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.  

Image by freepik

On a heavier note; I recently discovered a quote by John Stossel.  I don't know much about Stossel, other than he's a Libertarian.  I've only seen a few of his topical reports on television but his pithy take on the nature of taxation is amusing.  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

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“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

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 we celebrate new first-time buyers, or new qualified first-time buyers?  

The debate
We continue creation of 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 two indispensable enabling factors -- federal government housing policy and monetary policy.  Without state-sponsored encouragement to make loans to anyone with a pulse, 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.

And the debate goes on...

"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.

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 in order 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 tax policies that induce businesses to make new investments and help consumers consume, instead of unleashing so much QE, but some of his contemporaries would challenge that assertion.   Major economists in the media often disagree in practice and do so with the type of certainty reserved for hard science and their views are frequently colored by their political leanings.   

I once saw an Economist on Squawk Box who insisted that professional economists collectively agree on nearly all major policy prescriptions.  I

Nassim Taleb, Wikipedia

wish I could recall his name.  His remarks still strike me as wishful.  Maybe he was right, but it sounded as though he wanted viewers to believe that the discipline of economics breeds the kind of metaphysical certainty found in the natural sciences.  There's a reason that the name for the field of study has long been referred to as "Political Economy". 

To help settle the issue or at least test it, a long form Krugman-Feldstein debate or a Taleb-Krugman debate would be an interesting spectacle, like the sort we could watch years ago.

Paul Krugman, Wikipedia

I'm referring to the old TV debates on public television that featured thought leaders from opposite ends of a policy spectrum who respectfully but forcefully hashed out their differences on politics and economics.  

My favorite debater remains the late William F. Buckley.  Though not a PhD economist, he did hold an undergraduate degree in economics from Yale.  Amazon Prime members can access some of WFB's old "Firing Line" debates for free.

WFB, Wikipedia

Holiday gifts 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 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 described by some in the financial press as a tax cut because the 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 Keynesians who routinely advocate for enormous government spending to stimulate demand are reacting.  Putting money directly in the hands of taxpayers can also spur consumption.  

Summer notes on New York

I've taken business trips to New York City since the Eighties and for me much remains unchanged -- both good and not-so-good. 

Times Square street performer
John Maddente photo

Taxi cabs now co-exist with new competitors like Uber and Lyft giving riders new options, but the ride through decrepit parts of Queens enroute to LaGuardia airport, is still dreary.  

The Times Square area remains a crowded kaleidoscope of sounds, sights and smells that probably began to lose its charm in the Seventies.  Thousands of pedestrians 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

How slander goes unpunished

As a teen, I once scraped together enough money to buy a hamburger at a diner, then sat down at a table and waited and waited.  I watched waitresses serving customers around me and after a long period, I caught the attention of one waitress.  I asked her 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 the charge and left the diner with emotions that affected me decades later and even as I write these words.  I never learned the identity of my accuser.

The point of the story is that if one is going to charge another of being a thief, one must be able to back up the accusation, or there ought to be consequences for the accuser.  

Slanderous or libelous commentary is allowed in America's political environment because it's accepted as free speech and there are no rules for fair play

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when public policy fights occur.  

Unfortunately, class warfare is one avenue that works well for the accuser to smear someone.  Frequently, the one doing the smearing advocates for a populist cause.  Too often, without evidence, one can accuse another of holding depraved motives like "voter suppression" or "racism" and get away with it.  Want examples?   

Do you recall 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 comparison is largely forgotten today.  

Consider Vice President Joe Biden's spoken gem on the campaign trail, telling an African American audience that Republicans are "...going to put y'all back in chains."  Many pundits dismissed the remark as just one more bone-headed comment by Biden.  Now contrast that sorry episode with how Mitt Romney got crucified for citing an accurate statistic about the extent of government transfer payments. 

Romney's utterance wasn't populist, so the opposition could vilify him as a contemptible elitist, yet Biden's reprehensible remarks about the GOP left him unscathed.  

Political slander often occurs after Conservatives disclose ideas to reform the welfare state, curtail federal spending, or simplify the tax system.  Some ideas are better than others, but there's always a number of character assassins that will cry "Racism!"  And advocates trying to reduce voter fraud often attract a full-scale tar job, replete with charges of "voter suppression".    

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Most Conservatives encounter this sort of thing sooner or later.  What if it happens to you?  My advice is to expose your character assassins fully, fairly and early.  Fight with facts, but fight no less.  

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