Merry Christmas, everyone!!

The Temptations - Silent Night

The Latest Mortgage Foreclosure Mess is just another Financial Crisis

Warren Mosler

Economist specializing in monetary policy and running for Senator Dodd's Senate seat

The current mortgage crisis is not a real economic crisis.There have been no houses that have been actually destroyed - there has been no fire, no hurricane, or no earthquake damage. It's entirely a financial crisis, at least so far. So the government appropriate response doesn't include bulldozers, hammers and concrete. Just data entries into spread sheets in the Fed's computer.

The question is, are the authorities standing by with policy responses as needed to make sure it doesn't spill over into the real economy? To make sure people can still go to work, to grow food and to eat it, to build houses and live in them, to make shoes and wear them, to go hospitals and take care of sick people, to go schools and teach classes, to maintain the infrastructure of our country and to do cancer research?

Unfortunately the authorities are not doing any such thing. Therefore it all just might again needlessly/tragically spill over to the real economy, like it did in August 2008, when they let the last financial crisis spill over into the real economy, and from which we are only beginning to recover.

As I said then, and repeat once more, it's critically important to identify and punish the bad guys with a vengeance and alter incentives that support fraud. And it's even more important to not let the financial crisis spill over into the real economy by letting aggregate demand fall, sales collapse, and real jobs get lost. 

And today, as in August 2008, interest rate cuts and just about anything else the Fed might do isn't going to do the trick, and more likely will probably just continue to make things worse. Now, as then, and as always, an immediate fiscal adjustment is the needed silver bullet that restores demand. 

And now, as then, I continue to propose a full payroll tax (FICA) suspension which will immediately work to restore private sector aggregate demand, sales, and jobs. Private sector jobs are almost entirely a function of sales, directly or indirectly. Capitalism is driven by sales. When sales go up, jobs go up. A restaurant that's full doesn't lay anyone one off, no matter how much the owner dislikes the current tax structure, or the paper work. 

Public infrastructure spending can also a valid option. But it takes time, and it's ok to do both. Suspend FICA taxes and put in place desired infrastructure project funding, presumably in a well thought out basis with an eye to efficiency, and not in a blind rush to support aggregate demand.

So why is our government not standing by to suspend FICA taxes? 
And, even more pointedly, why haven't they already done so? Especially as it's a highly regressive punishing tax on the people we need and are hurting the most - the people actually working for a living who produce all the real goods and services that support our existence. 

Yes, it's the first deadly innocent fraud at work. The government thinks it needs those FICA revenues to be able to make Social Security payments. The problem is our elected Federal government officials do not understand actual monetary operations. If they did they'd recognize that the function of federal taxes is to regulate the economy and not to raise revenue. They don't understand the function of federal taxes is to simply take dollars away from us; it is not to give them what they need to spend. Their first clue should be that if we were to pay our taxes with old $20 bills they'd give us a receipt and then shred those $20 bills. Furthermore, is their not removing what's restricting aggregate demand (FICA taxes) so that normal spending patterns can resume getting something for nothing.

Instead, however, the deficit terrorists remain firmly in control. 
The best we can expect is for the decision makers not to raise taxes at year end when the tax cuts expire. There is no talk of actually lowering taxes for consumers, under any circumstances. 

Even the media's 'deficit doves' (who remain THE PROBLEM), agree that the 'long term deficits' are a problem, by pointing to interest rates as evidence that markets are currently willing to fund deficit spending, and talking about how austerity today is not the way to bring down deficits longer term. In general, they flagrantly violate 'Lerner's Law' (don't concede the principle) or what Lerner called 'Functional Finance' in the 1940's - government policy should target full employment and price stability regardless of whether it increased or decreased public debt, short term or long term.

So will this latest mortgage crisis hurt the real economy? Probably (and hopefully) not, best I can tell. It looks more to me like it's a potential transfer of dollars from banks and lenders with no propensity to spend to borrowers with high propensities to spend.

But I could easily be wrong. There is always the risk that it all somehow results in a further cutback in credit to the real economy. And while this potential drop in aggregate demand is easily offset by a simple fiscal response, the odds of our current gaggle of regulators and elected officials getting it right with an appropriate fiscal response seems slim and none.

John Maynard Keynes, after initially backing away from Lerner's 'Functional Finance' proposals, subsequently accepted them, writing: "[Lerner's] argument is impeccable, but heaven help anyone who tries [to] put it across to the plain man at this stage of the evolution of our ideas." 

I know the feeling!!!

Huffington Post: October 18, 2010 02:51 PM

Warren Mosler

Economist specializing in monetary policy and running for Senator Dodd's Senate seat

Debunking Fears

In the spirit of election time the focus for my posts this month is the dismal science.

This shot is from
             Lesson 1 Nat'l Debt & Budget Deficit Explained
 The Narrator comments are in red.  My questions are in blue.

Warren Mosler's Ingenious Healthcare Proposal

How many doctors would NOT absolutely love Warren Mosler's healthcare reform proposal?

Are you a healthcare professional? What do you think? I'm just curious and invite you to comment candidly below.

If you are like me and not a healthcare professional I'd like to know what you think too. Please comment below as to whether this sounds like a favorable or unfavorable proposal.

If you want to cut to the chase on this topic just advance the video to the 7 minute mark where the healthcare portion of the discussion begins.






Remember to post your comments. Thank you!!

"If we would have done this in 2008, back when I started propsing it, unemployment would have never gone beyond 6%"

The Social Security Trust Fund - What It Is And What It Isn't

The Operational Realities Monetarists Ignore

Borrow Smart!

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Seeking a Mortgage? Don't Get Pregnant.

From the New York Times  Monday July 19, 2010
 -by Tara Siegel-Bernard

Mortgage lenders are taking a harder look at prospective borrowers whose income has temporarily fallen while they are on leave, including new parents at home taking care of a baby. Even if a parent plans on returning to work within weeks, some lenders are balking at approving the loans.

“If you are not back at work, it’s a huge problem,” said Rick Cason, owner of Integrity Mortgage, a mortgage firm in Orlando, Fla. “Banks only deal in guaranteed income these days. It makes sense, but the guidelines are sometimes actually harsher than they need to be.”

Back in the slapdash days of easy credit, lenders were more likely to overlook the fact that a parent was out on maternity or paternity leave. But now that lenders have become more conservative, they are requiring new parents to jump through more hoops to prove their income will be enough to cover the mortgage.
So before some prospective parents start spending their Sundays at open houses, they should be prepared to deal with some complications. They may have to delay the purchase, deal with the banks’ bureaucracy (and requests for extra paperwork) or buy a home they can afford on one salary.

“Maternity leave or any other leave of absence often prevents a person from obtaining a mortgage,” said John Councilman, president of AMC Mortgage in Fallston, Md. “There are some who long for the days when such strict proof of income was not required.”

The lenders’ new attitude can be traced, in part, to new loan quality-control measures that went into effect earlier this year. Fannie Mae and Freddie Mac, the two quasi-governmental mortgage giants that buy the bulk of conventional loans from lenders, have not changed their rules for qualifying for a mortgage. But the system of checks and balances has been tightened, making lenders increasingly skittish.

Fannie, for instance, now requires lenders to recheck a borrower’s financial situation right before the loan closes. That includes calling an employer to verify employment. Before, lenders required only a statement in writing. Fannie’s new rules went into effect on June 1. Freddie’s similar rule took effect in January.

Both Fannie and Freddie have always required that borrowers have enough income to pay for the loan on closing day — and the lender must document that the income is likely to continue for at least three years.
But here is how some lenders are interpreting the guidelines for, say, a new mother receiving short-term disability insurance for a couple of months (new mothers may receive disability payments while on maternity leave, though the amount and length depend on state law and company policies).

Since the disability payments will not continue for three years, these lenders will not count it as qualifying income, brokers said, and will require the new mother to reapply for the mortgage once she returns to work. (The same logic may apply to an injured employee receiving worker’s compensation.)

That is what happened to Elizabeth Budde, a 33-year-old oncologist who lives in Kenmore, Wash. She nearly lost her mortgage after a loan officer learned she was home with her newborn.

With stellar credit and a solid job, Dr. Budde said she had been notified via e-mail that she was approved for a loan on June 15. But that note prompted an automatic, “out of the office” e-mail reply from Dr. Budde’s work account, which said she was out on maternity leave.

The next day, Dr. Budde received a second e-mail message from the lender, this time denying her loan approval. Since “maternity leave is classified as paid via short-term or temporary disability income,” the e-mail message said, it could not be used because it would not continue for three years.

The message also said the lender could not consider her regular, salaried income because she was not on the job. “I was really shocked,” Dr. Budde said. “At the time, they didn’t know how I was getting paid for my leave.”

The lender suggested that she get a co-signer — her husband is a graduate student, so his income was not enough to qualify — or reapply after she returned to work. But with the help of a representative from her real estate brokerage firm, Redfin, Dr. Budde was finally able to explain that she was receiving her full salary during her time off since she was using accumulated sick and vacation days. Once she provided a letter from her employer, proving her case, she was able to requalify.

“The reason we were buying the house was because we were having a baby,” said Dr. Budde, who is now living in the three-bedroom home, bought for $300,000. “And now we got punished for having a baby.”
Janis Smith, a spokeswoman for Fannie Mae, said there was nothing in its guidelines that would prohibit a borrower on maternity or paternity leave from qualifying for a mortgage, as long as the borrower had proof at the time of the closing that his or her income would be adequate upon returning to work. Letters from a doctor (with a return date) and the employer (stating the return date and salary) should be enough, she added.
Loans backed by the Federal Housing Administration follow a similar protocol. Brad German, a spokesman for Freddie, said its guidelines required underwriters to make sure the borrower’s income was stable and could be expected to continue for at least three years.

But, brokers said, many lenders are clearly reading those guidelines through an increasingly conservative lens. “Lenders are picking and choosing what part of the Freddie and Fannie guidelines they want to use and how they will interpret them because one bad loan could put a company out of business,” said Jeffrey J. Jaye, president of the Upfront Mortgage Brokers Association, a trade group for brokers who disclose their fees upfront.

For some lenders, that may mean approving a loan only after the borrower is back at work “There is no real assurance that the new mom will come back to work after she has the baby,” said Marc Savitt, president of the Mortgage Center, a brokerage in Martinsburg, W.Va. “It’s just prudent underwriting to go ahead and approve the loan, but she has to be back before closing.” (Lenders cannot ask a woman if she is pregnant, brokers said, but they can ask borrowers if they expect their employment or income situation to change.)
Indeed, if Fannie or Freddie learn that a loan does not meet its underwriting requirements, it can require the lender to repurchase the loan. Both companies are performing more quality control checks on the loans they buy or package and sell as securities. And, perhaps not surprisingly, the number of repurchase requests has risen sharply.

The companies said they required lenders to buy back a total of $3.1 billion in loans in the first quarter, up 64 percent from the same period last year.

“While repurchase requests have always happened in the past, it’s never been to the degree that is happening now,” said Kevin Iverson, president of the Reed Mortgage Corporation in Denver, acknowledging that the repurchasing is obviously driven by the high level of defaults. “The end result is lenders are running a bit scared. So when in doubt, they just reject the loan.”

Dave Varni, a real estate agent with McGuire Real Estate in San Francisco, recently learned about lenders’ nervousness about borrowers on leave while working with a couple expecting a baby within weeks. They wanted to make an offer on a home, but they needed both of their salaries to qualify. Ultimately, a mortgage broker told Mr. Varni that the expectant mother would not be considered “employed” when it was time to close the loan, which would probably disqualify her.

“It was eye-opening to me and my clients,” said Mr. Varni, who said the broker explained that lenders were skittish about lending to a new parent who might decide to stay home. “We are going to assess our situation and may have to shift our search to something where he could qualify by himself.”

Scorecards, Buckets and Points, The Anatomy of a Credit Scoring Model

There are four primary components to any credit score; the scorecards, the characteristics, the variables and the weights.

Scorecards – The scorecards are actually scoring models but cannot stand alone as a freestanding credit scoring system. All properly designed scorecards are built to evaluate the risk of a homogenous population. Bankrupt consumers is one example. “Consumers with thin credit reports” is another example. There are many more examples of scorecards but FICO and other model developers don’t generally disclose the exact definitions.

The purpose of having multiple scorecards in a model is to optimize it’s performance for all different consumer credit file types. If your credit score just had one scorecard then it would likely do well for one group of consumers and perform substandard for all others. That’s not a good credit scoring system. The better your developer is at defining a unique population, one that support it’s own scorecard, the better results from your credit score. Currently the FICO scoring system has 10 scorecards (for older versions) and 12 (for FICO 08). The following three components all reside within the scorecards.

Characteristics – A characteristic is simply a question the models asks your credit report. So, for example, “how many inquiries do you have in the past 12 months?” or “what is your revolving utilization?” or “what is the oldest account on your file?” Each scorecard has a different set of characteristics, but many of the same characteristics reside across multiple scorecards.

No model developer discloses all of their characteristics but we do know some of them and we do know that there are thousands of possible characteristics to choose from when building a model. There’s actually software designed to think up characteristics.

Variables – If the characteristic is best described as a “question” then the variable is best described as “the answer.” So, if the model asked you “how many inquiries do you have in the past 12 months” then the variable could be “none” or “one” or “15.” That’s why it’s called a variable, because the answer to the question can vary.

Each of your answers is going to place you neatly into a bucket or bin or class, they’re all the same thing so don’t get confused by the term. For example, here’s how inquiries COULD be bucketed, binned, or classed…THIS IS AN EXAMPLE.

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries

1 inquiry

2-5 inquiries

6-10 inquiries

>10 inquiries

The decision on how to break up those buckets is made by the model developer. He or she is trying to come up with the best scenario, which yields the most predictive model. This is an important step because you can’t simply choose how to break up your buckets based on common sense or anecdotal evidence. It has to be based on science. Just because you “think” 5 inquires is worse than 2 inquiries it doesn’t mean that it’s actually true. In the example above, 2, 3, 4, and 5 inquires all mean the same thing, which is why they’re all in the same bucket.

This “bucketing” process is going to apply to almost every characteristic in your scoring model. NOTE: Just because your bucket looks one way in one of the scorecards it doesn’t mean it’s going to look the same way in the others. It could easily look like this in a different scorecard…

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries

1 inquiry

2-4 inquiries

5-8 inquiries

9-12 inquiries

>12 inquiries

Weights – Weights, or point values, is where your scoring model is most visible to lenders and consumers. This is where your final score is going to start coming together. The weight is the point value given to your variable. So, if I used the above example here’s what it could look like…

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries = 50 points

1 inquiry = 45 points

2-4 inquiries = 40 points

5-8 inquiries = 20 points

9-12 inquiries = 5 points

>12 inquiries = 0 points

Just as it is with characteristics and variables, the point values will be different in different scorecards. So, using my first example for inquiry bucketing your weights could look like this…(remember, this is the same characteristic just in a different scorecard)

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries = 60 points

1 inquiry = 55 points

2-5 inquiries = 50 points

6-10 inquiries = 20 points

>10 inquiries = 0 points

This is what confuses so many “credit expert pretenders’ because they generally want to assign a fixed point value to each item on a credit report. When you look at these inquiry examples you quickly realize there is not a fixed value per inquiry. The value or points you earn is based entirely on what bucket you fall into. You don’t lose 5 points per inquiry. That’s not how scoring works.

There ended the lesson!

From Credit CRM blog by Jamison Law

FHA Changes for CLTV as of September

Combined Loan-to-Value Requirements for Refinance Transactions

This Mortgagee Letter eliminates the unlimited Combined Loan-to-Value (CLTV) ratio that was first introduced in Mortgagee Letter 2007-11. With the exception of streamline refinance transactions, the combined amount of the FHA-insured first mortgage and any subordinate lien may not exceed the:

• applicable FHA loan-to-value ratio  
• AND geographical maximum mortgage amount.

FHA is returning to its former CLTV limit for case numbers assigned on or after September 7, 2010.

Provided that the new FHA-insured first mortgage meets the eligibility criteria for mortgages with secondary financing outlined in HUD Handbook 4155.1 paragraph 5.C., existing or modified subordinate liens may remain outstanding; and/or new subordinate liens may be offered to facilitate the refinance. The chart below provides the applicable CLTV for refinance transactions. Maximum CLTV for Refinance Transactions

Rate and Term (or No Cash Out) Refinances                                     97.75%  (CLTV)

Refinances for Borrowers in Negative Equity Positions                               115% 

FHA-to-FHA Streamline Refinances With or Without Appraisals      125%  (CLTV)

Cash-out Refinances                                                                               85%   (CLTV)

Jeremy S. squared Op-ed Follow up -

 op-ed in the WSJ last week should be a laughing stock! I suspect these two goof balls know it too.  I find little value to spending time rebutting but I said I would so here goes.

There can be no bond bubble because it's a savings account not an equity.  It makes no difference what the yield is you still get your money back at maturity, guaranteed.   Nothing

is selling comes with a guarantee.  They're equity guys drumming self-preservation.   

Kudos to the CNBC crew that interviewed Professor Seigel as they correctly identify flaws as follows:

CNBC "I wonder, Professor Seigel,  how there can be a bond bubble specifically in treasuries when the government controls it and the government has ... explicitly pledged to keep interest rates low.  Does this mean that the bubble, if there is one, has to pop or can the air be let out more gradually as the government controls it?"
 
Siegel "Gobbeldeegook...1.4 Tarillllliiiooon dollar deficit.. Bippity-boppity-boo."

CNBC then makes a point that underscores what I said above - a bond is an investment has a guarantee and therefore cannot deflate nor can it inflate -  your money is always there at maturity.

It's a savings account, stupid!

Why I'm not pushing the rates-could-reverse-sharply pill.

Or the.reverse-quickly one either.  History clearly shows us that the Fed sets the trend.

Stormy
    www.moslereconomics.com
        Counter Insurgency, Deficit Terrorist Unit

Market close - no surprise!

Treasury auction met higher demand than opposing opinions expected and in turn MBS recovered from earlier lows.  The FNMA 30 year 3.5% coupon ended the day at 100.66 – up 19bp. 

.

Stock slid on news that existing home sales plummeted in July.  

                               

Contrary to the     

   

op-ed last week in the WSJ, The Great American Bond Bubble  , we are heading into a depression.  How painful will it get before mainstream and our policy makers lay down their foolish ideals, accept the truth and respond appropriately?   

Make no mistake – there is an appropriate response that can fix our economy and fix it fast.   Our only constraints are political. 

‘The Great American Bond Bubble’ oh MY!

This post is in rebuttal to today’s Wall Street Journal op-ed by Jeremy Siegel and Jeremy Schwartz fashionably titled ‘The Great American Bond Bubble’.    For anyone who is unable to view this WSJ piece in its entirety don’t feel left out!  Mr. Siegel was a guest on CNBC today –watch it here.

Going to have dinner, go swimming then will come back and finish my rebuttal.  It might be long, could be short.  Will post it here between now and Friday afternoon.   Your interest is appreciated.  lol  Interest.  Appreciate.  Get it?  

Resp,

MortgageAngel

Click here for follow up post

Uncle Sam thirsting for government securities?

Today's Clusterstock Chart of the Day and it's coinciding narrative

Why the thirst for government securities? Well, government has a big thirst for money, and in this environment, it's nice to put money with an entity that you're sure can pay you back.

Well, government has a big thirst for money

A sovereign government that spends by marking numbers up in your bank account and taxes by marking those same numbers down a notch, thirsting for something only it can create.

Does Parker Bros somehow prefer $500 bills over all the rest?

Been to a concert lately? How much did you pay for the tickets? And what did the host do with the tickets you gave in exchange for entry?

Think about it and ask what, if anything, does it mean?

24 HOUR EUROS

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The Mortgage Brokers You've Never Heard Of

This is an excerpt from an article in the December 2009 issue of RealtyTrac.  Read all of it here.

UMBA

The Upfront Mortgage Brokers Association (UMBA) has just 80 individual members and 10 company members. Based on the ideas of Jack Guttentag, aka “The Mortgage Professor,” a nationally syndicated real estate columnist and a Professor of Finance Emeritus at Wharton, the group has a code of ethics that actually means something.

For instance, members pledge that “the broker will endeavor to act in the best interests of the customer.” Nothing fuzzy about this, it creates a fiduciary obligation to represent borrowers.  Members also promise to “establish a price for services upfront, in writing, based on information provided by the customer.”

“The price,” says the UMBA code, “may be a fixed dollar amount, a percent of the loan, an

hourly charge for the broker's time, or a combination of these. The price or prices will cover all

the services provided by the broker. If the broker charges a loan processing fee, the amount

will be disclosed to the customer, regardless of whether it is paid directly to the broker or to a

third party.”

Lastly, with UMBA members hidden yield-spread premiums are out. Not only are such premiums disclosed, they're credited to borrowers.

“If the broker's fee is 1 point, for example,” says UMBA, “and the broker collects 1 point from the lender as a 'yield spread premium', the broker either charges the customer 1 point and credits the customer with the yield spread premium, or charges the customer nothing and retains the yield spread premium.”

You can see the benefit of the UMBA approach. If it makes sense to have a buyer broker representing you as a real estate purchaser, why would it not make sense to have a mortgage broker protect your interests when you get a loan?

UMBA is small and not well known, but the way things are going it's the future of mortgage brokerage. Members pledged to its standards are listed on its website, UpfrontMortgageBrokers.org

____________________

Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

Oh Happy, Happy New Year!