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Trick or Treat

Friday, October 31, 2008 | 05:45 PM

by Chris Britt

by Tom Toles


More Halloween comics here

Friday, October 31, 2008 | 05:45 PM | Permalink | Comments (1)
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Markets Gain 11% on the Week

Friday, October 31, 2008 | 04:35 PM

Dow Industrials, Week of October 27-31

S&P500, Week of October 27-31

Pretty solid week, with broad gains across all of the indices, mostly due to the big day we saw on Tuesday. But Thursday and Friday both saw upside action, too.

All told, a pretty wild, positive week.

What does this mean going forward? Is the bottom in?

What say ye?

(post comments here)

Friday, October 31, 2008 | 04:35 PM | Permalink | Comments (0)
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Haunted Houses

Friday, October 31, 2008 | 02:30 PM

Via Ed Stein from Rocky Mountain News:

Happy Halloween!

Friday, October 31, 2008 | 02:30 PM | Permalink | Comments (3) | TrackBack (0)
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Compensation Structures in Mortgage Industry

Friday, October 31, 2008 | 01:10 PM

Interesting piece on how mortgage workers were comped during the heyday by John Quigley, titled Compensation and Incentives in the Mortgage Business.

It goes a long way to explaining why so many people did such silly things during the boom: They were well paid to do so!

A quick excerpt:

The incentive structure that arose for firms in this specialized industry set the stage for
the collapse. The incomes and fees generated are all transactions-based, that is, payments are made at the time the transaction is recorded. The originator of the loan, typically a mortgage broker, is paid at the time the contract is signed. Brokerage fees have varied between 0.5 and 3.0 percent. The mortgage lender earns a fee, between 0.5 and 2.5 percent, upon sale of the mortgage. The bond issuer is paid a fee, typically between 0.2 and 1.5 percent, when the bond is issued. On top of this, the rating agency is paid its fee by the bond issuer at the time the security is issued. All these fees are earned and paid in full within six to eight months after the mortgage contract is signed by the borrower.

Thus, no party to the mortgage transaction has any economic stake in the performance of
the underlying loan. In fact the mortgage broker is paid a larger percentage, termed a “yield spread premium,” if he convinces his clients to accept a higher and more default-prone interest rate. With this structure of incentives, it is not hard to understand why any risky loans were originated, financed, sold, and securitized, especially during the period of rapidly rising house prices from 1999 through 2006. With expectations of rising house prices, it is also not hard to understand why pools of these loans received the imprimatur of a credit rating agency when offered for sale.

One does not need to invoke the menace of unscrupulous and imprudent lenders or of equally predatory borrowers to explain the rapid collapse of the mortgage market as house price increases slowed in 2006, before ultimately declining. There were certainly enough unscrupulous lenders and predatory borrowers in the market, but the incentives faced by decent people—mortgagors and mortgagees—made their behavior much less sensitive to the underlying risks. The only actor with a stake in the ultimate performance of the loan was the mortgagee. Everyone else had been paid in full—way before the homeowner had made more than a couple of payments on the loan.

The full list of foolishness is maintained at mortgage implode . . .

>

Permanent post here


Source:
Compensation and Incentives in the Mortgage Business
John M. Quigley
The Economists' Voice:  Vol. 5:  Iss. 6, Article 2.
http://www.bepress.com/ev/vol5/iss6/art2

Friday, October 31, 2008 | 01:10 PM | Permalink | Comments (19) | TrackBack (0)
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Moral Hazard of the Coming Mortgage Bailout

Friday, October 31, 2008 | 10:09 AM

“Why am I being punished for having bought a house I could afford? I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

-Todd Lawrence, Norwich, CT homeowner with a traditional 30-year mortgage

>

Herein lies the simple problem in trying to “save” so many mortgages: A huge swath of them should not be saved. Some of that is due to price, some of it is due to not wanting to reward irresponsible behavior, but the bulk of it is simply because the people living in these homes cannot reasonably afford to pay for them, even after a 20-30% workout.

There are now more than 10 million “home-owers” underwater, with their mortgages greater than the present value of their homes. Since they have little skin in the game — thanks to banks that did away with down payment requirements — there is little incentive for them to tough it out.

Not surprisingly, it is FDIC Chairman Sheila Bair who is leading the push towards a mortgage workout plan. She wants policy makers to take action to help people stay in their homes — thereby taking pressure off of the FDIC, which insures the banks.

Why? More foreclosures = more bank failures = bigger FDIC obligations.

The problem with this current rescue  plan is that it is designed to “prevent the continued downward spiral of the housing market.” But that is EXACTLY what the housing market needs — overpriced homes that are not selling need to come down in price. We had a normal price increase from 1996-2001, and then a near vertical set of price gains from 2002-06. Any framework for systematically modifying loans that fails to comprehend that is doomed to failure.

(permanent post here)

Continue reading "Moral Hazard of the Coming Mortgage Bailout "

Friday, October 31, 2008 | 10:09 AM | Permalink | Comments (75) | TrackBack (0)
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Department of Follow-Up Dept.

Friday, October 31, 2008 | 08:45 AM

by Marion Maneker   
(comments here)

>

As the election closes out amid the wet squelch of the economy, it's worth looking forward toward the Obama transition. In the past, I've wondered about who would be holding down the fort at Treasury. Jon Heilemann answered that in this week's New York magazine: ". . . the inside betting is on a Larry Summers encore. 'They’re gonna want somebody who knows the building, knows the economy, has been confirmed before and been advising them on economics,' says the former Clinton aide. 'I’d be flabbergasted if they chose somebody else.'"

Continue reading "Department of Follow-Up Dept."

Friday, October 31, 2008 | 08:45 AM | Permalink | Comments (0)
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President Bush and Home Ownership

Friday, October 31, 2008 | 08:00 AM

There was an editorial in IBD this week, mistitled, Why The Mortgage Crisis Happened. Funny thing is, they somehow overlooked these speeches below.

The pandering and disinformation campaign of the far right are looking more and more like the death spasms of an intellectually bankrupt ideology . . .  (comments are here)

A Home of Your Own, by President Bush, May 17, 2002

President Bush 2002 Speech Encouraging More Lending Fanny Mae and Freddie Mac

President Bush Discusses Homeownership Financing August 31 2007



(comments are here)


Sources:
Why The Mortgage Crisis Happened
M. JAY WELLS
10/29/2008   
http://www.investors.com/editorial/EditorialContent.asp?secid=1502&status=article&id=310173877357981

Friday, October 31, 2008 | 08:00 AM | Permalink | Comments (0)
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Levitt: Derivatives Necessary, Should Be Regulated

Friday, October 31, 2008 | 03:30 AM
in Video

Former U.S. Securities and Exchange Commission Chairman Arthur Levitt talks about the importance of credit derivatives to the financial markets and the need for regulation and transparency, and the outlook for executive compensation at financial firms. Levitt is a senior adviser to the Carlyle Group and a board member of Bloomberg LP, the parent company of Bloomberg News.

click for Video:

http://www.bloomberg.com/avp/avp.htm?N=av&T=Levitt%20Says%20Derivatives%20Necessary%2C%20Should%20Be%20Regulated&clipSRC=mms://media2.bloomberg.com/cache/vhbslNoBG_nI.asf

00:00 Credit derivatives' importance, transparency
01:26 Growth of derivatives market, new regulation
02:11 "Some moderation" in executive compensation

Running time 03:48

Source:
Levitt Says Derivatives Necessary, Should Be Regulated: Video
Bloomberg, Last Updated: October 29, 2008 09:23 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azMrpQyorJFs

Friday, October 31, 2008 | 03:30 AM | Permalink | Comments (14) | TrackBack (0)
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The Economist endorses . . .

Thursday, October 30, 2008 | 11:30 PM

Gee, do you think Europe is looking for a change from the States?

Comments can be found here.

Thursday, October 30, 2008 | 11:30 PM | Permalink | Comments (0)
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Blaming the Bears

Thursday, October 30, 2008 | 05:35 PM

Here’s the latest act of idiocy: Blaming the media or the Bears for the credit collapse and market crash.

This not only demonstrates a total lack of understanding as to the difference between causation and correlation, but it evinces an utter disregard for the way the economy and markets  operate. makes about

A classic example of this form of brain damage can be seen on the comments of a recent Floyd Norris blog post, Consumers Drag Economy Down.  Norris notes, (as we did earlier today) “Consumers are clearly in retreat, and the economy is suffering. The year-over-year increase in real G.D.P. is 0.8 percent, the lowest for any four-quarter period since 2001.”

It didn’t take long — the second comment actually — before the ‘tards actually started blaming Norris for the collapse. Let’s see what Mark D. had to say:

Great. You guys are posting stuff that will create a self fulfilling prophecy.

Yes, it was all Floyd Norris of the New York Times who cut rates to 1%, and then kept them there for a long time. And, it was Norris who forced the banks to lever up 40X. It was he who forced the rating agencies to slap a triple AAA on junk paper, it was Norris who mandated that hedge funds, trusts, pension funds and other buy this junk paper.And of course, it was Norris who forced all those mortgage originators to write those NINJA loans, and all those home buyers to take 2/28loans they could not afford when the reset occurred.

Why does the internet cause people to turn their brains off? Does anyone ever think for even a second before posting nonsense like this?

Self-fulfilling prophecy?  Here’s a self-fulfilling prohecy: Write thoughtful intelligent commentary on the economy, and a large swath of humanity will trip over themselves trying to demonstrate why IQ test are given on a cuvre.

A few other observations:

1) Because the NBER has not yet declared this a recession only means the official start and end dates are unknown.  A recession can occur regardless of their declaration.

2) No, Charles J. Duffy, a recession is Not defined as “two consecutive quarters of negative real growth.” The NBER definition is here: http://www.nber.org/cycles/recessions.html

3) By that definition, we have likely been in a recession since December 2007, or perhaps January 2008.

~~~


The Big Picture is moving! The new post here

Thursday, October 30, 2008 | 05:35 PM | Permalink | Comments (36) | TrackBack (0)
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