Kevin Drum

Don't Mess With Texas (Mortgages, That Is)

| Thu Apr. 1, 2010 12:37 PM EDT

I think I've blogged about this before, but Alyssa Katz has a good piece today about how Texas generally avoided the housing bubble that afflicted the rest of the country and nearly destroyed Wall Street. The key, she says, is that Texas had uniquely stringent regulation of home equity loans:

As home prices skyrocketed in many markets, cash-out refinancings became standard, even in the relatively sober world of Fannie Mae and Freddie Mac. By 2006, Freddie Mac reported that 88 percent of refinance mortgages that it purchased were for amounts at least 5 percent higher than borrowers’ previous loan balances. Subprime, in insane pursuit of risk, piled on with cash-out refinances for high-risk borrowers, often approaching the entire appraised value of the home.

But not in Texas. A borrower there can secure a home-equity line of credit from a bank. And she can refinance her mortgage or take out a home-equity loan. But the total amount of debt on a home cannot exceed 80 percent of its appraised value, and any proceeds cannot be used to pay off other debts.

This is, you'll note, essentially a limit on leverage. In this case, though, it's not a limit on bank leverage, but on individual homeowner leverage. It's a good example of how leverage is shot through our entire financial system, and how reining it in at one level can have a big impact on every other level as well.

But there's more to Texas than just their regulation of HELOCs. State law also prohibits mortgage loans with prepayment penalties. And it prohibits negative amortization loans, where the principal you owe goes up over time because you're not required to make full interest payments. There are also limits on balloon payments and requirements that mortgage lenders take into account the borrower's ability to repay a loan. (Shocking, I know.)

My guess is that these latter restrictions, especially the ban on prepayment penalties and negative amortization loans, were actually more important than the HELOC restrictions. Prepayment penalties were a key part of the mortgage madness of the past decade, since the most egregious subprime and Alt-A loans only worked if you were penalized for paying off your loan early. You can hardly afford to offer loss-leader teaser rates, after all, if the borrower can just enjoy the low payments for a couple of years and then refinance into a standard mortgage with no penalty, leaving the lender with the losses on the first two years of the loan.

Bottom line: there are several common-sense changes to home mortgage regulations that would go a long way toward stabilizing the housing market in the future. The 80% HELOC rule is a good one. Banning prepayment penalties is another. Requiring a minimum 10% down payment for all home loans would be useful too — as well as making sure that brokers don't use "silent seconds" to get around this rule. All of these regs would not only be good for consumers, they'd help keep a lid on housing prices as well. And remember: it was skyrocketing housing prices that underlay everything else that happened during the past decade. It's too bad that no one at the federal level seems much interested in doing any of this stuff, isn't it?

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New CAFE Standards Finally Signed

| Thu Apr. 1, 2010 11:28 AM EDT

This has been in the works for a long time, but it's still nice to see it finally made official:

The Obama administration finalized the first national rules curbing greenhouse gas emissions Thursday, mandating that the U.S. car and light-truck fleet reach an average fuel efficiency of 35.5 miles per gallon by 2016.

The new fuel efficiency standards, issued by the Transportation Department and the Environmental Protection Agency as the result of a May 2009 deal with the auto industry, represent a peaceful end to a contentious legal battle over how to regulate tailpipe emissions....As a result of the new rules, the U.S. vehicle fleet is projected to cut its greenhouse gas emissions 21 percent by 2030.

For all the crap CAFE gets from conservatives and car buffs, it's been an astonishingly successful program. It probably cut oil use following the embargoes of the 70s more effectively than any program before or since — and unlike gas prices, which fell precipitously in the early 80s, it had a permanent effect. What's more, for most of us it did it with virtually no noticeable impact on the cars we drive.

Technology has advanced a lot since the original CAFE standards were adopted, and I expect the new ones to have approximately the same invisible effect on the kinds of cars we drive. At the margins, it will make the most egregious gas guzzlers a little more expensive. It might even spell the end of a few of them. And on average, your next new car might accelerate from zero to sixty half a second slower. But that's about it. And in return we'll extend our oil supplies, import a bit less from Saudi Arabia, and cut down on greenhouse gas emissions. It's no panacea, but it sure is a cheap way to make a difference.

 

April Fools Fail

| Thu Apr. 1, 2010 10:47 AM EDT

Atrios tweets:

hate when cannot tell is something is april fools joke. i hate april fools. bah humbug.

Does anyone else think this has gotten harder over the past decade or so? Or is my memory just failing me? It's not so much that April Fools gags have gotten more sophisticated, it's that the world has gotten so bizarre that even Onion-like gags seem disturbingly plausible. In a world that has people like Michele Bachmann and Steve King serving in the U.S. Congress, how do you top real life?

Financial Phrases to Beware Of, Part LXXII

| Thu Apr. 1, 2010 10:34 AM EDT

Here is Mike Konczal reading my mind today:

Like "providing liquidity," whenever I hear "competitive disadvantage" as the main reason to not do a sensible financial regulatory related thing I think that there's some real shenanigans going on.

Obviously he's right about the "competitive disadvantage" shibboleth, but it's the other one I really have in mind. It's everyone's go-to excuse for why some arcane bit of financial rocket science is really a good thing: because it "provides liquidity" to the market. Whenever I hear that I reach for my wallet.

Example: if you ask Goldman Sachs about the value of high-frequency trading, in which they co-locate their servers near a stock exchange's servers so they can complete trades in 3 milliseconds instead of the pokier 10 milliseconds required by the dinosaur brokers that you and I have to use, they'll tell you that HFT provides needed liquidity. There are, at a minimum, two problems with that. First: does anyone really think that U.S. stock markets have historically suffered from a lack of liquidity? Stop laughing back there. But you're right: the answer isn't just no, it's hell no. In fact, U.S. equity markets are generally used as textbook examples of the most open, liquid markets ever created on planet Earth.

Second: financial rocket science does often provide additional liquidity. Unfortunately, it doesn't always provide additional liquidity. Typically, it provides liquidity when you don't need it and then scurries away and hides in a corner precisely when you do. Unless there's some underlying reason — or, better yet, some regulation — that gives you a reason to believe that a financial innovation will provide liquidity all the time, even when the market panics, it's useless.

End of rant. You may now go back about your business.

Quote of the Day: The iPad

| Thu Apr. 1, 2010 10:12 AM EDT

From Jack Dorsey, creator and co-founder of Twitter, on Apple's new iPad:

I'm most excited about the potential of being able to get closer to data — to be able to touch data. Being able to use your fingers for every aspect of the experience is something that's really going to change computing.

Seriously? I'm agnostic on the whole tablet computing thing, but surely being able to "touch" an iPad is the least of its attractions. Is there really a widespread feeling out there that our keyboards are getting between us and our data?

UPDATE: RickNAnn tweets: "If you used an iPhone regularly you'd understand, I think." Maybe so! At the moment, though, I barely even use my old dinosaur cell phone for calling people, let alone anything else, so I'm still a couple of steps away from that. I guess I'm waiting for direct brainstem connections to be invented first. Get cracking, scientists.

The Future of Politics?

| Wed Mar. 31, 2010 11:44 PM EDT

The Guardian almost had me going with this piece about Gordon Brown's upcoming election campaign:

Following months of allegations about Brown's explosive outbursts and bullying, Downing Street will seize the initiative this week with a national billboard campaign portraying him as "a sort of Dirty Harry figure", in the words of a senior aide. One poster shows a glowering Brown alongside the caption "Step outside, posh boy," while another asks "Do you want some of this?"

Brown aides had worried that his reputation for volatility might torpedo Labour's hopes of re-election, but recent internal polls suggest that, on the contrary, stories of Brown's testosterone-fuelled eruptions have been almost entirely responsible for a recent recovery in the party's popularity.

Unfortunately, it got silly enough after that to ruin the joke. But those two paragraphs actually sounded disturbingly plausible.

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How To Talk About Healthcare

| Wed Mar. 31, 2010 5:23 PM EDT

The individual mandate may be an essential part of healthcare reform, but it's also the part that's easiest to hate. After all, the government is forcing you to spend money to buy something that you might not want. Andy Sabl suggests some better framing:

Here is another way of describing ACA that’s completely accurate but explains the point much better:

“If you or your family aren’t getting health insurance through your job, the government will pay to get you private insurance coverage, just as an employer would. You’ll have to contribute something — but the law guarantees, with specific numbers, that it will be no more than you can afford. It’ll be less than three percent of your paycheck if your family makes $33,000 a year, less than ten percent if you make as much as $88,000. Pre-existing conditions won’t matter. The government will still pay for your insurance, with the same affordable contribution from you.”

That sounds fine. Unfortunately, I have (as usual) some doubts about whether there's any chance of this working. A few comments:

  • For better or worse, the term "individual mandate" has been commonly accepted for years. Trying to change it now isn't likely to be any more successful than Republican attempts to cynically change "private accounts" to "personal accounts" when the former started polling badly.
  • We still have a problem: what do we actually call the policy formerly known as an individual mandate? Andy has provided an explanation for how the overall program works, but not a name for that specific piece of the puzzle. People are going to write about the fact that everyone is required to get coverage whether we like it or not, so there has to be something to call it.
  • In real life, how would this work? Once we reel off Andy's paragraph, the next question from the Fox News anchor interviewing you is still going to be, "But it's not voluntary, is it? You have to get insurance whether you like it or not, right?" What's the answer?

Am I being too gloomy here? It just seems like these attempts at precision framing don't usually survive contact with the real world. Comments?

Quote of the Day: Corker on Healthcare

| Wed Mar. 31, 2010 4:59 PM EDT

From Sen. Bob Corker (R–Tenn.) on Republican promises to repeal healthcare reform if they take over Congress:

“The fact is that’s not going to happen, OK?” 

Reality based! On the other hand, as Andy Kroll reports, Corker is now firmly toeing the party line on financial reform: "I couldn't support the bill in its current form," he says. "I have no plans to support the current legislation." And that's about a bill already so watered down that the stock market has barely even yawned at the possibility of its passage. Corker may, relatively speaking, be one of the more accomodating Republicans we have left in Congress, but that's not saying much.

Insider Trading

| Wed Mar. 31, 2010 1:56 PM EDT

Some facts for your consideration:

Fact 1: If you trade stocks based on insider knowledge (for example, maybe you know that next week's earnings announcement will be disappointing), that's illegal.

Fact 2: Ditto for bonds.

Fact 3: Credit default swaps are basically insurance on bonds. So buying or selling CDS coverage based on insider knowledge is illegal too. Right?

Well hold on there pardner! You're assuming that credit default swaps are securities. Because insider trading laws only apply to securities. But swaps are — well, they're just private contracts between two consenting adults. Nothing security-ish about them. Capiche? So forget this whole insider trading thing.

Felix Salmon explains further here and then says maybe we ought to do something about this:

The first obvious thing that needs to be done here is to give the SEC formal jurisdiction over single-name CDS....The second thing which ought to be considered is moving CDS trading onto an exchange, where it can be regulated. And it's almost certain, at this point, that that's not going to happen. In fact, I asked Craig Donohue, the CEO of CME Group, about this at yesterday's Reuters Global Exchanges and Trading Summit. He's very keen on clearing over-the-counter CDS trades, but he said that he's come to the decision over the past couple of years that he's not interested in listing CDS on any of his exchanges directly. The big CDS players are his clients, they make lots of money from their OTC trading, and he seems to have no appetite to start competing with them on that front, rather than simply facilitating the clearing of their trades.

Financial regulatory reform is looking better all the time, isn't it? No serious capital or leverage requirements. A consumer protection agency housed at the Fed and barely worth the paper it's implemented on. And no exchange trading of CDS because the exchanges don't want to do it and Congress probably won't force them to. I don't know about you, but I'm about ready to say we should just scrap the whole thing and admit that we're OK with Wall Street plutocrats continuing to run the country for their own benefit until they destroy the country properly. At least that would have the virtue of honesty.

And by the way: Felix will shoot me for saying this, but I've pretty much come to the conclusion that credit default swaps should simply be banned. Their benefits are actually pretty minimal, while their vulnerability to abuse seems almost unlimited. I'm having a harder and harder time these days buying the case that we can regulate them into submission.

The New Tower of London

| Wed Mar. 31, 2010 12:49 PM EDT

Below I commend to your attention "London's answer to the Eiffel tower," scheduled for completion prior to the 2012 Olympic Games. "The structure will officially be called the ArcelorMittal Orbit, after steel magnate Lakshmi Mittal, the richest man in Europe, who is funding it." Naturally, Boris Johnson is deeply involved too. Its designer says: "There is a kind of medieval sense to it of reaching up to the sky, building the impossible. A procession, if you like. It's a long winding spiral: a folly that aspires to go even above the clouds and has something mythic about it." Though at only 400 feet, it's not clear which clouds it will go above.

Your opinion is naturally solicited.