Friday, October 24, 2008

Sub Prime Mortgages, What are they good for.

One of the key things killing this economy is the sub prime mortgages put into securities that come out of our secondary mortgage industry. So what is a sub prime mortgage and why do people want them and why would a mortgage company deal with them.

A sub prime mortgage is a mortgage that has low payments in the first 3 to 5 year but over time the interest rate rises to much higher than the prime interest rate and the loan payments become much higher after 5 years. so why would a person commit to a 20 to 40 year loan knowing that payments will climb over time so that they can not afford it. They do that because their credit rating is bad and the mortgage rate they would normally get would keep them from getting the house they love. So they take this loan to build their credit rating and in 3 to 5 years they refinance their house with their brand new clean credit rating. The intent of sub prime mortgages is for people with low income and poor credit to prove them selves.

so if the loan is much more likely to become default why would a company give the mortgage. Because they believe the value of the house will definitely climb. So if the loan must be foreclosed on in 3 to 5 years then the house will have gone up and therefore they will get their money back and possibly more because the value of the house has gone up. That was certainly true during the housing bubble but now that the bubble has burst, those sub prime mortgages are very scary problems. And that is one of the contributing factors. we have no idea when the house situation will even out and people can figure out what the actual value of those sub prime mortgages are. because if they get foreclosed on, people could lose their shirts on those houses because a foreclosed house is difficult to sell for profit in a bad housing market.

Next time you see Bill Clinton and a Democratic member of the house or Senate be sure and thank them for the 1999 legislation and the 2004 legislation that allowed Fannie Mae and Freddie Mac to include sub prime mortgages in their quotas for low income housing mortgages purchased and for helping them put those mortgages in our securities.

Tuesday, October 21, 2008

The Forgotten Man

America met Joe the Plumber last week. But a pro-market economist writing over a hundred years ago was already familiar with Joe Wurzelbacher and Americans like him -- and understood how they are used and exploited by politicians.

"They are always under the dominion of the superstition of government, and forgetting that a government produces nothing at all, they leave out of sight the first fact to be remembered in all social discussion -- that the state cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it. This latter is the Forgotten Man."

"He Works, He Votes, Generally He Prays - But He Always Pays"

Sumner wrote of the Forgotten Man: "He works, he votes, generally he prays -- but he always pays -- yes, above all, he pays."Joe the Plumber has struck a chord in the closing weeks of this election because he represents the Forgotten Man. When he confronted Sen. Barack Obama on the campaign trail with the question of what would happen to his taxes under an Obama Administration should he realize his dream of owning his own business, Joe cast the decision that faces us in this election in stark relief:

Which will be better for our economy: Politicians redistributing our wealth or growing more wealth?

Tuesday, October 7, 2008

Government, The problem or The Solution?

Ronald Reagen was elected because of a phrase "Government is the problem, not the solution". I believe that this is mostly the case. While the Government is the solution in some cases, Since the 1930s, our federal gov't has become more the problem and less the solution.

Is deregulation really the problem? Lets explore the issue. Our economy is like a human body. Money is the blood and banks are like a bunch of hearts pumping money in and out of the system. A significant amount of money banks take in comes from Securities founded on Mortgages. Banks leverage securities up to 40 times. For every security valued at $1 million they can loan up to $40 million dollars. This keeps the blood moving. Of course, 40 times is crazy. So if 5% of that $1 million is bad, then they should not have loaned out $1,000,000 *.05 * 40 = $2,000,000. Even though the security's value should only be reduced to $950,000, the money they have outstanding that shouldn't be out there is $2,000,000. And then other banks used that $2,000,000 to also create loans. House of cards!!

The 5% number comes from the Governments estimation to the loans in play in securities that they expect to fail. The $700 billion number for the bailout is 5% of the $12 trillion dollar mortgage market.

Where do these securities come from? Fannie Mae and Freddie Mac. They were created to help loan company's have more liquidity so that more people who couldn't afford houses at that time, afford houses. So Fannie Mae buys up loans from loan company's and creates securities which other companies buy because mortgages are usually a very safe bet. The security's value is based on how much the market will pay for it. So it's value is not based on it's actual value just on it's perceived value. When the sub prime mess became public knowledge these securities perceived value went down far lower than 5%.

How did fannie mae come to exist and how does it do it's job --- Government Regulation dedicated to helping people get houses that couldn't afford it.

Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano
's New Deal to provide liquidity to the mortgage market. For the next thirty years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States. In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.[6] Fannie Mae ceased to be the guarantor of government-issued mortgages, and that
responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae). In 1995, Fannie Mae began receiving affordable housing credit for buying subprime securities. In 1999, the Clinton administration and Fannie Mae shareholders encouraged the lender to increase the number of mortgage loans offered to those of low and moderate income, both to improve rates of home ownership among those groups and to increase profits.[7]
In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[8]

Fannie Mae and Freddie Mac gave money to many people in Congress. The person who received the second most money is Barack Obama.

So how did we get all these bad loans into securities. There were a lot of reasons but one of them was Government interference. First we have the 1977 Community Reinvestment Act. This act was passed under Jimmy Carter and it said, if you are bank that receives deposits from low income areas, you must also provide housing loans to low income areas. This was the Government telling people who they could make loans to. Now this act is 31 years old and not enough to have created the amount of poison we have in our blood stream. Now we have a set of "Community Organizers" in organizations like ACORN. This is a Federally funded organization that uses the Community Reinvestment Act to intimidate banks along with other intimidation factors to force banks to give more loans to people who normally couldn't get it. There was an attempt in Congress to give money to ACORN in the recent bailout bill. Barack Obama was a Community Organizer for ACORN. ACORN has also been linked to a fair amount of voter fraud.

So is Gov't the problem or the solution? It's is certainly a contributor to the problem. Do we need more Gov't to solve a problem that they helped create? I don't think so!

Monday, October 6, 2008

To regulate or not to regulate

The financial crisis has created a lot of accusations about deregulation. I hear the word unbridled a lot. But lets review the facts. In 2004 and several time before that and after, the Republicans attempted to increase regulation on Fannie May and Freddie Mac and those regulations were defeated primarily by Democrats. In 2007 the democratic controlled congress saw that their support 30 year support of these monstrosities that were created by regulation was going to come around and hurt them so they ended up passing the similiar bills to what the republicans wanted in 2004. However, 2007 was too little too late.

The point here is regulation is neither good nor bad. It depends on the regulation. Republicans have been trying to get rid of bad regulation and bring in good regulation.

Friday, October 3, 2008

Feeling and Valuing

I want to provide some wonderful excerpts from one of my favorite books "The Fisher King and the Handless Maiden" by Robert Johnson

This Book is about our Wounded feeling function, probably the most common and painful wound which occurs in our Western world. It is very dangerous when a wound is so common in a culture that hardly anyone knows that there is a problem. There is general discontent with out way of life but almost no one knows specifically where to look for its origin.
Thinking is that cool faculty which brings clarity and objectivity - but provides no valuing; sensation describes the physical world - but provides no valuing; intuition suggests a wide range of possibilities - but provides no valuing. Only feeling brings a sense of value and worth; indeed, this is its chief function. Without feeling there is no value judgment. To lose one's feeling function is thus to lose one of the most precious human faculties, perhaps the one that makes us most human. We can understand the term feeling more accurately if we define it as the capacity to value or to give worth to something. People who have a finally differentiated feeling function bring grace and good feeling with them; one feels valuable in their presence.
The feeling function is a casualty of our modern way of life. To search out the loss or woundedness of this most valuable faculty is the task of our book.

The very term feeling is itself ambiguous, an orphan word. Its true meaning has not quite differentiated itself from its tactile origins. It derives from the verb to feel in its tactile sense. Our use of the word feeling is made to describe much more subtle realms. The act of valuing has no dignified term of its own and is still tied by an unseen umbilical cord to the realm of sensation. Little wonder that strong feeling is unconsciously tied to some physical act that we think should give expression to it. Of course, one may make sublime expression of feeling by a physical act, but feeling should not be unconsciously tied to the physical realm. Feeling is on of the wonderful, terrible, ambiguous words that contribute so much to our confusion.