In a follow up to my post of May 4th, the National Council on Aging has an online booklet with on FHA insured reverse mortgages.
Author: sgstofka
Housing Crisis Causes
A wide array of suspects have been lined up as the causes of the mortgage crisis in this country. They include subprime borrowers, poor underwriting standards, adjustable rate mortgages that lured buyers with low teaser rates then reset at unaffordable rates several years after the initiation of the mortgage.
A professor of economics, Stan Liebowitz, analyzed data from 30 million mortgages and states his findings in an 7/3/09 WSJ op-ed. The chief culprit, the Darth Vader of the meltdown, is an ancient villian familiar to anyone in the business of providing credit. When customers have none of their own money in a purchase, no “skin in the game”, they are more likely to default on a loan.
The fault for this practice is the lender’s. When a lender is asked why they would do something that they have been told will surely put the loan at risk, they answer with a variety of reasons: “I wanted to make the sale”, “I thought they were good for it”, and “the competition was doing it so I had no choice” are some of the more common.
Prof. Liebowitz cites a simple statistic for home foreclosures in the 2nd half of 2008: “although only 12% of homes had negative equity, they comprised 47% of all foreclosures.” His analysis found that “interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points.”
Following negative equity as the prime culprit in foreclosures, unemployment had the second greatest impact. Prof. Liebowitz concludes that “a significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising”.
Government efforts to reduce interest rates spur refinancing but not home purchases and it is purchases, not refinancing, that stabilizes home prices. Government programs to inflate home ownership rates only threaten to recreate the housing bubble that led to this crisis. Mortgage payments that were greater than the 31% target level of the “Making Homes Affordable” plan had so significant contribution to foreclosures and the author doubts that this program will have much effect in reducing foreclosures.
As housing prices are approaching their long term inflation adjusted levels, the author predicts a natural stabilization of prices without any government interference. We can only hope that our political leaders will know when to stop “helping”.
Saving
Two weeks ago, the Federal Reserve released their first quarter’s report of money flow in the U.S., showing that we saved over 4% of our income and reduced our debts by about 3%. (p. 15) That’s the good news.
The bad news is that foreign investment in the U.S. has slowed to a relative trickle (p. 22). Although foreign investors bought Treasuries, they have been selling mortgage backed securities at a furious pace, unloading in 6 months what it took them the previous two years to accumulate.
Foreign investors have been selling both corporate and municipal bonds. There has been almost no net investment in the U.S. stock market. Without that extra buying pressure from foreign capital, the U.S. stock market is unlikely to move upward in any significant way.
For years Americans have relied on the savings of foreigners to support consumer borrowing, mortgages, business and municipal loans. Foreign investors still hold more than half of our federal debt. But foreign money is moving elsewhere. Now it’s up to us.
Patent Law
The title of today’s blog is sure to get you yawning. Without patent protections, there would be no cell phones, primitive computers would be sold in kits, and microwave ovens would not be taking up counter space in your kitchen.
To develop an idea into a marketable product takes money. Who wants to invest money to develop a product that, if it is popular, some other company can copy for free?
In the past decade or two, the Patent Office has granted numerous “business process” patents, many of them to IBM, which is the world leading patent holder. So why is IBM willing to see reforms that would restrict some patent awards? The profusion of patents whose scope is too broad is stifling innovation.
What are “business process” patents? US Patent 6,766,303, granted to the investment firm Goldman Sachs in 2004 is an example: a method for hedging one or more liabilities associated with a deferred compensation plan. IBM owns patent 7,180,615, granted in 2007, for one click printing in a web browser. Well, at least breathing is not patented, you might joke. Wrong. Patent 7,396,333 was granted to Cardiac Pacemakers in 2008 for their system of predicting disordered breathing. Two months ago IBM was granted patent 7,519,645 for a method to add decimal numbers. It is very clever, involving both addition and subtraction.
How do these companies get patents for what seem like abstract ideas? To be patentable, ideas must be tied to particular machine or apparatus, or transform a particular article to a different state or thing. What is the machine that is tied to all these abstract ideas? The computer.
The last patent law was enacted in 1952, when the only computers were room sized machines with less computing power than today’s hand held PDA. In 2003, 2005, and 2007 Congress tried and failed to pass a patent reform bill. In March 2009, two Senate bills and one House bill were introduced. Will Congress succeed this time? If you can figure out a system for predicting that success or failure, you could probably get a patent on it.
Big City Woes
Bob Marley, the reggae singer, sang “The bigger they are, the harder they fall” and the lyrics strike a chord in big cities around the U.S. New York, Chicago, L.A., Philadephia, Detroit, Phoenix and Atlanta are among the cities reporting huge deficits.
In a 6/24/09 WSJ article, Douglas Belkin details Chicago’s woes and finds that fat fiscal spending in past years has deepened the budget crisis as the recent economic downturn has sharply reduced revenues.
Chicago’s experience should be a lesson for other cities. Through high sales taxes, increasing fees and privatization of city services like parking meters, Chicago’s revenues jumped in past years. City politicians pumped the extra revenue into their operating budget while residents paid higher fees from these now privatized services.
As sales tax and property tax revenues have declined, the City has fewer revenue sources to fall back on. While Morgan Stanley continues to rake in collections and high towing fees on many of Chicago’s parking meters, Chicago is laying off and furloughing city workers.
Arnold Schwarzenneger, governor of California, has repeatedly argued for a “rainy day” state savings fund. From this economic downturn, both state and city politicians can learn a lesson that they may not have learned in childhood – the value of saving.
Financial Regulation
In 1966, Congress passed the Fair Packaging and Labelling Act, which required manufacturers of retail products to list the contents and weights of their products. The food industry fought hard against it. Breakfast cereal makers were accustomed to packing their cereal in big boxes to trick the consumer into thinking that they were getting more product.
In 1969, Congress tried to pass a law mandating unit pricing but the food industry lobbied hard against it and the bill died in the Senate. The reasoning was that consumers could figure out the unit price or the price per ounce of a product by themselves or bring recently introduced battery powered calculators with them when they went shopping. In 1970, some grocery stores began to offer unit pricing as a convenience feature to lure customers. Unit pricing in grocery stores is now commonplace.
Many years ago there was one mortgage product, a 30 year fixed loan, making it fairly easy to compare mortgages. Because easy comparison by a customer is not always good for the seller, mortgage companies competed by introducing a complexity of “points”, closing fees and prepayment penalty packages to distinguish their mortgage product from their competitors.
The 15 year mortgage arose a few decades ago, followed by a variety of mortgage products. This profusion of choices can be a boon to a consumer but it can also be confusing. This variety and confusion is an effective sales tool, making it more difficult for a customer to compare products and prices.
Just as the food industry fought packaging regulations, the financial industry will fight similar regulations on their products. Under proposed financial regulations, teaser rates of “0% interest for 6 months” will have to be followed by plain English of what that teaser rate will reset to in six months. No longer will credit card companies be able to bury the truth in impossibly small print referencing the greater of the LIBOR rate (what’s that?, you ask) or the Federal Reserve discount rate (what’s that?, you ask again). Mortgage companies would have to offer at least 2 – 3 standard products, like a 30 year fixed loan, that a consumer could compare pricing with a competing mortgage company. While this legislation works its tortuous way through Congress, the finance industry will be busy lobbying against it and figuring out how to outsmart it.
ETF Max
A month ago I wrote about investing in leveraged ETFs, enumerating several risks and the erosion of a investment returns in a see-saw market.
As more brokers recommend these products to their clients as a tool to limit risk or improve returns, the Financial Industry Regulatory Authority (FINRA) is cautioning brokers to exercise some care in how they present these products to their clients.
State Tax Declines
There are many summer sounds to be heard on June nights but this year one of those sounds are the gnashing of teeth in state capitols throughout the U.S.
In a May report, the non-profit Rockefeller Institute summarized early state reporting of income tax for the first quarter. After adjusting for inflation, state income tax revenues declined an average of 14% compared to the first quarter of 2008. South Carolina’s drop was precipitous – over a third. The average decline in sales tax revenue was 7.6% but Georgia saw a drop of over 16%.
Many states start their fiscal year in July and must base their budgets on preliminary data. Personal income tax makes up an average of 40% of state revenues for the 41 states which have personal income tax. The Rockefeller Institute projected an even steeper decline in revenues in April revenues. Since most states must balance their budgets, there will continue to be hotly contested adjustments to state spending to meet the reduced revenue streams.
Gross Domestic Product
A month after each quarter ends, the Bureau of Economic Analysis (BEA) releases an advance estimate of the nation’s output of good and services, or GDP. As the Bureau receives more specific data, they revise their advance estimate, calling this revision a preliminary estimate.
On 5/29/09, the BEA released their preliminary estimate of first quarter GDP. The good news is that GDP didn’t fall as much as indicated by the advance estimate released at the end of April. It was “only” a decrease of 5.7% from the last quarter of 2008. Defense spending decreased 6.8%. While personal spending was up 1.5%, gross domestic purchases of goods and services declined by 7.5%.
Recent signs indicate that the deceleration in the economy has slowed. New housing permits have seen an increase. The rate of applicants for unemployment is less jaw-dropping. The manufacturing index, while not positive, has turned around from its steep decline. This is a big ship that had lots of momentum in the wrong direction. It will take a while.
LucreTalk Freed
Due to technical difficulties at Blogger, I have been unable to post the past few days. Like the star ship Enterprise, I was caught in a tractor beam.
Innocent Investor 