August 16, 2013

Weekend Topic Suggestions

Please post topic ideas here!

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Comment by Ol'Bubba
2013-08-16 04:49:40


Comment by Al
2013-08-16 05:57:56

I like them with maple syrup.

Comment by Blue Skye
2013-08-16 20:08:33

I made some a couple days ago with chopped up peaches. Blueberries are my favorite, or maybe chopped apple. Always with real maple syrup. Bisquick usually.

Comment by Arizona Slim
2013-08-16 09:15:51

I make my own from scratch. Whole wheat pastry flour, two eggs, and baking powder. Add a little water, mix, cook and enjoy!

Comment by Michael Viking
2013-08-16 10:37:52

I use the 3-2-1 EMF formula. 3 Eggs, 2 cups Milk, 1 cup Flower. Simple to remember, easy to make. They’re more Swedish hotcakes rather than pancakes though.

Comment by Bill, just South of Irvine, CA
2013-08-17 11:03:26

Krusteaz, just add water.

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Comment by polly
2013-08-16 05:11:09

I think a discussion of the 30 year mortgage (and the government intervention that is necessary to keep it around) would be interesting. Here is an article arguing in favor of it. I’m sure there are plenty out there arguing against at least the government intervention portion and probably the idea of the 30 fixed mortgage entirely. Article is pretty short, so I will provide all the text, but click through to the article anyway. I’m sure I’ve mentioned here that the Fannie building looks like it wants to be an English country manor. There is a photo in the article.

In defense of the 30-year mortgage

By Mike Konczal, Published: August 10 at 9:00 am

When writers are forced to discuss the complicated world of housing reform, as they have had to do after President Obama’s recent housing speech, they usually rush to one of two meta-conversations.

The first is whether or not we emphasize homeownership too much, and whether we should encourage more people to rent.

The second is whether or not the 30-year fixed-rate mortgage, which President Obama and many approaches to Fannie/Freddie reform want to preserve, is a luxury, and a subsidy not worth preserving after the crisis.

Given the complexity of the debate, I don’t blame anyone for going meta. The Center for American Progress put out a document that charts out the minor differences between 26 (!) different plans to reform Fannie Mae and Freddie Mac (the GSEs). But readers should know that GSE reform does impact them even if they are a renter, and be aware of the strong arguments for why a 30-year fixed-rate mortgage is worth preserving.

Fannie and Freddie aren’t just for homeowners

Let’s get the first conversation out of the way: The GSEs play a major role in providing financing for mortgages for multifamily units that go to fund apartments and other rentals. As Andrew Jakabovics and John Griffith of Enterprise Community Partners note in an informative editorial, the GSEs’ credit guarantees were especially crucial “to keep money flowing to the multifamily rental market during economic downturns.” Pre-crisis, the GSEs accounted for almost 30 percent of new multifamily mortgages; during the crisis it’s been closer to 60 percent, and hit 85 percent in 2009. Without the GSEs, the huge run-up in rental rates during the crisis would have been much more vicious.

FHFA, in a recent series of studies, found that, without the government guarantee, this market would have little value, and that private investors wouldn’t sweep in to pick up the slack. If the credit guarantee was to be dismantled, FHFA estimates that rents would increase between 0.2 and 2.1 percent, and new rental housing supply would decrease anywhere between 4 and 27 percent.

Sorry renters, you have to pay attention. If you live indoors, and even if you cannot afford to live indoors, you have a stake in this debate.

Why back up private mortgages?

Before going further, let’s break down some of the jargon. Before the crisis, the GSEs were private firms that would create mortgage-backed securities and retain the credit risk. They had an implied backstop from the government. Since the backstop was only implied, this insurance was never explicitly priced. Meanwhile, private-label mortgage-backed securities (PLS), which took over housing in the 2000s and are associated with subprime loans, did not have this credit risk guarantee. They were thought to be safe as a result of stream of private financial engineering techniques.

The approach being considered in the Senate, as well as by Obama, has two parts. First, it would create something like an exchange for creating, standardizing and regulating new mortgage-backed securities, and create an agency, the Federal Mortgage Insurance Company (FMIC), modeled on the FDIC, for this purpose. This would sell catastrophic risk insurance on those securities for an actuarially fair price, thus making it the government guarantee explicit and priced. Investors would still take the first 10 percent of losses in this case. The House bill, PATH, would have a weaker exchange and no guarantee, leaving the entirety of housing to the PLS market. (A good, accessible summary is here.)

There are three broad reasons to support the credit guarantee included in the Senate plan. The first is that the PLS market is a mess, and unlikely to recover soon. There are record number of defaults, but also conflicts-of-interest, bad servicing and endless lawsuits. Even if it does recover, there’s little reason to believe the PLS market can cover the entire demand for U.S. mortgages by itself.

The second is that providing macroeconomic stability is a legitimate and important function of the government. After the crash, the government had to step in, prevent a banking crisis and run the entire mortgage market after private capital disappeared. As such, the government holds the tail risk of the mortgage market imploding already; why not make this insurance explicit, while also regulating and pricing it?

We need 30-year mortgages

And the third reason is to preserve the 30-year fixed rate mortgage. But wait, why should we preserve that? As David Min, a law professor at University of California, Irvine, has argued, there are several broad reasons to continue this mortgage.

The 30-year fixed rate mortgage provides certainty over costs for homeowners. There’s cost certainty in relation to interest rates, but also when you compare the 30-year mortgage to other mortgages, which require consistent refinancing. Prime mortgages with a fixed rate have a lower overall foreclosure rate than adjustable-rate mortgages.

This stability is mirrored in macroeconomic stability. Before the Great Depression, mortgages were usually short-term, with variable rates of interest, had bullet or balloon payments, and needed to be consistently refinanced. This is also what you would think of when you think of the subprime loans of the 2000s that characterized the PLS market. And these loans tend to facilitate pro-cyclicality in the housing market, with more dramatic swings with short-term interest rates.

Meanwhile, the 30-year fixed-rate mortgage puts interest rate risk on those who can best handle it. The broad financial universe of lenders puts large resources into analyzing and responding to interest rate risk, resources individual households can’t deploy. You see this in the data; foreclosures for adjustable-rate mortgages are significantly higher than fixed-rate mortgages, even when both are prime. The 30-year fixed rate mortgage is just good business sense.

A lot of people cite the availability of loans for wealthy homeowners in the high-end “jumbo” (loans too big for the GSEs) market as sufficient proof that there’s no need for a government role in housing. But there’s no reason to believe that this will scale to the size of the United States’ housing market or even outside the very wealthy. As Georgetown University law professor Adam Levitin has testified, the jumbo market is small, perhaps 10-15 percent of all origination. It also piggybacks on the GSEs by locking in rates through their markets and hedges their risks through GSE instruments.

The market gods will not save you

It would be nice to imagine that the “free market” will just take care of this issue. But remember that the housing market is created through a huge web of government policy. The PLS market, that choice of those who claim the free market, was created through a wholesale revision of law in the 1980s, from tax law to replacing state laws with the ratings agencies. Without those changes, PLS wouldn’t even exist. The question is not whether government should play a role. It’s what role government should play.

This is, in broad strokes, the argument for keeping the government’s mortgage guarantees, and preserving the 30-year mortgage. If you think it’s appropriate for the government to charge a fair fee for catastrophic insurance, and to nudge interest rate risk onto lenders, while working to ensure the stability of the macroeconomy and accessible mortgage credit, then the Senate bill has something for you. If you think that handing over the entirety of the housing market to the mortgage industry of the 2000s is the right approach, then the House bill is more your style.

Comment by polly
2013-08-16 08:09:08

Sorry. Longer than I thought.

Comment by Patrick
2013-08-16 13:56:20


Excellent topic. You are probably aware that Canadian terms tend to run only to five years, so hearing that the USA does 30 is a surprise.

My thoughts are why would a bank invest in these:
1. because they can be insured
2. because they can be securitized
3. because they have changing values; ie interest rates lower than contract then mortgage is worth more, etc

I agree that not all people probably have them for full term, having borrowed up, separated, etc and I also agree that knowing what percentage of these make it to term might be a surprise.

I think the Private label should not be insurable, require 25% down, along with all debt service numbers - including DTI.

I think these 30 year have a place though because they allow lesser incomes to purchase. I think these are the only mortgages that should be insurable by the government. However, at least 10% down should be required. The gov should also enforce the banks to have a percentage of their inventory in these types of mortgages, and representative of all social status and location.

Comment by TRUTH
2013-08-16 08:14:40

How many people work at the same job for 30 years? How many people have the same spouse for 30 years? The 30 year mortgage = three decades of mortgage albatross debt slavery for broke ass LOOSERS!

Comment by shendi
2013-08-16 18:06:34

With the boomers retiring in droves :) will there not be a boom in move-up jobs? The existing under 50 folk get promoted and so on until they need new 20 somethings to the do the menial work?

Currently, almost all the boomers in STEM, especially the TE fields, are all directors, VPs and above - a sort of inverted pyramid. There ought to be a chance that these high paying jobs would be passed on to at least a few in their 40s and so on. People should be feeling richer and out they go to buy 2 to 3 of the ever increasing- in price houses!

Comment by oxide
2013-08-16 18:47:24

I think there will be move-up jobs, but I don’t think there will be a “boom.” Many places — including the US government — are already banking on attrition rather than layoffs to reduce the workforce. Example: Six people will retire. Two jobs will be eliminated, leaving four openings. Three of the openings will be filled by patient Gen Xers, the last opening will be filled by a go-getter Millenial. As for the rest of the Millenials… I don’t know.

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Comment by Bill, just South of Irvine, CA
2013-08-17 11:09:18

That is my argument against loans and marriage. People are living longer and the youthful part of their lives are being extended too, thanks to more awareness of moderation, plenty of rest, and plenty of exercise to keep the cancer-causing flab off. I feel as though I started a new career in my same one of software. I am enjoying learning new things, especially state-of-the-art stuff so new you have to join mailing lists to find out if people encountered the same software issues. And I am over age 54.

Comment by Whac-A-Bubble™
2013-08-16 08:19:43

What percentage of people with 30-year mortgages actually pay them off on schedule?

If that percentage happens to be minuscule (my guess!), why do we need them?

More guesses:

1) The false pretense that the loan will be amortized over 30 years enables the buyer purchase the same home with lower monthly payments than for a shorter amortization period and the banks to charge more interest.

2) Cross subsidies in the form of mortgage guarantees and interest rate suppression (aka taking away retirees’ ability to survive on fixed-income investments) provide a wealth transfer to 30-year mortgagees.

Comment by Blue Skye
2013-08-16 21:07:09

You are hitting it close here. Government subsidy is always a wealth transfer.

Comment by Blue Skye
2013-08-16 20:19:01

“Without the GSEs, the huge run-up in rental rates during the crisis would have been much more vicious…”

I see it totally the other way. Government subsidy of long term mortgages keeps the prices of rental units high, just like it keeps the price of all houses high. Commercial rents fell during the crisis, dramatically. That is one area not subsidized (that I am aware of) by the FedGov.

Comment by rms
2013-08-16 21:10:04

“In defense of the 30-year mortgage”

Families raising children cannot afford a mortgage with terms longer than ten years because their children eventually cost more in their teen and college years. The story above was very narrow and short sighted in that it didn’t examine other countries or our post-WWII single income housing experience. The thirty year mortgage and the working-mom are a by product of LBJ’s Great Society; how else to afford 30% of the population spending their lives on the porch sipping cheap wine? Like Dubya, Obama is nothing more a corporate shill pimping life-long debt. He should be ashamed of himself and considered an enemy of the productive family.

Comment by Bubbabear
2013-08-16 05:27:40

BEEF! That’s what America is having for dinner

Comment by Whac-A-Bubble™
2013-08-16 06:32:29

How much further will U.S. long-term bond yields rise, and what effect will it have on housing?

Comment by Whac-A-Bubble™
2013-08-16 06:36:00

It looks like a primary beneficiary of QE3 were foreign bond investors, and they were among the first to exit on taper hints.

Dollar struggles as U.S. ten-year yields hold near two-year high
GLOBAL MARKETS-Asian shares down as debate on Fed tapering picks up
Thu, Aug 15 2013
Dollar suffers sharp reversal, gold & capital flows eyed
Thu, Aug 15 2013
FOREX-Dollar falls in volatile trade after mixed signals from data
Thu, Aug 15 2013
FOREX-Dollar swings as data gives mixed signals on stimulus
Thu, Aug 15 2013
CORRECTED-PRECIOUS-Gold drops as U.S. data boosts dollar, Treasury yields
Thu, Aug 15 2013

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

NEW YORK | Fri Aug 16, 2013 9:13am EDT

(Reuters) - The dollar fell against the euro and traded little changed against the yen on Friday, as investors adjusted positions amid a rise in U.S. Treasury yields on expectations that the Federal Reserve may start withdrawing stimulus as soon as next month.

While a cutback in stimulus is not a rise in official interest rates, investors are acting as if the rise in Treasury market yields is the equivalent. Rising U.S. yields would typically raise the attractiveness of dollar-denominated assets and be good for the dollar.

But coming on the back of a major policy shift from the Federal Reserve, quantitative easing or bond purchases by the Federal Reserve for its own balance sheet was uncharted territory, and investors are concerned that rising yields may lead to a sell off in U.S. assets.

Treasury Department data on Thursday showed China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus.

The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.

“Yesterday’s data spooked investors into concern about a wholesale abandonment of U.S. assets,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. “If Treasury prices continue to fall, potential tapering may not be as broadly positive for the dollar as first thought. Ultimately rising bond yields will support the dollar but not against such a big change in the backdrop.”

Comment by United States of Moral Hazard
2013-08-16 08:48:23

I would like to talk about the current crude oil bubble, and how the MSM and government are completely ignoring it as it drives a stake right through the heart of American balance sheets and ultimately the economy. We’re nearing $110 per barrel. In 2008 at these prices, there was non-stop coverage.

Each time it marches higher, there is some brief headline like ‘crude oil higher on tensions in Egypt’ or some such, but never an explanation as to why these tensions which were baked in at $90 are being baked in again at $107. The answer is it has nothing to do with Egypt, or supply and demand. Wall St. speculators have taken control of our energy supply, and like Enron they are manipulating the market to line their own pockets. Yet, nobody will touch it.

Comment by goon squad
2013-08-16 10:01:32

The headlines are mostly bullshit, unless it involves a hurricane in the Gulf of Mexico or war / civil unrest in a country that actually produces oil (not Egypt).

Comment by oxide
2013-08-16 12:39:19

Wall St. speculators have taken control of our energy supply,

Throwing a hissy about the sacrosanct free market today, are we?

Comment by Whac-A-Bubble™
2013-08-16 14:15:35

Free markets only work well for a few people if there is excessive market power in the hands of a small number of corporations and individuals.

Comment by shendi
2013-08-16 18:00:22

The price of gasoline is still low compared to what people pay overseas. Just the global wage arbitration that is going on so too the price of gasoline will rise to be more or less equal in consuming countries.

If you have not noticed it so far, people are more or less used to the price increases. At least no one is complaining they cannot pay the mortgage in California due to the increase in the price of gasoline because of bubble 2.0

Comment by Blue Skye
2013-08-16 21:19:18

“people are more or less used to the price increases…”

Excellent point!

People are more or less used to higher gas price, higher food price, higher taxes, higher just about everything except their wages. Now we need them to borrow large so the economy can grow! If they don’t, prices will collapse to a more normal level.

Comment by (Still) Waiting for the Fall
2013-08-18 03:54:29

Europe’s fuel prices (what Bloomberg shills DON’T say) are high because of the taxes imposed by the EU countries to support the excellent road system and alternative transportation systems in place. You really don’t need an automobile in Europe to get around. Last I checked the taxes in Germany were about 90c (3/4 of a Euro) for a liter with a 20% VAT (value added tax) on top of that. The oil gurus think that we should be paying the same here with about a third of the taxes that Europe collects…
Mo money, Mo money.

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