There goes some hope...

The obama administration planned to reduce mortgage insurance by .25% or 25 basis points from .85 to .6 and that order was reversed by one of the first acts of the new administration.

Leave the politics of the decision aside, with increasing mortgage rate this was expected to help the entry level mortgages and now that is gone. Don’t be surprised if it ends up disrupting Jan and Feb sales/ closing.

http://thehill.com/policy/finance/315336-white-house-suspend…

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Prices should never be set by administrative fiat. There exists a greater law for setting prices, Supply and Demand by the whole market.

Denny Schlesinger

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<<<Prices should never be set by administrative fiat. There exists a greater law for setting prices, Supply and Demand by the whole market.>>>

Is that not pretty much what caused the housing crisis? Reward was divorced from risk largely due to regulations, approval or rejection was divorced from qualification for loans due to regulations, and and thereby systematically loans for homes were created that were divorced from proper pricing in regard to risk and asset value supporting the loans.

I.e., in simplicity terms, from a prior thread, mortgages were written without allowing supply and demand to set prices. The result was of course disastrous.

Tinker

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OT: Ah, but what if the sum total of the intitiatives allow the economy to grow much faster? Is that not better?

Is that not pretty much what caused the housing crisis? Reward was divorced from risk largely due to regulations, approval or rejection was divorced from qualification for loans due to regulations, and and thereby systematically loans for homes were created that were divorced from proper pricing in regard to risk and asset value supporting the loans.

I.e., in simplicity terms, from a prior thread, mortgages were written without allowing supply and demand to set prices. The result was of course disastrous.

If you are implying the financial crisis is about sub-prime and sub-prime has happened because there was government fiat or mandate, nothing can be further from truth.

This blog sort of captures the moment at the real time.

http://www.calculatedriskblog.com/2007/11/were-all-subprime-…

The crisis is because of prime loans. There were many research studies done showing that.

As far as the government interference, I have not seen any economist complained about FDIC insurance rate changes.

These discussions really get very political and I will leave it here.

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I.e., in simplicity terms, from a prior thread, mortgages were written without allowing supply and demand to set prices. The result was of course disastrous.

I view more as the fact that no one had skin in the game, thus moral hazard. Exact same thing happened under the S&L crises in the 80’s. You could buy an S&L with debt, put all the depositors assets into a risky bet and if it paid off, you get rich, if not you walk away and let the FDIC and debt holders take a bath. You don’t need a lot of complicated regulations if people have their own money at risk.
Homeowner’s should not get interest only, no money down loans.
Banks should not be able to sell off every risky loan, or at least have a clawback clause, that includes bonuses.

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<<<I view more as the fact that no one had skin in the game, thus moral hazard>>>

Exactly. Moral hazard divorces risk from reward, thus price from costs. It happens because banks were able to profit on loans and then sell them off risk-free.

However, the only way they were able to do this was because of Federal loan guarantees that incentivized those they bundled and sold these loans to that the risks were minimal, otherwise they could not have sold these loans at such lucrative prices to these acquirers. We forget that the people who bought the loans did not do so in order to benefit the banks but themselves as well.

This is text-book moral hazard that the insurance companies are very well aware of and price for it and structure their insurance contracts with the moral hazard in mind. Not so the Federal government.

Is like Federally insured flood insurance, because the flood risk is so great that private insurance companies will not insure properties at high flood risk. This moral hazard causes people to buy houses in high flood risk areas, and then complain about it when the Mississippi, for example, floods again.

Tinker

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These discussions really get very political and I will leave it here.

Supply and demand are entirely economic.

Denny Schlesinger

However, the only way they were able to do this was because of Federal loan guarantees that incentivized those they bundled and sold these loans to that the risks were minimal, otherwise they could not have sold these loans at such lucrative prices to these acquirers.

Again, the point of federal loan guarantees only caused bundling is totally inaccurate. It is not the FHA loans.

It wasn’t Harlem, Philadelphia, Baltimore, Chicago, Detroit or any other poor, largely minority urban area covered by the CRA. No, the crisis was worst in Florida, Arizona, Nevada and California. Indeed, the vast majority of the housing collapse took place in the suburbs and exurbs, not the inner cities…

The raters stamped AAA grades – the same as given to U.S. government debt – on what they should have known were junk mortgage securities in order to gain market share

This is the failure of the free market and not the government. It is the government and tax payer bailed out the free market. The real moral hazard is we didn’t let enough firms go bankrupt.

http://www.fresnobee.com/news/business/biz-columns-blogs/art…

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CM,

I will look deeper into the issue. One thing I remember is real estate agents trying to recruit me to be their closing attorney (I said no), and banks wanting to give me $1.5 million mortgage when the house I wanted only required a $500k mortgage (which I said no). Ending up selling the home for the same price I bought it for (so saying no was the good thing, although few people did so back then), but dang, should have kept the home as I am sure it is probably 50% or more valuable now. Wonderful how quality bought at a good price perseveres even through a bubble.

But whatever the source, the moral hazard, totally agree, and that was the disputed issue back then, to bail them out or let them go bankrupt. From a politicians perspective, you let them go bankrupt (for the public good) you don’t get anyone in your gratitude. Bail them out, and you have Wall Street owing you. Almost all politicians would go the bail out way if plausible. Another moral hazard (inherent with government, that it is other people’s money, and your currency is votes).

But yes, we are approaching political here, and I don’t want to do that. I am just talking philosophically, but given how everything is politicized, I’ll leave it at that and not go further.

Thanks CM.

Tinker

perhaps mortgage insurance rates should be based on the risks involved, not on edicts from President politicians of either party.

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Good points taken. Wondering if there might not be some other benefits coming to consumers. Waiting and hopeful.

John

It’s hard to keep politics and business separate at times isn’t it? Tough to find the line. They can be so intertwined. If your goal is to do so, what questions do you ask to help you not cross that line?

John

There is no separating politics from business, the economy and life in general. The definition of politics is “The art of governing.” But there is a line we can draw and not cross and that is to separate bipartisan dueling from actual governing. For example, we could discuss immigration and not mention (vilify) parties or politicians.

Denny Schlesinger

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Thanks for jumping in and processing with me. My question was kind of rhetorical and you made my point. Pretty hard to separate the two and there really is an art to discussing these together. Don’t want to veer too far off here, but the more we think we know, the more we really don’t know. Perhaps it touches a raw nerve in what we value or don’t value. Humility can go a long way, but we should be able to mention parties/politicians without being in attack mode.

Warmly, John

Humility can go a long way, but we should be able to mention parties/politicians without being in attack mode.

Indeed! Thanks,

Denny Schlesinger