Kevin Drum

Foreclosure Kabuki

| Thu Jul. 30, 2009 12:56 AM EDT

Why are so few mortgage companies willing to modify loans for delinquent borrowers even though the federal government has allocated $75 billion to keep them from taking a big hit when they refinance the loans?  What's the holdup?  Peter Goodman reports:

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked in the law department of a major mortgage company, Ocwen Financial. “I don’t think they’re motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It’s a license to do whatever they want.”

....“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America [....] By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

....As a home slides toward foreclosure, mortgage companies pay for many services required to take control of the property and resell it. They typically funnel orders for title searches, insurance policies, appraisals and legal filings to companies they own or share revenue with.

An old gag asks, What do you call a thousand lawyers at the bottom of the ocean?  Answer: A good start.  These days, I don't think "lawyer" is the right profession for that joke.

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Yet More on High Frequency Trading

| Thu Jul. 30, 2009 12:13 AM EDT

Jon Stokes has more about high frequency trading over at Ars Technica.  His piece doesn't address the allegations that HFT shops engage in front running (i.e., sneaking a look at stock prices a few milliseconds before anyone else), but focuses instead on "pure" HFT strategies.  For example:

One of the most important uses for HFT is to get the best price for very large stock orders by breaking them up into small orders of random sizes and hiding the activity from other traders, who, on sensing that a large order is in progress, might take advantage of that knowledge by making moves that would impact the stock price....Some categories of "predatory algos" closely monitor the markets in order to sniff out exactly these types of hidden large orders, so that the algo can trade against them. For instance, if a predatory algo detects that someone is trying to hide a large sell order for [Intel] by trickling it out into the market in small blocks, it might work to bid down the price of [Intel] just a bit so that it can pick up those blocks at a discount and then sell them for a profit when the share price floats back up to the market's earlier, non-manipulated valuation.

It kinda reminds me of Charlie Stross's fictional Economics 2.0 — an automated economy that runs so fast no human being can keep up with it.  In an interview at Felix Salmon's blog, Stokes adds this comment about the allegedly gigantic trading profits generated by HFT:

To justify this $20B/year “fee” you have to make the case that the market system as a whole is getting something of value to all the payers in return. So supporters will say that it’s the price of liquidity and innovation, and, besides, they’ll argue, everyone who has been participating in the markets for decades has been paying these hidden liquidity taxes (and I’d rather call them taxes than fees) to specialists and any other market maker. But when you see this tax ballooning at Internet speed — much the same way that finance has ballooned as a portion of GDP — you have to take a step back and ask, “what is the real, fundamental benefit that we’re all paying for here when we collectively direct money into this?”

This, of course, is a question we've been asking about a lot of financial innovation lately: how, exactly, does it benefit anyone other than the tiny band of Wall Street zillionaires who collect fees from it all?  And Felix adds this:

My bottom line is that HFT is a black box which very few people understand, and that one thing we’ve learned over the course of the crisis is that if there’s a financial innovation which doesn’t make a lot of sense and which is hard to understand, there’s a good chance there’s systemic risk there. Is it possible that HFT is entirely benign and just provides liquidity to the market? Yes. But that seems improbable to me.

John Hempton offers a contrary view here.  He's very skeptical of the $20 billion number that's been tossed around lately, and in any case says that trading is a whole lot cheaper today than it was in the past even if the HFT folks are skimming a cut off the top.  That's unquestionably true, but I'm not sure it's a very good defense.  If Wal-Mart overcharges every customer by a penny, it's still wrong even if you're saving money compared to the corner market.  Add in the potential systemic instabilities caused by the HFT black box, and I think the burden of proof should be on the high frequency community to convince us that what they're doing is safe and worthwhile, not the other way around.

When Should We Start Leaving Afghanistan?

| Wed Jul. 29, 2009 7:35 PM EDT

Bing West writes in the Wall Street Journal today that it's time to get the hell out of Dodge:

The Taliban are Afghans, to be dealt with by Afghans....On patrols, Afghan soldiers spot the enemy 10 times more frequently than do coalition solders. Afghan soldiers are brave, hardy, ill-disciplined, individualistic, temperamental and trustworthy.

A year from now, coalition forces should be able to gradually withdraw, replaced by robust support and adviser units embedded in Afghan security forces. We shouldn’t make this a NATO war, allowing the Afghans to stand back. We’re outsiders, no matter how many schools we build or cups of tea we drink.

Nothing West says here is especially controversial, really, except for that "a year from now" part.  But why shouldn't we begin withdrawing in 2010?  Al-Qaeda is essentially destroyed, seven years of occupation doesn't seem to have improved our ability to fight the Taliban, and bringing in the DEA isn't likely to help things.  Besides, it's not as if Bing is suggesting that we repeat the mistakes of the past and simply hightail it for the exits:

For things to turn out right for us [...] we have to gradually let the Afghans do their own fighting, while supporting them generously. Afghan forces will need $4 billion a year for another decade, with a like sum for development. The crunch in terms of American support for the war will come a year from now. The danger is that Congress, so generous in supporting our own forces today, may not support the aid needed for progress in Afghanistan tomorrow.

Obama has a plan for leaving Iraq.  He needs one for leaving Afghanistan too.

The Limits of Transparency

| Wed Jul. 29, 2009 6:27 PM EDT

Should Barack Obama respond to the "birther" lunatics by asking the Hawaii Department of Health to produce his original birth certificate?  Should Sarah Palin be required to produce original medical records proving she's really Trig Palin's mother?  Conor Friedersdorf says no.  Elected officials may have less right to privacy than ordinary citizens, but there are limits:

As evident is that public officials are under no “transparency” obligation to address all questions. Were the right fringe to allege that Barack Obama is in fact a woman, and demand a photograph of his penis to definitively prove otherwise, and the left fringe retaliated by alleging that Sarah Palin is a man, and requested the same sort of photographic proof, Andrew [Sullivan] would surely join me in concluding that both politicians have some right to privacy. Right?

Right.  There's a level of craziness beyond which no politician is obligated to respond.  All it does is spur yet more craziness.  If you believe that the state of Hawaii has conspired to hack its computer system and produce a phony certificate of live birth, then what good would the original document do?  You'd just figure it had been forged.

If someone produces actual evidence of scandal or wrongdoing, then you have to respond.  But if mere conspiracy theorizing is all that's required, then the sky's the limit.  Bill Clinton has to prove he wasn't transporting bales of coke through Mena airfield.  Barack Obama has to prove his mother wasn't in Kenya in August 1961.  Sarah Palin has to prove she wasn't faking a pregnancy in 2008.  John McCain has to prove he didn't collaborate with the enemy while he was in a Vietnamese prison camp.

Conspiracy theorists will always be with us.  But the adult community doesn't have to humor them.  All that does is make things worse.

Cats and Dogs Sleeping Together

| Wed Jul. 29, 2009 3:44 PM EDT

Andrew Sullivan responds to my post last night suggesting that in the long run community rating is more important than having a public option in the healthcare reform bill:

But how do you contain costs after you have mandated coverage? The health care industry will make more money if everyone is covered. If you don't make them commit to serious concessions, such as the public plan, this time around, how are you going to do that in the future? The answer, I'm afraid, is: you won't. Onto receivership for the US! But more people will be healthy as the dollar collapses and the economy implodes.

Let me get this straight.  Andrew Sullivan is arguing for greater federal intervention in the healthcare market?  Because that's the only way to hold down costs?

I feel like I'm living in Bizarro world.  But hey — I'm all for a public option.  I suspect it would have only a modest effect on long-term healthcare costs — which is pretty much the way I feel about every other proposal to rein in spending too — but modest is still better than nothing.  In any case, I guess this means Andrew, Mickey, and I are all in agreement on something.  Weird.

Quote of the Day

| Wed Jul. 29, 2009 1:54 PM EDT

From Dan Drezner, who's currently teaching a summer course along the banks of the Rhine in lovely Basel:

If you think the bank bailouts are unpopular in the United States, try the Swiss reaction to the Swiss federal government's bailout of UBS.  It's to the Voldermortian point where they asked me not to say "UBS" because it's so embarrassing.  We have compromised — I can now say "UBS," but must then spit three times over my right shoulder to ward off evil spirits.

Basel, of course, is the home of the famous Basel Capital Accords, which did approximately nothing to stop our late financial meltdown.  In fact, Basel II probably made things worse.  So Swiss students have every right to be embarrassed, even if they were only renting their city out to the world's central bankers, so to speak.

OTOH, Basel is also the birthplace of Roger Federer.  So they've got something to cheer for too.

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Good News on Healthcare

| Wed Jul. 29, 2009 1:36 PM EDT

Today we get good news from the House:

House leaders, the White House and four Blue Dogs on the Energy and Commerce Committee reached a deal Wednesday on a health care overhaul....Rep. Mike Ross (D-Ark.), head of the Blue Dog health care task force, said the deal would cut more than $100 billion from the Democratic health bill, increase exemptions for small businesses and prevent the public insurance option from basing reimbursements on Medicare rates.

And we get good news from the Senate:

The chairman of the Senate Finance Committee, Max Baucus, Democrat of Montana, who is leading efforts to develop a compromise health care bill announced Wednesday that negotiators had pared the price-tag to under $900 billion over 10 years and that lawmakers had agreed on ways to cover the cost....Late Tuesday, Mr. Baucus had hinted that his group had mostly finished their work on how to pay for the bill. “The costs, I think, are pretty well nailed down,” he said.

Perhaps Tyler Cowen is right: a lot of the day-to-day chatter along the way to healthcare reform "is simply noise."  We won't know that for sure until we have actual bills, an actual conference report, and an actual vote, but hey — it's an odd-numbered day and I'll take whatever good news I can get.  And agreement of any kind, even without knowing the details yet, is forward progress.  That's good news.

Blowing Bubbles

| Wed Jul. 29, 2009 12:46 PM EDT

How do we pop financial bubbles before they get out of hand?  Alex Tabarrok surveys the literature and comes away pessimistic that it can be done:

Bubbles occur even as uncertainty about the fundamental value diminishes.  We also know that once a bubble starts it's difficult to stop.  Circuit breakers and brokerage fees (transaction taxes), for example, don't do much to stop bubbles....Investor education doesn't help (for example telling participants about previous bubbles doesn't help). Even increasing interest rates doesn't do much to stop a bubble already in progress and may increase volatility on net.

So what's the answer?  Once a bubble gets going, maybe there isn't one.  However, some lab experiments suggest that having lots of cash sloshing around is instrumental in getting bubbles going in the first place:

[These] experiments are consistent with the Fed having a significant role in bubble inflation (a theory I have not pushed).  In other words, rather than identifying and popping bubbles already on the rise, not blowing bubbles in the first place may be easier and more productive.

That would be a start, anyway.  More research, please.

Financing Solar

| Wed Jul. 29, 2009 12:12 PM EDT

My homeowners association would go ballistic if I tried to install solar panels on my roof, but if you live in a less benighted area it's an attractive option.  The problem is that the upfront cost is too high for some people, and if you take out a conventional loan you run the risk having to keep making payments even if you sell your house.  One option is an outfit like SolarCity, which leases the installation for a set monthly cost.  If you sell the house, the lease goes with it, so your risk is minimal.  Brad Plumer passes along news of another alternative:

Two years ago, however, the city of Berkeley figured out an easy financing trick to get around this problem — the city itself just issues a bond to pay for the upfront costs of installing the panels, and the homeowner then repays the government over the course of 20 years via a small line item on the property-tax bill. (This way, if the home is sold, the costs of the panels get passed on to the new owner getting the benefits.)

It's a small policy tweak, but quite sensible. No mandates, no regulations, just offering homeowners an extra option if they choose. So it's not surprising to hear that, as Kate Galbraith reports today, the idea's been proliferating like crazy: This year alone, eight states have followed California's lead by giving their municipalities permission for this sort of financing, including Colorado, New Mexico, Ohio, Oklahoma, Texas, Vermont, Virginia, Wisconsin. (Apparently, a lot of cities need permission from the states before they can mess with property-tax bills.)

Another benefit of this is that cities can generally borrow at lower rates than private homeowners, so the economics of the panels work out better.  It makes a lot of sense, especially in sunny areas like California and the southwest.

UPDATE:

Getting Out of Iraq

| Wed Jul. 29, 2009 11:51 AM EDT

Things are going so swimmingly in Iraq that we might speed up our exit plans:

Defense Secretary Robert M. Gates said Wednesday that the relatively low levels of violence in Iraq and improved cooperation of late between U.S. and Iraqi forces have raised the possibility that commanders might be able to "modestly accelerate" the reduction of U.S. forces this year.

....Gates said if trends throughout Iraq remain generally positive, the United States could withdraw three combat brigades, each consisting of about 5,000 soldiers, from Iraq this year. The existing plans call for two brigades to be withdrawn.

The expedited schedule might also have something to do with the tensions Ernesto Londoño reported a few days ago following the American response to an insurgent attack in Baghdad:

When the shooting subsided, another confrontation began. A senior Iraqi army commander who arrived at the scene concluded that the Americans had fired indiscriminately at civilians and ordered his men to take the U.S. soldiers into custody. The U.S. military said the soldiers had acted in self-defense and had sought to avoid civilian casualties; U.S. commanders at the scene persuaded the Iraqis to back down.

....Word of the incident quickly spread among U.S. soldiers in Baghdad. Several said it heightened concerns that the split-second decisions they make now have the potential to draw a sharp rebuke from Iraq's increasingly assertive security forces. And reaction from Iraqi military officials seemed to confirm those fears.

These things might be entirely unrelated.  Gates himself implicitly dismissed the incident by saying, "There clearly will be the occasional hiccup by someone who doesn't get the word."  Still, if violence is generally under control and Iraqi commanders are starting to harass American troops, that might make quick withdrawal into a more welcome option than it would be otherwise.  Just a thought.