Wednesday, March 04, 2015

Private underwriting can benefit America


“Isn't this what got us in trouble in the first place?” 

That was the first reader comment following a CNN/Money web article concerning a recent shift by government sponsored entities (GSEs) who buy most mortgages from lenders, to accept down payments as low as 3%. The previous minimum was 5%.  In an era when banks are forced to hold more capital, the GSEs which became insolvent during the financial crisis and received one of the largest bailouts in American history, have cut the minimum down payment for home buyers.

This policy change enacted by the Federal Housing Finance Agency (FHFA) which regulates the GSEs and by extension, influences trillions of dollars in mortgage exposure to American taxpayers, is worrisome.  Defenders of the FHFA actions point out that the change still protects taxpayers by requiring private mortgage insurance (PMI) and it applies only to issuance of fixed rate loans. 

Fixed rate requirement
To be fair, fixed rate notes help borrowers to service their debt predictably, which in turn helps to manage taxpayer exposureMany will recall that waves of defaults occurred in 2007-2008 after in-over-their-heads borrowers experienced mortgage payment increases from adjustable rate loans that reset to higher interest rates.  

Private mortgage insurance requirement
The PMI component offers less comfort to critics.  PMI is by design reactive -- it kicks in after default.  President Obama recently directed the Federal Housing Authority (FHA) to decrease premiums it collects for FHA mortgage insurance. (The FHA is an agency of the federal government that insures private loans issued for new and existing homes).  Like the GSEs, the FHA mortgage insurance fund required a taxpayer-funded lifeline in 2013, after unprecedented default volumes.  The stated intention behind all of these moves is to lower the cost of a conventional mortgage for lower income home buyers. According to HUD, these lower mortgage insurance premium rates (alone) will add 250,000 new first-time home buyers. Should the goal be 2.5 million new first-time buyers?  Would that make the move more successful in the eyes of policy makers or their base?  

The debate, my take
We continue creation of potentially catastrophic bubbles inflated by some noble intentions and lots of ignoble politics.  I'm dismayed when I encounter people who still prefer to blame The Great Recession completely on the banks.  They completely ignore an indispensable factor -- federal government housing policy.  Without its unparalleled ability to encourage loans to anyone with a pulse, the housing crisis -- and subsequent financial paralysis -- could not have occurred.  There would not have been enough lousy loans to securitize.

Private sector alternatives
Private sector partnerships can help mitigate publicly-backstopped asset bubbles in the sub-prime housing markets.  Such programs, which are beginning to take hold in the Twin Cities and elsewhere around the country -- prove that public-private partnerships can work when funded by entities and accredited investors risking their own money.  

Such programs can help moderate the huge spigot of taxpayer-sponsored mortgage credit and mortgage insurance that the Left continues to embrace too fully.

Saturday, January 17, 2015

"Crowd lending" as an investment?

You've probably heard of crowd funding web sites like Kickstarter that function as online forums for well wishers to support new business enterprises or community projects.  People fund these ventures because they believe a given solicitor's work has intellectual merit, serves some worthy ideal, or includes a compelling new technology.  Contributors do not receive any equity or financial return in exchange for their "investment".  

You might be less familiar with online forums created for "Debt Crowdfunding" which can indeed reward investors with a financial return on invested capital.  The concept itself is not exactly new.  The leader in this space is the Lending Club Corporation which was incorporated in 2007, trades on the NYSE under ticker LC and is registered with the SEC.  A competing company is called Prosper Funding LLC.  

Lending Club touts itself as "the world’s largest online marketplace connecting borrowers and investors" and it has made a palpable impact on the future of consumer lending (and probably commercial lending) by facilitating over $6.2B in loans since its platform launch, according to the company website.  If this business doesn't qualify as one with a "disruptive technology"; I don't know one that would.   

Individual or institutional investors that use Lending Club's exchange can invest in hundreds or even thousands of individual notes with consumer loan repayment periods of 36 months or 60 months -- or small business notes -- with loan repayment periods of 12 months to 60 months.  (The majority of consumer loans are issued for debt consolidation or to pay off credit card debt).  

Lending Club partners with WebBank who issues the loans and charges interest rates pegged to each borrower's credit profile.  Less credit worthy borrowers pay comparatively higher interest rates on loans.  Investors in these notes are compensated for the added risk of default, with comparatively higher ROI.  That transparency, or at least that built-in linkage between risk and reward, is one thing that attracted me to Lending Club.  Disclosure: I don't give investment advice, make paid endorsements or financial recommendations, but I've invested in Lending Club notes.

The investor web site is impressively simple to navigate with powerful views, charts and calculations.  One can see individual consolidated returns and returns for Lending Club investors, in the aggregate.  The site also gives investors an ability to see loan level detail (without personal identifiers of borrowers) and repayment performance on individual notes.  

As loans are paid back (some loans of course do not perform and get charged off with investors absorbing 100% of the loss) investor cash is credited, less a 1% management fee to Lending Club.  Investor cash -- which is the portion of one's Lending Club investment not committed to credit issuance -- is pooled in a trust account at Wells Fargo Bank.  Lending Club does not take custody of investor cash remitted to this account and investors can withdraw cash via ACH transfer to their own bank account at any time.  

Exiting an investment in notes prior to maturity is beyond the scope of this post and like any asset class, one ought not invest more than one is prepared to lose.  There's no guarantee on any of the notes or, of course, the solvency of Lending Club.  All said, crowd lending is an intriguing alternative investment, to explore with caution.  
Renaud Laplanche photo from Lending Club.

Finally, a word about Lending Club's founder, Renaud Laplanche.  Mr. Laplanche is a former practicing attorney with an MBA from the London Business School who turned himself into a software entrepreneur.  Last year he won the Innovation Award in the consumer products category from the Economist periodical.









Friday, December 26, 2014

Related to that Christmas Eve post...

There's a piece in today's Wall Street Journal called "The Fed's Needless Flirtation With Danger" in which Martin Feldstein writes that to stimulate demand, "Well-designed tax rules are a safe and effective alternative to quantitative easing".  Dr. Feldstein argues that we'd have been better served by stimulative tax policies that induce businesses to make new investments and help consumers consume, as opposed to so much QE.   

Unrelated to that X-mas Eve post...

I once saw an Economist on Squawk Box who insisted that nearly all of his peers (i.e. other PhD economists) -- collectively agree on all major policy prescriptions.  I
Nassim Taleb, Wikipedia
wish I could recall his name. 
He still strikes me as wishful.  In my opinion, the guy wanted everyone to believe that the discipline of economics actually breeds the kind of certainty found in the natural sciences.  

In any case, wouldn't a Krugman-Feldstein debate or a Taleb-Krugman debate be an interesting spectacle?  I'd settle for a Twitter smack-down.
Paul Krugman, Wikipedia

I miss the old TV debates that featured thought leaders at opposite ends of a policy spectrum, hashing out their differences on politics and economics.  My favorite debater remains the late William F. Buckley.*
*Amazon Prime members can access some of WFB's old Firing Line debates -- free.
WFB, Wikipedia

Wednesday, December 24, 2014

Holiday cheers for the American consumer

Have you read about the recent boost in U.S. consumer spending?  Of course you have and you know it is widely attributed -- at least in part -- to a steep drop in energy prices, particularly a drop in gasoline prices.   

Office.com clip art
This development is often described by the financial press as a tax cut because the dollar benefit accrues to the consumer in much the same way a tax cut does.  That is, by paying less at the pump, we automatically keep more of what we earn.  I wonder how Keynesian-devotees and other Paul Krugman types (who routinely advocate for enormous government spending to stimulate demand), are reacting.  

It appears that putting money directly in the hands of taxpayers, also spurs consumption.  Shocking.

Tuesday, August 12, 2014

Summer notes on New York

I've taken business trips to New York since the Eighties and for me much remains unchanged -- both good and not-so-good. 
Times Square street performer
John Maddente photo

Thousands of taxi cabs now co-exist with new and superior competitors like Uber and Lyft, but the ride through decrepit parts of Queens to or from LaGuardia airport, is still dreary.  

The Times Square area remains a crowded kaleidoscope of sounds, sights and smells that probably began to lose charm in the Seventies.  Unkempt oddballs mill around a neon backdrop of seedy shops and streets that cry for updates, or at least a protracted power wash. 

On the other hand, I'm still captivated by the view looking southward down Park Avenue that terminates at the Met Life Building and Grand Central Terminal, or looking northward down Park Avenue from the other side of these buildings. 

Central Park remains a rolling, twisting, verdant place of tranquility.  In Lower Manhattan ("Downtown") adjacent to the monolithic New York Stock Exchange, a timeless and magnificent statue of George Washington still looks on above the steps of Federal Hall where General Washington took his oath to become President.

I could go on about the gems of old New York, but have a look at the gleaming new Freedom Tower!  It is one of the most breathtaking buildings I've seen.  This structure with its inspired shape, beautiful blue color and sheer enormity -- soars over the somber space where the World Trade Center Towers stood. 


Freedom Tower
John Maddente photo

Sunday, March 23, 2014

Why Leftist slander goes unpunished

As a teen, I once scraped together enough money to buy a hamburger.  I walked to a diner, sat down at a table and waited.  I watched waitresses serving customers around me and after a long period, I caught the attention of one waitress.  I asked if someone could take my order.  She replied that another waitress had seen me steal a tip and that's why nobody would wait on me.  The charge was bogus.  I had taken nothing.  I protested my innocence and left the diner with emotions recalled decades later as I write these words.

If one is going to accuse another of being a thief, one must be able to back up the accusation, or there ought to be at least the prospect of punitive consequences for the accuser.  Whether behavior breaches a legal standard or not, slanderous (or libelous) commentary is all too common in America because it gets passed off as free speech -- especially in the arena of public affairs. 
freepik image


Class warfare -- the Excalibur sword of Leftist political slanderers -- gets a pass as long as one advocates for a populist cause.  One can without evidence, accuse another of depraved motives like voter suppression or racism and get away with it.  

The smears go unpunished because too many observers shrug it off.  Want some examples?   

Remember when Sen. Harry Reid likened the GOP to slavery sympathizers because he couldn't handle Obamacare criticisms?  (See my Examiner column published here).  His disgraceful words are largely forgotten.  

Consider Vice President Joe Biden's spoken gem on the campaign trail, telling African-American voters that Republicans are "...going to put y'all back in chains."  Pundits dismissed the remark as one more bone-headed comment by Biden, then Romney got crucified for citing an accurate statistic about the extent of government transfer payments.  

Romney's utterance, while true, wasn't populist so the opposition could vilify him while Biden's contemptible and absurdly false remarks, left him unscathed.

Political slander often occurs after Conservatives disclose ideas to reform the welfare state.  Leftist character assassins will holler racism.  And advocates to reduce voter fraud often attract a full scale tar job, replete with charges of "voter suppression" (again, racism). 

freepik image
All Conservatives encounter this sort of thing sooner or later.  So, what if political slander happens to you?  Expose your character assassins and fight with facts -- but fight no less.  

If you have a better remedy; please let me know.

Monday, September 02, 2013

Fast food and class warfare

CAUTION: The fast food wage debate is heating up. Get too close and you could get burned.  Consider recent actions against McDonald's undertaken by labor unions and community organizers and then...
Big Mac
Wikipedia image
read Al Lewis' column, ("Let Them Eat Burgers" September 1, 2013).  Lewis concludes a super-sized minimum wage increase is justified on the basis of a single data point (average age of minimum wage workers has increased) and a weak comparison to an Australian business model.  

Mr. Lewis' account of a recent protest demonstration reminds me of the danger I've been talking about since 2008.  Here's the story...

A mob is demanding a doubling of the minimum wage to $15 an hour, in front of a Denver-area McDonald's which had to shut down because of the ruckus.  Lewis interviews a man working at McDonald's (albeit a different McDonald's) -- twenty-six year old Dakota Bosma, who had this to say about his employer, 

"They'd rather line their own pockets, than take care of us." 

According to the Bureau of Labor Statistics (BLS), there are over four million workers employed at fast food establishments in the U.S. and half work part time. Turnover is high and this job pool is expected to narrow as new technologies become cost efficient alternatives to tasks currently performed by humans.

The education level required to perform most of these jobs is less than a high-school education.  Such jobs were not conceived as self-sustaining careers.  They are low skilled, temporary jobs for which the market pays a correspondingly low wage.  Nothing wrong with the work of course -- most of us have performed such jobs -- and I take Lewis' point that if the average age of minimum wage workers is increasing, it says something troubling about the employment picture.  I never said that no increase is warranted.  So far, we're fine.

However, does McDonald’s have a primary responsibility to "take care of us" or satisfy their customers, franchisees and shareholders?  What are the larger implications to our system if a corporation like McDonald's is pressured to transform itself from a great American business into a social safety net that also sells burgers?

What motivates these protests?  Is it a feeling that one has no choice?  What disturbs me most is the implication that employees are "owed" more by McDonald's.  Most McDonald's restaurants are not even owned by McDonald's Corporation -- they are franchised to individuals or small businesses that pay royalties and franchise fees to McDonald's. This fact might not matter to Mr. Bosma who added,

"The corporation makes billions of dollars every year -- they can afford to pay us $15".

Piling on, Mr. Lewis writes, "Companies have paid the lowest wages they could, for as many years as they could" but he fails to acknowledge that unions sought higher wages and benefits with limited productivity requirements.  It's called negotiation.

Microsoft Clip Art




Sunday, June 09, 2013

IRS Plot Could Be Worse Than Watergate

These days, some want to dismiss charges of government abuse as conservative cynicism but 40 years ago during Watergate, Dems made similar charges stick because there was criminal behavior in the federal government.  Although we don't yet know where the IRS plot began and who knew about it before the election, comparison between the two scandals was inevitable.

In the early 1970s, the abuse targeted high level political enemies of President Nixon.  This time, it's hundreds of ordinary citizens who were targeted by the IRS.  They happen to disagree with the direction of our country.

Some Pols are trying to tamp down the significance of what could become one of the saddest chapters in American politics.  George Will made this observation in the Washington Post (May 13, "In IRS Scandal, Echoes of Watergate"),
"Jay Carney, ... calls the IRS’s behavior “inappropriate.” No, using the salad fork for the entree is inappropriate. Using the Internal Revenue Service for political purposes is a criminal offense."
We also witnessed the former IRS Commissioner, Steven Miller, characterize the agency actions by using the word "mistakes."  Borrowing Mr. Will's style, I'd say, no, a mistake is purchasing too much mulch.  Using the power of the IRS to suppress political dissent is a criminal offense.  People go to prison for less -- ask Martha Stewart.

Ms. Lois Lerner, IRS director of tax-exempt organizations, took the Fifth before testifying but not before she exclaimed that she had done nothing wrong.  Really?
 
Even some Democrats like Senator Claire McCaskill (D-Missouri) are upset.  Ms. McCaskill said,
 
"We should not only fire the head of the IRS, which has occurred, but we’ve got to go down the line and find every single person who had anything to do with this and make sure that they are removed from the IRS and the word goes out that this is unacceptable." 
 
We also need to learn who at the highest level of government knew about this despicable effort and when they knew it -- just as Howard Baker demanded to know in 1974 at the Watergate hearings.

Sunday, April 14, 2013

If only the truth could go viral


"Vote for me and you'll get free stuff!"
Microsoft Clip Art
This post by a Rabbi in Teaneck, NJ is a powerful reminder why America is in trouble.  I've added blue italics for points which I feel are spot on.

By Rabbi Steven Pruzansky
 
"The most charitable way of explaining the election results of 2012 is that Americans voted for the status quo - for the incumbent President and for a divided Congress. They must enjoy gridlock, partisanship, incompetence, economic stagnation and avoidance of responsibility.  And fewer people voted.
   
But as we awake from the nightmare, it is important to eschew the facile explanations for the Romney defeat that will prevail among the chattering classes. Romney did not lose because of the effects of Hurricane Sandy that devastated this area, nor did he lose because he ran a poor campaign, nor did he lose because the Republicans could have chosen better candidates, nor did he lose because Obama benefited from a slight uptick in the economy due to the business cycle.

Romney lost because he didn't get enough votes to win.  That might seem obvious, but not for the obvious reasons. Romney lost because the conservative virtues -
the traditional American virtues – of  liberty, hard work, free enterprise, private initiative and aspirations to moral greatness - no longer inspire or animate a majority of the electorate. 
The simplest reason why Romney lost was because it is impossible to compete against free stuff.

Every businessman knows this; that is why the "loss leader" or the giveaway is such a powerful marketing tool. Obama's America is one in which free stuff is given away: the adults among the 47,000,000 on food stamps clearly recognized for whom they should vote, and so they did, by the tens of millions; those who - courtesy of Obama - receive two full years of unemployment benefits (which, of course, both disincentivizes looking for work and also motivates people to work off the books while collecting their windfall) surely know for whom to vote.
 
The lure of free stuff is irresistible.


The defining moment of the whole campaign was the revelation of the secretly-recorded video in which Romney acknowledged the difficulty of winning an election in which "47% of the people" start off against him because they pay no taxes and just receive money - "free stuff" - from the government.

Almost half of the population has no skin in the game - they don't care about high taxes, promoting business, or creating jobs, nor do they care that the money for their free stuff is being borrowed from their children and from the Chinese.

They just want the free stuff that comes their way at someone else's expense. In the end, that 47% leaves very little margin for error for any Republican, and does not bode well for the future.

It is impossible to imagine a conservative candidate winning against such overwhelming odds. People do vote their pocketbooks. In essence, the people vote for a Congress who will not raise their taxes, and for a President who will give them free stuff, never mind who has to pay for it.
   
That engenders the second reason why Romney lost: the inescapable conclusion that the electorate is ignorant and uninformed. Indeed, it does not pay to be an informed voter, because most other voters - the clear majority – are unintelligent and easily swayed by emotion and raw populism. That is the indelicate way of saying that too many people vote with their hearts and not their heads. That is why Obama did not have to produce a second term agenda, or even defend his first-term record. He needed only to portray Mitt Romney as a rapacious capitalist who throws elderly women over a cliff, when he is not just snatching away their cancer medication, while starving the poor and cutting taxes for the rich.    

Obama could get away with saying that "Romney wants the rich to play by a different set of rules" - without ever defining what those different rules were; with saying that the "rich should pay their fair share" - without ever defining what a "fair share" is; with saying that Romney wants the poor, elderly and sick to "fend for themselves" - without even acknowledging that all these government programs are going bankrupt, their current insolvency only papered over by deficit spending.

Similarly, Obama (or his surrogates) could hint to blacks that a Romney victory would lead them back into chains and proclaim to women that their abortions and birth control would be taken away. He could appeal to Hispanics that Romney would have them all arrested and shipped to Mexico and unabashedly state that he will not enforce the current immigration laws. He could espouse the furtherance of the incestuous relationship between governments and unions - in which politicians ply the unions with public money, in exchange for which the unions provide the politicians with votes, in exchange for which the politicians provide more money and the unions provide more votes, etc., even though the money is gone.
   

Obama also knows that the electorate has changed - that whites will soon be a minority in America (they're already a minority in California) and that the new immigrants to the US are primarily from the Third World and do not share the traditional American values that attracted immigrants in the 19th and 20th centuries. It is a different world, and a different America. Obama is part of that different America, knows it, and knows how to tap into it. That is why he won.

Obama also proved again that negative advertising works, invective sells, and harsh personal attacks succeed. That Romney never engaged in such diatribes points to his essential goodness as a person; his "negative ads" were simple facts, never personal abuse - facts about high unemployment, lower take-home pay, a loss of American power and prestige abroad, a lack of leadership, etc. As a politician, though, Romney failed because he did not embrace the devil's bargain of making unsustainable promises.

It turned out that it was not possible for Romney and Ryan - people of substance, depth and ideas - to compete with the shallow populism and platitudes of their opponents. 
Obama mastered the politics of envy – of class warfare - never reaching out to Americans as such but to individual groups, and cobbling together a winning majority from these minority groups. If an Obama could not be defeated - with his record and his vision of America, in which free stuff seduces voters - it is hard to envision any change in the future.

The road to Hillary Clinton in 2016 and to a European-socialist economy - those very economies that are collapsing today in Europe - is paved.
  
  
Society is permeated with sloth, greed, envy and materialistic excess. It has lost its moorings and its moral foundations.. The takers outnumber the givers, and that will only increase in years to come.  The "Occupy" riots across this country in the last two years were mere dress rehearsals for what lies ahead - years of unrest sparked by the increasing discontent of the unsuccessful who want to seize the fruits and the bounty of the successful, and do not appreciate the slow pace of redistribution.
   
If this election proves one thing, it is that the Old America is gone. And, sad for the world, it is not coming back."