The forecast is for anywhere from 8 to 16 inches of snow from today until tomorrow. It seems like it has been snowing since December almost continuously, and indeed, we have been breaking records. See this article from the National Post in Canada.
Now one year's data do not make a trend. But has anyone noticed, with Arctic ice on the rebound, how quiet the global warming crowd has been?
Tuesday, February 26, 2008
CNBC Pessimism
I often check CNBC's website for market information, and have always noted the pessimism that they seem to be infused with. Are they always short the market or what?
This morning, the Producer Price Index came out, and it showed inflation up a bit. No question about that. The first headline I saw on CNBC was something like "Inflation Data Pounds Futures." The futures were down maybe 35 points on the Dow -- not what I would call a pounding.
Now the headline is "Inflation Gloom Casts Market Pall." You would think the Dow would be down at least 100 points, right? No...at 941am, CNBC has the Dow down 15.88.
Pessimism runs rampant.
This morning, the Producer Price Index came out, and it showed inflation up a bit. No question about that. The first headline I saw on CNBC was something like "Inflation Data Pounds Futures." The futures were down maybe 35 points on the Dow -- not what I would call a pounding.
Now the headline is "Inflation Gloom Casts Market Pall." You would think the Dow would be down at least 100 points, right? No...at 941am, CNBC has the Dow down 15.88.
Pessimism runs rampant.
Saturday, February 23, 2008
Subprime Ethics
One more issue on the subprime market has come up.
Is it unethical for a home owner to walk away from their mortgage, if it is in their interest to do so?
Suppose you bought a home and took out an adjustable rate subprime mortgage. Your initial rate was 8%, but it would reset to 9.5% very soon. Unfortunately, you will not be able to refinance the house since housing prices have declined and banks have tightened their lending standards. At a rate of 9.5%, your finances will be stretched very thin. You are tempted, therefore, to drop the keys to the house off at the local mortgage broker who financed your mortgage in the first place. Now there are a lot of ramifications of doing this, not all which I understand -- you might still end up owing the bank money, requiring a bankruptcy filing, and you could also end up with a big tax bill from the IRS for any loan amount that the bank writes off. But for my point, let's just assume (very safely) that there will indeed be circumstances when it is in the individual's interest to default.
It is not as if you CANNOT make the mortage payments, just that it really is not in your economic interest to do so. You, and your family, would be better off renting a house, saving the difference between your new mortgage payment and the rent, and of course dealing with all the implications of the default.
Is it unethical to walk away from that mortgage?
I say... no.
Is it unethical for a home owner to walk away from their mortgage, if it is in their interest to do so?
Suppose you bought a home and took out an adjustable rate subprime mortgage. Your initial rate was 8%, but it would reset to 9.5% very soon. Unfortunately, you will not be able to refinance the house since housing prices have declined and banks have tightened their lending standards. At a rate of 9.5%, your finances will be stretched very thin. You are tempted, therefore, to drop the keys to the house off at the local mortgage broker who financed your mortgage in the first place. Now there are a lot of ramifications of doing this, not all which I understand -- you might still end up owing the bank money, requiring a bankruptcy filing, and you could also end up with a big tax bill from the IRS for any loan amount that the bank writes off. But for my point, let's just assume (very safely) that there will indeed be circumstances when it is in the individual's interest to default.
It is not as if you CANNOT make the mortage payments, just that it really is not in your economic interest to do so. You, and your family, would be better off renting a house, saving the difference between your new mortgage payment and the rent, and of course dealing with all the implications of the default.
Is it unethical to walk away from that mortgage?
I say... no.
The Subprime Mortgage Market: Caveat Emptor
I have been doing a fair amount of reading on the subprime mortgage market in preparation for possibly teaching a class on the topic next year. In doing this, a colleague passed on to me the prospectus for the mortgage-backed securities that were sold in one deal in June 0f 2006. This is fascinating reading. For anyone not knowing what a prospectus is, it is the document (over 300 pages long in this case) that lays out all aspects of the securities being sold, including all risk factors. It is the legal document required by the Securities Exchange Commission.
This one deal was based on almost $1 billion of mortgages that had been originated in California, Florida and NY by New Century Mortgage Corporation. They were subprime mortgages. What does that mean, exactly? Well, in the prospectus is a long section on the underwriting standards of New Century. Here is an excerpt:
"Under the "C" risk category, an applicant must have a FICO score of 500, or greater...Unlimited 30 day and 60 day late payments and a maximum of one 90 day late payment within the last 12 months is accceptable on an existing mortgage loan. An exisitng mortgage loan must be less than 120 days late at the time of funding of the loan. All bankruptcies must be discharged at least one day prior to funding of the loan; provided, however, that Chapter 13 bankruptcies may be discharged with loan proceeds...The mortgaged property must be in at least average condition..."
Income verification is also interesting. "Under the limited documentation program, applicants usually are required to submit verification of stable income for at least 6 months, such as 6 consequtive months of complete personal checking account bank statements, and under the stated income documentation program, an applicant may be qualified based upon monthly income as stated on the mortgage loan application if the applicant meets certain criteria."
Whoo, boy. Does anything smell a little junky around here? The lowest tranche of the securities was promised an interest rate of the one-month LIBOR plus around 3%, for a total return of around 8%.
One thing I can say for sure: Anyone who read that prospectus has no right to say they were not adequately warned. I would have had a lot of questions to follow up with, but there was a lot in that prospectus that should have sent red flags up all over the place.
One really good summary article on the subprime market is this: : “Understanding the Securitization of Subprime Mortgage Credit,” Ashcraft and Schuermann, Federal Reserve Bank of NY, December 2007.
This one deal was based on almost $1 billion of mortgages that had been originated in California, Florida and NY by New Century Mortgage Corporation. They were subprime mortgages. What does that mean, exactly? Well, in the prospectus is a long section on the underwriting standards of New Century. Here is an excerpt:
"Under the "C" risk category, an applicant must have a FICO score of 500, or greater...Unlimited 30 day and 60 day late payments and a maximum of one 90 day late payment within the last 12 months is accceptable on an existing mortgage loan. An exisitng mortgage loan must be less than 120 days late at the time of funding of the loan. All bankruptcies must be discharged at least one day prior to funding of the loan; provided, however, that Chapter 13 bankruptcies may be discharged with loan proceeds...The mortgaged property must be in at least average condition..."
Income verification is also interesting. "Under the limited documentation program, applicants usually are required to submit verification of stable income for at least 6 months, such as 6 consequtive months of complete personal checking account bank statements, and under the stated income documentation program, an applicant may be qualified based upon monthly income as stated on the mortgage loan application if the applicant meets certain criteria."
Whoo, boy. Does anything smell a little junky around here? The lowest tranche of the securities was promised an interest rate of the one-month LIBOR plus around 3%, for a total return of around 8%.
One thing I can say for sure: Anyone who read that prospectus has no right to say they were not adequately warned. I would have had a lot of questions to follow up with, but there was a lot in that prospectus that should have sent red flags up all over the place.
One really good summary article on the subprime market is this: : “Understanding the Securitization of Subprime Mortgage Credit,” Ashcraft and Schuermann, Federal Reserve Bank of NY, December 2007.
Clinton vs. Obama on Health Care
I was listening to the Clinton/Obama debate last night and was struck by their slight difference on health care policy. The key difference seems to be that Obama does not have a mandate for everyone to purchase insurance while Clinton would.
Couple issues here. First, I just cannot understand why people would think that mandating health care coverage is such a great thing. I can understand a desire to subsidize it, a la Obama, but if someone doesn't want to spend their money on health insurance, why should we force them to? (By the way, what will the penalty be? Will we incarcerate someone for not buying health insurance?)
There could be "reasonable" arguments here, but I don't think any of them explain Clinton's position. One, we could fear our own self-control, so that if an uninsured person gets sick, we will not let them go without care but would pay for it. I don't think this is a reasonable argument and I don't think it is why the mandate idea appeals to so many people. Second, one could raise an adverse selection argument, saying that if people can opt out, then the healthy will opt out leaving only the least healthy in the pool, causing a classic "lemons" problem that can cascade and cause the insurance market to not function. This story has no support from the working of health insurance markets generally, and again, I don't think it is what explains the support for mandates.
I think what explains the support for mandates is the usual liberal belief that people do not make good decisions and need to be protected from themselves, along with an embarrassment that liberals feel when talking to Canadians and Europeans who tout their universal health coverage. "How can you live in a country where some people do not have health coverage?" Gosh, that is almost as bad as living in a country that lets people carry guns for self defense.
Couple issues here. First, I just cannot understand why people would think that mandating health care coverage is such a great thing. I can understand a desire to subsidize it, a la Obama, but if someone doesn't want to spend their money on health insurance, why should we force them to? (By the way, what will the penalty be? Will we incarcerate someone for not buying health insurance?)
There could be "reasonable" arguments here, but I don't think any of them explain Clinton's position. One, we could fear our own self-control, so that if an uninsured person gets sick, we will not let them go without care but would pay for it. I don't think this is a reasonable argument and I don't think it is why the mandate idea appeals to so many people. Second, one could raise an adverse selection argument, saying that if people can opt out, then the healthy will opt out leaving only the least healthy in the pool, causing a classic "lemons" problem that can cascade and cause the insurance market to not function. This story has no support from the working of health insurance markets generally, and again, I don't think it is what explains the support for mandates.
I think what explains the support for mandates is the usual liberal belief that people do not make good decisions and need to be protected from themselves, along with an embarrassment that liberals feel when talking to Canadians and Europeans who tout their universal health coverage. "How can you live in a country where some people do not have health coverage?" Gosh, that is almost as bad as living in a country that lets people carry guns for self defense.
Sunday, February 17, 2008
California Craziness
It was only a matter of time. A bill being debated in California would require that state's science curriculum to include climate change. Two obvious problems with that. One, do we really need a state legislature to mandate science coverage? And two, you just know what kind of treatment the teachers are going to give the subject.
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