Vive la France!

I sympathize with the great nation and people of America's oldest ally FRANCE.  May God soothe their anguish at this difficult time following the deaths of 130 French citizens at the hands of jihadist murderers.  Our President is mistaken about the national security challenges we face.  Unfortunately, he proclaims that evil abroad is "contained".  All the while, the national debt has grown more under his tenure than it has under all previous US presidents combined.  Perhaps that's why a former Chairman of the Joint Chiefs of Staff famously quipped that the biggest "...threat to our national security is our debt."

A clear and present danger to civil liberties

Destruction of evidence, failure to comply with Congressional subpoenas and giving false testimony before Congress are impeachable offenses.  One thinks of Watergate which resulted in prison time for a few officials and forced the resignation of President Richard Nixon, but I'm actually referring to the IRS scandal I first wrote about over two years ago ("IRS Plot Could Be Worse Than Watergate" June 9, 2013).  

I'm surprised how little fallout has occurred since.

An article for interested readers to examine was published in the Wall Street Journal (WSJ) last month by two Congressmen Ron DeSantis and Jim Jordan.  Anyone who still denies existence of a partisan scandal might want to read this WSJ article:

"The Stonewall at the Top of the IRS" -- July 28, 2015

by Congressman Ron DeSantis and Congressman Jim Jordan

(Also worth reading in WSJ: "How Congress Botched the IRS Probe" -- May 15, 2015 by Foley & Lardner attorney, Ms. Cleta Mitchell.)

Last week, during the Republican Presidential debates, Sen. Rand Paul complained about meta data collected to catch terrorists, but he said nary a word about the IRS issue. 

IRS Commissioner John Koskinen
Official photo

The IRS scandal is as tangible than any federal surveillance problems we've seen, yet Sen. Paul prefers to focus on the NSA without evidence of citizen abuse.  I cherish privacy rights and respect the instincts behind Senator Paul's effort, but I'm more troubled by what's occurred recently at the IRS. 

Spring has sprung!

While it's still too cool in southern Wisconsin to get excited about the weather, the morning sunlight streaming across my lawn is enough.  A week of travel on a sour stomach and poor weather in north Texas, makes me appreciate the moment all the more.  On a heavier note...

I recently discovered a quote by John Stossel that captured my attention.  I don't know much about Stossel, other than he's a Libertarian.  I've seen a few of his topical reports on television and that's about it, but his pithy take on the nature of taxation is interesting.  Mr. Stossel says....

"Politicians, bureaucrats and the people they 'rescue' get money through force — taxation.  Don't think taxation is force? Try not paying, and see what happens."

Private mortgage 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 exposure.  Many 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 or qualified first-time buyers?  

The debate
We continue creation of potentially catastrophic bubbles inflated by some noble intentions and lots of ignoble politics.  I'm dismayed when people still prefer to blame The Great Recession completely on the banks.  Those voices ignore an indispensable factor -- federal government housing policy and monetary 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 lower credit quality loans to securitize at the volumes we witnessed.

Private sector alternatives

Private sector partnerships can help mitigate publicly-backstopped asset bubbles in the subprime 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 partnerships might help moderate the huge spigot of taxpayer-sponsored mortgage credit and mortgage insurance programs that the Left continues to embrace without sufficient taxpayer safeguards.

"Crowd lending" as an investment?

You've probably heard of crowd funding web sites like Kickstarter that function as online forums for investors to fund 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".  

There are also online forums for "Debt Crowdfunding" which reward investors with a financial return on invested capital.  One leader in this space is 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 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 creditworthy borrowers pay comparatively higher interest rates on loans and investors are compensated for the added risk of default, with comparatively higher ROI.  I don't make paid endorsements or investment recommendations, but to be transparent, 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.  

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, the solvency of Lending Club.  All said, crowd lending is an intriguing alternative investment to explore.  

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.