A ‘Potential Contagion Effect’ From Exotic Loans
The Washington Post has this report on exotic loans. “Despite regulators’ warnings that some popular types of mortgages are risky, lenders are still making them, and mortgage insurance companies have begun pleading with federal banking agencies to act quickly to restrict them. The loans under scrutiny include interest-only mortgages and ‘option’ mortgages, in which borrowers decide each month how much to repay.”
“The risk comes because eventually these loans ‘reset,’ meaning the payment is adjusted upward, sometimes as much as doubling,- to repay the full interest and principal owed.”
“‘We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans,’ Suzanne Hutchinson, of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ‘The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk.’”
“Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the FDIC.”
“Late last year, regulators began telling the industry that some of the new loan types put some buyers in jeopardy and lenders at risk of loan losses. But lenders continued making the loans at a fast clip.”
“In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did, about the same percentage as in May 2006, according to new data. These loans are even more common in the expensive Washington area, where about half of home borrowers used them in May 2006.”
“Regulators also told lenders last year that they were considering an advisory called a ‘guidance,’ setting new rules on these nontraditional loans. Regulators say the final version of the rules will be announced within a few months.”
“The rule change has few supporters in the lending industry, and much opposition. In written comments to regulators, the Mortgage Bankers Association called the proposed ruling ‘overly prescriptive’ and said heavier regulation might stifle product innovation.”
“But the mortgage insurers, which cover the losses when loans go bad, see big problems. Their trade group, in a plea to regulators delivered in a comment letter last month, alluded to its fear of widespread foreclosures if some of these new borrowers default on their loans. An increase in such problem properties could weaken the real estate market and drive down home values even for those who bought conservatively and diligently paid their mortgages.”
“Not all lenders agree with the big banks and industry trade groups. David Dowling, a loan officer in Tampa, asked regulators to ‘ignore the lobbying efforts of those in my industry about keeping lax lending standards.’”
“He said he has had a string of elderly clients come to him for help after lenders placed them in adjustable-rate, interest-only or option loans. He said these borrowers did not understand that they had placed themselves at risk of losing their homes. Dowling said he has met people who had owned their homes free and clear and who lost them to foreclosure after taking out these loans.”
How many people work for you? You are on the radio and new posts appear! WOW!
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thanks, ben. great to hear the voice of this incredible blog:
ben’s parting advice on the show: “taxpayers, BEWARE: don’d let the gov’t bail out fannie mae and freddie mac for the $1-1/2 trillion bill for this bubble at your expense.
nice job, ben!
I’d echo the nice job comments, and also wished that some contrarian would have called in for fireworks (but they’re probably all at their open houses today). But I still don’t get the focus on Fannie and Freddie. I’ve repeatedly asked for evidence that they are big players on the risky side of this market, and have never seen any. If prices tank REALLY big time (drops of 20% in all markets, not just San Diego and Miami) credit risk could sink the traditional mortgages, but by that point Fannie and Freddie would have to stand in line for a bail out, behind the mortgage insurers who will take a hit long before Fannie and Freddie do, the hedge funds and their counterparties (who’ll take the hit when the exotic stuff goes bad) and who knows who else. And depository lenders should be lining up at just about the same time.
I’ll ask again - anyone have any evidence that Fannie and Freddie are big players on the toxic side of the mortgage market?
mort_fin,
It is not that Fannie or Freddie have taken on more risk than anyone else, they haven’t. Fannie and the Fredster have no explicit guarantees, they are GSEs, but they are privately run, and poorly at that. Exorbitant bonuses, cooking the books, they have been resistant to regulation or even suggestions by regulators. Ginnie Mae, by far, will take the biggest hit because of the nature of their guarantees and the fact that they insure securities explicitly, especially for low income borrowers. I think that Ben was just saying that the type of flatulent arrogance exhibited by Fannie and Freddie should not be rewarded by a bailout at the end of the day. Correct me if I’m wrong here, Ben.
They do subprime. FNM CEO Mudd said at the press conference the day he got the job that they would do more subprime. They are guaranteeing $billions in loans at insane levels, but the credit rating agencies all say the taxpayer is on the hook.
These two rank in the top five of the worlds largest corporations. With accounting fraud, mistatements, restatements, and the fact that Fannie has no timeline for filing financials should be a concern for every taxpayer. Remember, the serious fraud didn’t come out about the S&L’s until after many were bankrupt.
mort
“flatulent arrogance” I like that.
Ben and mort
I was pretty surprised when I saw Mudd make the statement that they would do more subprime. Talk about bad timing. Freddie has been doing subprime, at least in their investment portfolio, since around 1997 or so. But I’ve seen no evidence that they do much of it. 5% of their exposure being subprime wouldn’t surprise me, but 10% or more certainly would. People keep pointing to Fannie and Freddie being exposed, or even causing, the subprime boom, but no one ever posts evidence to back it up.
As far as accounting scandal goes, read the OFHEO report on Fannie. The accounting scandal was primarily earnings massaging to get the executives their bonuses. They combed over the risk management and their findings were fairly small potatoes. Computer code to calculate ARM resets wasn’t tested sufficiently sorts of things. They make excellent points about the corporate culture. Essentially “if the auditors were willing to massage earnings what else would they have been willing to do?” but they combed through the place pretty thoroughly and didn’t find any major risk management problems.
Besides which, everyone talks about them in the context of credit risk (and this blog is the housing bubble blog, not the bond market blog), but the biggest risk they have by far is interest rate risk. That’s what sank the S&Ls, and that’s what almost sank Fannie in the mid 1980’s. I’ve never heard anyone establish a major credit risk concern for Fannie (or Freddie). If they go down, it’s much more likely to be caused by some weird gyration in the bond market than by housing price changes.
Of course none of this means that they should be bailed out, or that people shouldn’t express a desire to be proactive about not bailing them out. It’s just that I’d like to see some back up for the statements that they have a major credit risk exposure, or that they are fueling the subprime boom.
mort_fin,
The proof, as they say, is in the pudding. Since we are calling it in advance I would say that we have done nothing wrong. If they do not fail, and consequently are not in need of a bailout, fine, no problem. If they do, tough $hit. ’nuff said?
Bail them out with what? The national debt is $8.5 trillion. That’s almost 3 full stacks of $1 bills that reach from the Earth to the Moon, literally.
Add $500B to the debt. Problem swept under the rug, like last time.
And watch the value of the dollar go to zero.
The dollar won’t go to zero till a new military superpower emerges. A betting man would point to China in 10-15 years. Until then, the US can do pretty much as it pleases.
To wit, when the first major oil produced switched from Dollars to Euros (which would have been a slippery slope to the end of the Dollar as the global de facto fiat currency) it was invaded and the oil sales reverted to Dollars. Of course, that may have been a coincidence.
“produced” ought to read “producer”
Nice parting shot there about Fan and Fred. I hope it wasn’t lost on Mark’s audience. That hour went pretty fast.
Did you hear the joke ads that Mark was running on your end? I enjoyed the pusher trying to sell credit cards to a ten-year-old
I just caught the last half.
No fireworks. I was kinda hoping for some perma-bull to take Ben & Rich to task.
The tide of public opinion has turned.
Great job guys! Ben and Rich - really enjoyed listening to you today. Interesting that (while I was listening) not one RE Bull (No, it’s different this time) called in. Could it be that even they have finally given up???
Ostriches. Heads in the sand, hoping to look up after it’s all over and miss the entire meltdown.
Trouble is… the FBs are all on a short leash with a bungie cord and the other end has an anchor on it headed to the bottom. Bungie is stretched almost as far as it can go…
Now much of Illinois is seeing year over year price declines. The housing market is coming down fast even in non-bubble ares! Article at http://www.homepricebubble.com
Geez, I missed it. Damnit I’m requesting from here on out that Ben posts a 24 hr notice when he’s going to appear in the media.
Anybody have it recorded or a podcast of the interview?
I agree, great show.
Alas, sound no longer emanates from my computer. Until today, I was OK with that. Time to look for a new one.
Save money, and go for an audio card and external speakers. I recommend Audigy 2 sound cards - I have one myself. They are one or two years old, and no longer on the bleeding edge price-wise. All told, $50 for sound card and $50 for speakers, vs $1000+ for a new, decent computer.
“the Mortgage Bankers Association called the proposed ruling ‘overly prescriptive’ and said heavier regulation might stifle product innovation.”
That’s what we need from the Lending industry - Innovation. SUre, with GSEs and the USG backing, who cares if the loans go south? Don’t we all want the everyone who wants a home to get one? How about H2 Hummers & Competition Yellow Corvettes for everyone too, while we’re at it.
Pathetic.
Why do insurers care one whit about how prevalent the use of “exotic” mortgages? Can’t they just raise their insurance fees to whatever level they deem appropriate for these risky loans? Why does the government need to get involved?
I agree that most of these I/O and option ARM mortgages will end in tears, but if the insurers and investors (who buy these loans from banks) don’t require big fees and discounts to compensate for the risk then they only have themselves to blame.
Their stated concern is with the loans they’ve already insured. You can’t raise the fees on those. An unstated concern, as I and others have indicated, is that they are being undercut by the Wall street funded providers of exotic loans. I wouldn’t be surprised if they are raising the rates on newly insured loans, but that just makes their declining market share problem worse.
Exactly. The mortgage insurers are being disintermediated by the Wall Street mortgage conduits. No wonder they are screaming. They could be completely out of business in a few years.
Calculated Risk had a great post on this topic within the last couple of days.
Tanta in the comments summed it up perfectly. There is nothing more to say after that. (Today’s post)
http://calculatedrisk.blogspot.com/
their concerned that these loans and the ensuing defaults will throw off their actuarial estimates on their losses. remember, people that bought mortgage insurance over the past few years were leveraged from 80-90-100%. if the market drops by 15-20% ,the mortgage insurers are 100% at risk on the pool of loans that they insure. they are trying to protect their capital, a silly concept these days when everyone sells their risk to the mbs investors overseas.
“Why does the government need to get involved?”
Mikhail — on that, you and I forever will agree. The question aptly applies, sadly, to far too many subjects these days.
This is exactly my question. Why aren’t the insurers charging larger premiums to cover the increased probability of a default? Problem solved! If they didn’t perceive the increased risk, then hold your own actuaries accountable rather than asking for Federal regs. Can anyone explain why they weren’t able to just charge appropriate premiums to cover the new risk?
What if they believe the risks are too high? Consider the premium you’d have to charge if 35% of the loans lose 35% of their collateral (home value) each year? You’d have to charge more than 10% of the home’s value as the annual insurance premium. Bought a $500K home, pay $4K/month insurance! This won’t fly! The lenders will be out of business!
“lenders” ought to be “insurers”
an article about “rising” rent in todays times.
http://www.nytimes.com/2006/08/19/business/19rents.html?_r=1&ref=business&oref=slogin
another interesting bit.
August 19, 2006
Off The Charts
A Car-Sales Indicator Suggests a Recession Is Near or Already Here
By FLOYD NORRIS
IF things are miserable for America’s new-car dealers, can a recession be averted? History says it cannot and suggests a downturn may have already begun.
The accompanying chart shows the rate of change in sales by new-car dealers, comparing the most recent 12 months with the 12 months before that; it is adjusted for inflation. The rule — unveiled here for the first time — is that if the figure is down 2 percent or more, a recession is either under way or set to begin within a few months. The figure fell to a negative 2.4 percent when June sales figures were released last week by the Census Bureau.
The available data go back to 1968, a period in which the American economy has recorded six recessions. The “dealer doldrums indicator,” as we will call it, called five of them, missing the 1981-82 recession only because it was not persuaded that the 1980 downturn had ever ended. It has never warned of a recession that did not occur.
A Car-Sales Indicator Suggests a Recession Is Near or Already Here
I love this line at the end;
There is, of course, no mystery now as to what the problems are for car dealers. They are pinched by the slumping real estate market because people can take less money out of home equity to buy cars.”
As if taking out HELOCs is a normal way to buy a car. And not a completely stupid idea.
One more stat showing we’re already in a recession.
Wake up and smell the coffee folks (oh wait, coffee shop sales are down in real terms for *all* of the chains, at least same store YOY).
To think, we’re only in the warm up act.
The HELOC bandwagon is about to dry up. As other’s have noted, appraisals are going to undergo a transformation (the current process is a joke). Mortgage insurance is going to be revamped… And the Mortgage secondary market is starting to run scared.
With the return of down payments… our savings rate is going to have to go positive in a big way. All of these people who HELOC’d themselves to the good life had better get ready to pay off their debt. Yes, I know many will walk away, but that’s a long discussion on its own.
Neil
John — what BS, at least for much of the country. Rents in east-central and coastal Florida are dropping, not rising. Simple reason: stuck flippers, trying to cash-manage their way out of a one-way hole to financial hell, are increasingly offering to rent out their fortune-makers, adding much stock to the existing inventory. From 12 months ago, I’ve gone from renting at a fair market price (and cheap, vs. owning) to carrying my (wonderful) landlord.
IMO, whatever rents are rising in select pockets of the country, it is an anomaly and renters should hold out for much, much better deals to come soon.
I find it funny that the Mortgage Insurance companies are “deeply concerned”. Mortgage insurance is a pure rip off, and exotic loans are cutting into their business.
“Mortgage insurance is a pure rip off…”
As is the title insurance business. You hear about as much about where those profits go as you do about the diamond business. Wonder if there are a lot of common bonds.
“As is the title insurance business.”
Is it ever. You’d be amazed how much fluff is built into these charges.
Whenever I close a deal and get the “Approved Attorney Rate”, a title insurance fee that costs, say $1,200, kicks back to me somewhere in the neighborhood of $900. Only $300 is the actual amount spent on the premium.
Then, when the title insurer winds up on the hook for something, they fight tooth and nail to deny coverage. I had a client recently who sold his mother’s home. Stupid title insurer didn’t do a bring-down, and a local taxing authority slapped a $3,000 lien on the property after the title search was done, but before the home closed. The insurer is now going after my client, who I’ve advised to lay low — pay up only if he’s sued.
I have watched the “title searchers” at the courthouse. They spend just a few minutes per app… many of them not even looking at things like fixture filings, probate errors, or what happened to the title before the previous owner sold. Just plowing through the paperwork. These aren’t even the attorneys, just clerks!
It looks like pure profit padding for the closers. I bet they just accept a bad title or two, as part of the cost of doing business.
It’s not just the “exotic loans” that are the danger, it’s that banks have been willing to lend 6x - 9x gross income, so people have bigger mortgages than were previously allowed.
6X-9X Unverified gross income to qualify for teaser rates. Now a recession? Talk about a wipe-out. GWB will be in offices for the greatest catastrophes of our time. Most of it simply bad timing. Of course the next President and most likely the one after that won’t have it easy either.
Financial catastrophies. We are already had 9/11, Katrina, Tsunami, Iraq War, 12 million illegal immigrants under his watch and the list goes on. He is either the bad timing president or he just sucks. It really depends on what side of the fence you are watching from. I tell my kids, “It is not what happens that defines you it is how you react to it that defines you.”
I would make the case that this housing bubble is sort of a reflection of what the current political climate is all about. I’m sorry if that offends anyone, but there are some remarkable parallels in behavior and end result.
You are (of course) free to speak your mind here. I would suggest that much of what has happened is disconnected from the people who have been elected. Also no matter what side you take, understand that probably around half of the readers here will be on an different side. In these days I have found very few remaining open minds on matters of politics.
Sig, your point is taken. This being a housing bubble blog, and that being the main area of agreement, politics is most likely best kept out of it. Although that is sometimes hard to do, when certain policies contribute to current situations. I have always believed, based on good observation, that in any group, whether that group be a country, a company, a charitable organization, etc, things trickle down from the top. For example, I use an a shipping service that has operations all over the world. My experience with the customer service people on the phone and with the delivery people on the ground has been consistently stellar, without exception. I am amazed every time. The spirits of the employees are very high. And that is how I know that the owners and management must be exceptional. Same goes for the grocery chain I patronize here in Florida. If both companies were public, I’d buy stock, but they are not and maybe that is why they are so good. I look at policy and examples as being set at the top and these usually manifest in standards of operating procedure on the ground. Would that we researched our elected officials as well as we do the appliances we purchase.
Was W responsible for the bubbles in Canada, Australia, and the UK?
Man, powerful guy… and here we all thought he was an idiot.
The Fed, with the petrodollar and the world standard of US$ reserves, make decisions that have repercussions through-out the world. A housing bubble in Canada, Australia, and the UK would not have happened had the Fed not gone bonkers on the liquidity game. Further, there were many articles in 2004 as to how Greenspan would help GWB through the election, unlike how Greenspan’s lack of aid took down his old man. All-in-all, when I think about how this is all going to play out, I’m beginning to wonder who’s “side” the Fed is on?
Most of it bad timing…Being from Texas and seeing this illegal thing first hand, I am amazed. GWB did not bring them here (many were here already), but why this gov. and the ones before it will not do anything to stop the flow is unbelievable.
This whole mess started with Reganomics. Unending deficit spending, and tax cuts for the wealthy and big business. The republican party has strayed too far from it’s mandate. I’m ashamed to be a registered republican.
The republican administrations deserve to have this mess blow up on them for starting this mess.
Mike, I hear ya, big time. Another recovering republican here.
never ever accept respnsibilty for your actions - never.
It was those mean rascally repubs that stuck a gun to my head and made me go deep into debt.
Yeah I ‘m a dumb demo that doesn’t know any better - please help me H dean - tell me how to live b4 its too late.
I’m talking about the national debt mess, and the tax law mess that the republicans are responsible for. Before Regan, who I liked, the business community were paying 32% of revenues collected. Now their paying 8%. The change in tax laws, started by Regan, were meant to help us out of a recession, but not be perpetuated to this day.
Put some of the blame for the RE mess on the federal reserve for allowing toxic mortgages, and keeping interest rates too low for too long.
Add both problems together, and it’s one hell of a mess.
If your an FB, thats your problem, blame mostly yourself. You made your bed and your going to sleep in it, not me.
beechdriver,
Are you being sarcastic or do you think only registered democrats are flippers? I would love to find out the political affiliation of FB’s. It is most likely equal. However, I would like to point out that my Irvine friends, who spend every dime they make, refinanced 3x, HELOC’d to buy 2 time shares, and have an I/O on an Idaho spec house, have a framed poster of George Bush hanging in their house.
“Now their paying 8%.”
“…and your going to sleep in it,”
I tell ya, anyone who writes this poorly is just plain hard to take seriously. How can anyone trust the judgement of such a person? I am, of course, directing these comments toward a third of the posters here - so take the advice however you will. Clean it up if you want to seem respectable. You seriously need to have a little faith on this one. It just looks uneducated.
Don’t tell me you’re writing quickly, and without desire to check for errors - this I understand. That would yield mistakes like “teh” or “adn.” These are known as typos. Consistently blowing their/they’re/there, you’re/your, and lose/loose…
This is just ignorance.
I’m grammatically challenged, or too lazy to retype. Pick one.
Or laziness. I taught English, but I sometimes commit the same sin of not proofreading. Seriously, though, to seem credible, I believe proper use of “your vs. you’re”, and “their vs. there”, and “lose vs. loose” are rudimentary.
Conjunction junction whats your function.
It functions when your conjuctions help join your functions!
OT:
I believe there exists a ready market for blogging software with built-in spelling and grammar review functionality. When I cut-and-paste pieces of wisdom from this blog into my Word document, it finds many mistakes that my brain interprets on the fly. Come on, Microsoft! Help us out! Or Google! Or Word-Press! Or whatever company that makes the blogging software that we use for this blog! It’s time! Please!
“Conjunction junction whats your function.”
Better, only 3 mistakes in this sentence.
Mike, Palmetto, Beech — the Libertarian Party has a lot for each of you. Whether representative of party registration or not, and likely the latter, there are vastly more libertarians, in thinking, on Ben’s blog than you will find in the general population. Smart folks want less government in their lives, IMO, than sheeple. The two mainstream parties represent merely different forms of more government.
There is no democrat or republican party anymore. Their both bought and paid for by the business community. They work for the business communities agenda. I consider myself an independent voter. I’m now smart enough to vote for those who will work for, my working middle class agenda, and do the right thing. I know the difference between right and wrong, and, good and evil.
Mike, I made the a similar comment in another thread and got flamed big time by a couple of posters who appeared to have a dem orientation. Of course, I couldn’t resist a little bit of baiting back, so was the architect of some of the flaming. Anyway, I think Chip is trying to present some viable alternatives and I understand what he is saying. In the last election, I did cast a vote, but it wasn’t for a Dem or Rep. I just couldn’t bring myself to do it. My accountant, a very wise man, told me that he always split his ticket, the purpose being that it was best to have a president from one party and a Congress from the other party, so that both sides would be so boondoggled and occupied by each other, that they would be pretty much unable to do too much effing with the people. He voted so as to contribute to the boondoggle. Under the current system we have, I definitely think that is the way to go.
I can’t wait for the September 5th primaries in FL. If there is no candidate who will get tuff on cheep illegal alien labor, which undermines my wages, I adopt the, throw the bums out mentality. That means, vote against the incumbents.
Oy, don’t even get me started on that subject. I touched on it lightly in another thread. Real lightly. The only candidate that seems to be taking a stand is Gallagher, oddly enough, and a smattering of old time (not neocon) repubs here and there. Most are tapdancing around the issue. But that issue can only be solved ultimately by the repeal of NAFTA and CAFTA and related new world order trade agreements. The housing bubble builders have encouraged a lot of the problem.
I’m betting that the problem will be solved with a complete economic meltdown in this country.
My accountant, a very wise man, told me that he always split his ticket, the purpose being that it was best to have a president from one party and a Congress from the other party, so that both sides would be so boondoggled and occupied by each other, that they would be pretty much unable to do too much effing with the people. He voted so as to contribute to the boondoggle. Under the current system we have, I definitely think that is the way to go.
Unfortunately the one moment when both sides seem to be able to get together and easily sing cum-bay-ah is when they want to raise taxes or increase spending.
LOL. Given that the populations of much of South and Central America have experienced economic meltdowns of various degrees over the last 20 years, illegal immigrants may be better equipped emotionally to deal with the situation unfolding today.
As for the “throw the bums out”, I wish it were that simple. I just wish that people would do their “due diligence” when picking their representatives. There are many wise and good men and women for both parties at all levels (fed, state, local); however, I just wish that the good ones would “shine through” more often.
Yes, I long for the days of Jimmy Carter - double-digit interest rates, economy in the toilet, rendering America feckless in all international matters.
Those were the days!
And happy days are here again!
We don’t have double digit interest rates yet, but as a result of the bubble and lax lending standards, for many the economy is already in the toilet and for others, they are starting to hear that giant sucking sound. As to America being rendered feckless in all international matters, happy days are definitely here again.
The entrepreneurial-spirit and risk-taking attitudes of flippers of recent years, were fueled by the innovative toxic mortgage products. Ask any flipper, trying to sell a property today, how that’s working out for them. FB comes to mind.
Just this week, I herd President Bush and CNBC pushing the entrepreneurial-spirit and risk taking mumbo-jumbo on us again, and how wonderful innovation is. Any average Joe can do it. No skills required. Yeah Right. So many stupid people buy into this crap, I feel like I live in a country full of morons.
Entrepreneurial-spirit, Highly overrated.
Risk-taking; Highly overrated.
Innovation; Highly overrated.
Add to that, teamwork and team players; Highly overrated, just for kicks.
I’ll add to your list,
piano lessons, sushi, Hummers, the name Hannah,
tropical fish tanks, new cars, Summer Blockbusters,
Alex Rodriguez 3rd baseman for the Yankees, all highly
over-rated
Well, isn’t this the “ownership society” GW was talking about? He wanted everyone to own something and by God, we do. Lot of debt.
Piano lessons? Even boogie piano?
Chip, yer crackin’ me up here.
Awww leave sushi alone
No, kill it. Every person I know who suggests Sushi thinks that they are some sort-of highbrow, cultured person, when in reality they just happen to be band-wagon jumpers paying exorbitant prices for rice and raw fish. It’s past-time for the middle class to get back to the basics, by which I include reasonably-priced foodstuffs and earning-a-living, rather than this money-out-air housing gambit, etc.
I take it you don’t know any Asians, then.
Your list fascinates me!
1. You listed Hummers and New Cars separately. I can only assume from this that you are talking about the kind of hummer that would be very hard for any male to agree is over-rated.
2. Sushi! I love this one. What is this recent (last ten years?) obsession with eating sushi? I love japanese food, but never eat the sushi. I guess it goes along with the 20″ chrome rims mentality? Is sushi a status symbol? How sad.
3. Tropical fish tanks, new cars, summer blockbusters, and A-rod. Those are all easy calls. Everyone over the age of 26 should have realized all of these.
4. Where did “Hannah” come from? I have to know.
I have lost pretty much all respect on ever subject save standing up to terrorists for our current President, even though I voted for him twice. But I will also state that I truly believe that the things that have kept this nation a vibrant and interesting place to be are the entrepreneurial spirit and the American tendency to build teams.
Sadly that has atrophied as of late, as it seems that most people are more interested in ripping each other off to make money rather than coming up with the next greatest thing. Add to that the prevalence for wanting to be the Rock Star / Show Boat / Ace Loner rather than part of a winning team and you can see where some of America’s edge may have gone.
The good news both of those core success values are still dished out by the bucket full by the Armed Forces.
As a small business owner myself, if I have a candidate who was in the Armed Services I would much rather hire them than anyone else – if for no other reason they usually know how to work as a team.
Prudent risk-taking, innovation and outstanding teams will win every time in any field of endeavor. I would say it is the only thing that the USA has been able to hang its hat on. While much of that is masked these days (especially on this blog) by insightful talk of the impending correction, the core of it is still there. When the fraudsters and rip-off artists are sidelined by the correction, the fundamentals will still win the game.
The “team-work” concept in business, is a tool used by the wealthy business owners to make themselves richer by maximizing productivity. The majority of American workers today make less money than they did 5 years ago. So, the productivity gains from “team-work” has done nothing for them. This is a capitalist society, not a socialist society; as is “team-work” a socialist concept. Team-work should only be exercised on the sports field, not in business.
Mike, “team work” has been twisted into exactly the concept you have expressed above. During the mid-century (50s, 60s and even 70s) team work was taken for granted in many companies and never talked about, because no one ever needed to. People were productive during reasonable working hours. Many had benefits, reasonable vacation and sick time, paid lunch hours, etc. There was plenty of money to go around. In many cases, management truly cared about the welfare of their employees and vice-versa. I’m old enough to remember when department stores tried a bold experiment and started staying open until 9:00 Thursday nights. Are we better off now that we have a 24/7 “bottom-line” oriented society? Nothing is wrong with profit and I have no beef with those who are smarter and more capable than I being remunerated more than I. But, when you have hedge funds that produce no real product, eff with the national and international economies, taking money out and contributing nothing to society in return, not even employment, save for a handful of mathematical eggheads and administrative people and maybe the construction of obscene palaces for their partners, that’s a problem. I would suggest that it is nothing more than legalized thievery and I am not surprised that these hedge fund partners have obsessions with bigger and bigger homes. They are trying to satisfy a need that only real achievement and production can satisfy.
There is a lot of rotten corruption in things like hedge funds. I would submit to all the learned readers of this blog that this is a historical anomaly.
As many have pointed out elsewhere and here that some of the fundamental mechanics of the economic system have been “gamed” for the last 10 years or so, displacing risk from places where it should not be removed. I would think that this cannot and will not last forever, as we really have not had a large sustained correction in quite some time. Dramatic re-evaluation of what the risk of investments like these really are will likely dry them up significantly (but not completely) for some time to come.
Just like you probably won’t see Option ARMs ever again once all is said and done, most of this hedge stuff could go away.
Again, this is just me looking at it from a math standpoint, not being wise on markets or economics. Just as you cannot sustain 20% price appreciation in any commodity *(like houses) this hedge stuff must at some time succumb to gravity.
Palmetto, I agree, and there’s nothing wrong with contributing to producing a quality product that your company can sell for a decent profit, and being rewarded for your efforts. But the rewards are getting smaller and smaller. It seems to me today that the lower paid workers in a company, are subsidizing the higher obscene compensation of the executives. The powerless lower and middle class who can’t do anything about it. If we protest, the executives will just in-source a lower wage worker from south of the boarder or out-source our job to cheaper labor in India or China. I like watching this whole thing ending very badly. Maybe then, we can get back to doing what’s right for those that actually produce.
And that is the true bottom line, Mike, production. Production of decent goods and services. When money represents those goods and services, it is valuable. When it doesn’t, it makes lousy toilet paper.
You paint with a rather broad brush there, but I guess that is how one can summarize things.
For me the reality is very different. I run a small company (6 people) in a very competitive business. The people who work for me are highly skilled technical people that I have carefully recruited to be part of a team. We all bust our ass for the goal of making this thing a success.
Am I wealthy? Well, I used to be that much is certain, but I would not call myself that now. My highest paid employee makes 86% of what I make as the boss. When we make money we are all going to get a cut. You can call that socialist if you want, I call it being smart – I want these hard chargers to be incentivized to win. And as my buddy who founded a successful company told me – nothing compensates like cash.
I would submit to you the smart capitalist makes sure that the people who contribute to the success get a share of the rewards. That’s how you keep them working for you.
Sorry for the business philosophy section. The subject of teamwork, leadership and rewards for innovation is a hot personal topic for me at the moment.
sig, you will get no argument from me on this. Essentially I agree with you. This is how companies I worked for and with used to do business. Production was rewarded. What Mike and I were discussing (I think) is how the concept of teamwork has been bastardized into all this harried, hectic work with little or no real reward. As I said earlier, in another time, teamwork was taken as a given, no need to talk, just do it. Now it has become in many cases an empty buzzword, code for working your butt off without any real reward, just to keep a job. I used to work for a company that had real teamwork without blatting about it all the time, people just did it and everyone made money. But the owner got tired and wanted to semi-retire, so he brought in layers of useless management and consultants who really blew it out their a$$es about teamwork all over the place, like it was something new. These parasites got enormous salaries, screamed “teamwork” at the boots on the ground and started outsourcing all the factory work to China, Malaysia, etc. The product became crappier and the delivery chaotic. Production was measured not by how much you could sell, (which became harder to do as the quality deteriorated) but by who was the best BS artist. One of the top parasites started slicking his hair back like Gordon Gekko, I swear to God. Well, needless to say, the company, although still in existence, is pretty much on life support. I haven’t worked for them in about five years, but I did hear that another one of the top parasites met the same fate as Ken Lay. And I’m not ashamed to say I didn’t feel a moment of sorrow.
Sigalarm, I didn’t mean to offend. My brush probably only covers 90% of small and big business out there. The people that work with you, are a privileged few. I work for a Fortune 500 company as a machinist, take pride in my work and am well educated. I earn 3/4 of what I earned 10 years ago, with less benefits. They get more than their monies worth out of me and they know it. They try to push the team-work thing on me, and I tell them, team-work is highly overrated and there’s no reward in it, and they know I’m right. Just look at my compensation which I cannot control, that’s controled upstairs. I’m not a simple minded drone. That’s the macro-economic reality for most of us, for reasons beyond our control.
Mike, wow, I really understand this. If you are here in FL, this is a widespread problem. On top working more for less money and benefits, here comes the housing bubble to make Florida even more unlivable.
You’re well-educated? You made 8 mistake in 9 sentences.
people should quit whining about other’s mistakes. You made one in two sentences!
While I myself strive to write accurately here, you fail to realize that this is akin to a conversation. People here aren’t writing for the ages and many don’t care. Many also write in a conversational tone for which grammer is much less important. You do yourself as much a disservice by ignoring the content due to formatting as they do in writing poorly.
Plus, u know, ur dumb ‘n stuff.
You made 8 mistake in 9 sentences.
You just made one; congrats.
Yeah, what feepness said. I get lots of useful information out of this discussion, regardless of what the Grammar Police think. Maybe I’m just well-educated enough to interpret this on the fly; if so, then I thank my mother! Or maybe I’m just too dumb to catch the errors, in which case I blame my father! [Chris Rock reference - for those who aren't well-cultured or L33T Supa-LOLz! :)]
Regardless, “team player” is one of the seven “values” that our company decided to implement. Of little surprise, the call-center managers think it’s a great idea, while the engineers thought “wtf, we do this already”. I’m always a valuable member of my team, regardless of what some little motivational-speech-and-poster-of-the-month suggests.
Sol, all of that motivational crap is a laugh. For the real versions go to dispair.com - I have that stuff on the walls. Most of the folks I have known since my 20s are in the tech business, and we all make things via small companies or small teams that are inside of larger companies, but work in a “startup” mode.
I know many many good jobs making things of value got shipped overseas (I bitterly opposed NAFTA at the time), but not everyone threw in the towel just yet.
If it really does hit the fan it might be advantageous to bring some of those jobs back too, FYI. But we will just have to see how it all plays out.
I think the whole globalization approach assumes that if we are all selling each other stuff we won’t try to blow each other’s brains out in wars. My Jarhead training from the dark ages tells me that is just wishful thinking. Imagine the panic if there is some kind of conflict (not even a war yet) with China and suddenly we can’t get our iPods or computer parts any more. That would be quite a shock to the system.
You made 8 mistake in 9 sentences.
You just made one; congrats.
Underappreciated.
Yes, people. Not a single one of the 8 mistakes referenced above was a typographical error. All made due to a lack of fundamental understanding of the English language. Typos are a mistake of a different nature. They’ll happen to anyone who doesn’t proofread (that’s most of us, at times). You’ll never see me bitching about those.
I’m no bazillionaire, but I’ve done pretty well for myself working for myself, and my rule of thumb (as what I think the grandparent poster was intoning), is that when building a business, selling a service, etc., you’ll do better coming at the problem as, “How can I help people solve a problem,” as opposed to asking, “How can I best get mine?” This idea also extends to collaborating or working with coworkers/subordinates. If everyone is only watching out for their own interests exclusively, no one wins.
Sadly that has atrophied as of late, as it seems that most people are more interested in ripping each other off to make money rather than coming up with the next greatest thing.
I’ve noticed that as well. There’s always been such a tendency, but it lurked in the shadows, ashamed of the light. That no longer seems to be the case.
Perhaps the fact that this tendency is now in the light is a good thing. Wasn’t it Supreme Court Justice Brandeis who said “Sunshine is the best disinfectant”? I don’t believe our society is yet that far gone, because I see more and more people denounce the tendency for what it is, rather than encouraging it. And these are people of many different backgrounds, econmic strata and political philosophies. I always felt the best and most chilling example of this tendency was heard in the Enron telephone tapes of energy traders mocking the people of California struggling to pay their energy bills. I will never forget the anger that I felt at hearing these soulless, dickless wonders gloating over human misery.
Crap, I’m about to get socio-philosophical.
That “screw-grandma” attitude came DIRECTLY from the “you can’t be allowed to succeed naturally” approach. Essentially we’ve spent 70 years engineering a system where natural skill and drive get stepped on. What do we have left?
Graft.
And we are to blame.
feepness, a little introspection is good for the soul. Although I’ve never had much of a liking for the “We of society are to blame” philosophy, sometimes there is something to it. I completely agree that parasites have come to be lionized, while slowly sucking the life out of their hosts. Sometimes it is not even the fact of the enormous amounts of money being hijacked that irks me as much as the insane glee with which the parasites do the hijacking. And that’s what I meant many posts earlier about a parallel between the current political and financial climates. Even though I am a recovering republican, I felt the same anger when I watched Max Cleland, the paraplegic Vietnam Vet and Dem representative, get savaged by the neocon political propaganda machine. But I didn’t speak out, and I should have. I am speaking out now, at the local level. The current administration was intertwined with Enron, as I believe it is with much of the current financial/economic system.
What has atrophied is what the true “Entrepreneurial-spirit “has morphed into. Not everyone is cut out to be a chief. The system cannot function with all chiefs and no indian warriors.
Would you agree that someone who wanted to buy an older, rundown property in an otherwise good neighborhood, fix it up with quality construction and a lot of sweat equity, and sell it at a modest profit is/was a flipper? I do, and I congratulate them!
The problem lies with the other 90% of flippers who bought pre-construction or just did the cursory paint, granite, and stainless. Big difference, IMHO!
I will disagree. The American economy tends to be more resiliant than the European economies because of the very reasons you dismiss. e.g., Intel, AMD, CISCO, etc. Yes, their stocks have tanked. But they still employ a lot of Americans via innovation.
Oh, this downturn will suck and be horrible.
What’s our economy going to do in a credit crunch? Yikes!
Neil
“‘We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans,’ Suzanne Hutchinson, of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators.
A recent letter? Suzanne, you’re a little late sweetheart.
Wonder if Suzanne researched this?
She sure gets around…no wonder she’s worried about potential contagion.
Sorry to be redundet, but this week’s Barron’s article paints a very nasty picture. The sad part from my perspective is that a great many people with a lot of equity in their houses got sucked into this mess. Folks who had 200, 300, 400, 500K of equity which may have provided a decent retirement bought into this nonsense. Instead they have HELOC’d themselves up the Wazoo. Oh Well!
link or summary please!
Peter — ditto SunsetBeachGuy’s request. I tried to surf to the article you referred to earlier today, but it requires a subscription. What did it say?
Go to “weekend bits and buckets”. Two short recaps. They will give the jist of the article.
Unfortunately, I’ve missed Ben’s show. But I’ve been puzzling over the issue of avoiding a massive bailout since last year. I heartily want to do something, but keep running into the same walls..not of inaction, but of education. If voters in local races want to vote for candidates against bailout, how is it possible when the issue is not on even on their agendas? After living through the S&L fiasco, I’m remembering that it seemed like a quick hoodwinking. Does anyone here have any suggestions?
Bail them out with what? The national debt is $8.5 trillion. That’s almost 3 full stacks of $1 bills that reach from the Earth to the Moon, literally.
Benny will just print up some more. No problem.
Pat — you’ve shined a light on a major flaw in our election process. There is no general forum in which the electorate can post their major concerns. If you belong to either of the two major political parties (they are, IMO, two branches of one big-government party), you tend to vote for the lesser of two evils and your core concerns likely are never directly addressed.
But suppose there were a site in which you, collectively, were able to vote about your priorities. Would you participate? A heck of a lot of people would. Has anyone EVER asked you how you feel about sending, in 2006, US taxpayer dollars abroad as “foreign aid”? I’ll buy you a cup of coffee if they have. No entrenched politician in Washington wahts to open that Pandora’s box, but some enterprising “Son-of-Ben Jones” probably will come up with it. The Truth (Internet) Shall Set Ye Free, only if freedom-seekers gain a strong enough foothold before governments restrict the medium.
….Unless and until net neutrality is voided….
Regarding the topic: Here in California probably 90% of the people who have Option ARMs make the minimum (below Interest-only) payment. They do this because they cannot afford a higher payment.
I have long felt that the riskiest loan program is the 100% financing. This contributed to pushing prices well beyond any reasonable level. This is mostly the 80% first and 20% second loans. The loans are usually interest-only for 2 years (sometimes 3 years) then they adjust and go to fully amortized, and have a big payment shock. What is really crazy is I have seen Option ARMs advertised in these 100% financing programs….to $1 milllion!!
I thought we reached lending insanity by mid 2003. I am amazed that it continues. (I work at a bank that does not lend Option ARMs, or 100% financing.)
Sensible — in the context of “Last man standing,” you’ll still be standing. Good for you and for your bank.
There’s not much point in standing-up if everyone else is sitting on their ass (waiting for a bail-out).
Traditional bank hand outs are to merge them into a well managed (healthy) competitor. Oh… its a very good thing to be the “last man standing” in that business. A very good thing.
Last night I had dinner with a friend, who wanted me to talk to his friends who own a local bar/entertainment venue. I have lots of projects and technical ideas, of which could promote these businesses. Perhaps a bit .com style, but really cheap to implement.
The business owners are skeptical, which I can understand. My friend says their mainly only interested in making lots of money with no work. They used to work hard at their business, but don’t anymore. Their prices are high in comparison to similiar venues, and that might be driving away the customers.
I tend to feel all the easy money in real estate has undermined the rewards of working. Anyone who previously owned a house seems to have won a lottery on the backs of those that don’t own.
Of course, all our manufacturing jobs are mostly gone, and we are supposed to be a service economy now. But if you’ve called any major US corporation on a non-sales related issue it’s pretty obvious that our service is a joke.
VaBeyatch — an apt, but depressing point on which I’ll probably dwell as I now head for the rack. Every time I read about our mostly-service-based economy, I’m reminded of Econ 101: no one prospers if everyone is employed just to do the other fellow’s laundry. (or something very close to that)
I am glad that I have found this blog. We have lived a frugal lifestyle well below our means and have been chastised by friends for our parsimoniousness. We never knew how or why people would borrow against their home to by cars and consolidate debt (ususally for impulse purchases that have long been forgotten). Now I am glad to see that we are not the only sane ones in America. I was beginning to question myself. Thanks for this blog.
You are sane along with many on this site that had the guts to say no to spending beyond their means. We all like nice things and would like to have many things we cannot aford such as a new Lexus,or a million dollar home but we will all survive just fine while our over consumption community fights for their survival in a coming down turn that will seem we have entered the great depression era.
“produced” should read “producer”
These are the people who most have to fear the bubble.
Speculators should know risk they are taking.
“conservatively and diligently paid their mortgages”
These are the people who most have to fear the bubble.
Speculators should know risk they are taking.