of licensing, it is only there to complement existing restrictions and will not solve the problem by itself. The MBA can not self-police (look what happened). By only implementing licensing and no other regulator reforms, will only make the problem worse.

After appraisal licensing was introduced in 1991, the quality of appraisals fell considerably over the next decade. The rise of wholesale lending (mortgage brokers) as an origination source and appraisal licensing was a powerful cocktail for bad mortgages.

Why? Because an appraisal license freed the lender from some liability. Hey, I hired them because they were licensed by the state. There was less responsibility or focus on the competence of the appraiser being hired. A similar thing will happen with mortgage brokers if this is the only action taken.

There needs to be greater oversight introduced and the lenders need to be held more responsible (financial incentives are the only way to make this work) for the quality of mortgages they sell to investors, to force lenders to take a hard look at the mortgage brokers they do business with. Until now, its been lip service.

This is a systemic problem that mushroomed to disaster this summer. It will likely take as long to fix the problem as it took for the problem to develop, perhaps into the next “up” cycle.

On second thought, lets ram this legislation through right now.

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Good Grief: 5 Stages of Housing Grief

October 30, 2006 | 8:25 am | |

From Paul Krugman’s Op-ed piece Bursting Bubble Blues [NYT subsc]:

* (1) Housing bubble? What housing bubble? “A national severe price distortion [in housing] seems most unlikely in the United States.” (Alan Greenspan, October 2004)

  • (2) “There’s a little froth in this market,” but “we don’t perceive that there is a national bubble.” (Alan Greenspan, May 2005)

  • (3) Housing is slumping, but “despite what you hear from some of the Eeyores in the analytical community, a recession is not visible on the horizon.” (Richard Fisher, president of the Federal Reserve Bank of Dallas, August 2006)

  • (4) Well, that was a lousy quarter, but “I feel good about the U.S. economy, I really do.” (Henry Paulson, the Treasury secretary, last Friday)

  • (5) Insert expletive here.

Krugman makes the argument that the drop in GDP and construction spending as well as the rise in foreclosure rates foretell a long decline in housing (I seem to recall a recurring pessimistic theme in his past columns on housing). From a political perspective, the Bush administration has tried to turn coverage from the Iraq War to the economy but that doesn’t appear to be a wise strategy.

In case you’re wondering, I don’t blame the Bush administration for the latest bad economic numbers. If anyone is to blame for the current situation, it’s Mr. Greenspan, who pooh-poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending.

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Random Economic Vetting: The R-Word And Going Stag To The Core

August 3, 2006 | 6:51 am |

While I try to digest the economic swirl of information these days, I became concerned by the comment by Treasury Secretary Henry Paulson on Tuesday [MW]:

Asked if the economy faces a recession in the near term, Paulson declared, “Absolutely not.”

When a government official makes such an affirmative comment in the public domain, it makes me worry. In fact, only once before in our economic history, did an inverted yield curve (long-term rates are lower than short-term rates) fail to predict a recession.

After the release of the latest round of economic stats, things seemed, at least on the surface, getting better for housing. The pace of GDP increases are falling, and in fact fell by more than what analysts had expected. A cooling economy could influence mortgage rates to fall (they have slipped over the past month) and help housing begin to dig itself out of its problems caused by rising inventory and slowing demand.

Not so fast. If the economy cools, it is not necessarily all good for housing either. Less optomism, less personal income (actually income is up now) and fewer jobs may serve as an offset for lower mortgage rates but it may slow the pace of erosion.

But now we have core inflation up [CNN] (inflation less food and energy) showing the highest increase in 4 years and concerns about recession and even stagflation are on the radar.

Stagflation [Wik] can be defined as: “Stag” refers to a sluggish economy with job shortages and little income growth, while “Flation” signifies rapidly rising prices. This was a problem in the 1970’s and difficult to resolve by the Fed because unemployment and inflation have opposite solutions. Raising interest rates reduces inflation by cooling the economy reducing jobs but lowering interest rates increases economic production and jobs.

Once last random thought: Who are these analysts that keep predicting data results upon their release? The reported news is not about what the statistic means, but whether it is above or below analysts expectations. And the stat is always above or below expections.

I’m getting a headache.


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#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
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Joined October 2007