Comments on: The Safety Net That Never Was – Part VIII http://housingdoom.com/2006/09/05/safety-net-viii/ Sat, 11 Feb 2012 01:19:56 +0000 hourly 1 http://wordpress.org/?v= By: Mike http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1062 Mike Sat, 09 Sep 2006 20:15:01 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1062 William, i would like to move to California and vote for you. You and your wife are an example of what may save this nation and help fund my social security. William, i would like to move to California and vote for you. You and your wife are an example of what may save this nation and help fund my social security.

]]> By: William http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1061 William Sat, 09 Sep 2006 17:27:44 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1061 Your comments about education is telling about keeping up appearances because I don't remember it costing a lot during my school days. I went to public schools K-12. And I went to the 2nd-tier CA university system after 3 years of picking up credits at the community college. $250 a year the first 3 at CCSF, $2000 the next 3 at SFSU. Even if I assume psychotic 10% inflation every year, that means my kid's total college bills will be $35K. If I can work part-time during the mid-90's and earn $10K a year, I don't see why my kid won't be able to do $20K part-time just due to minimum wage increases. But of course, being frugal for college means going to -- GASP! -- community/state colleges. Where a student gets the same education as a private school costing 40 times more -- because in the end, it's the effort the student puts in that controls what he learns. I think education is yet another poorly thought out decision for most people. For very specific jobs, the name of the school might count -- you want to join NASA/JPL, you're best shot is going to one of the top tech schools. You want to be a CEO, you need a Harvard or Stanford MBA. People continually repeat the mantra that education is an investment. Then why aren't they applying cost/benefit analysis that befits an investment? Will getting Harvard on your degree increase your earning power and will it be enough to pay for $200K in student loans? (There's plenty of online college cost calculators available -- what we now need is a reality check calculator that determines what the value of your education will be on your earning power.) Your comments about education is telling about keeping up appearances because I don’t remember it costing a lot during my school days. I went to public schools K-12. And I went to the 2nd-tier CA university system after 3 years of picking up credits at the community college. $250 a year the first 3 at CCSF, $2000 the next 3 at SFSU. Even if I assume psychotic 10% inflation every year, that means my kid’s total college bills will be $35K. If I can work part-time during the mid-90′s and earn $10K a year, I don’t see why my kid won’t be able to do $20K part-time just due to minimum wage increases.

But of course, being frugal for college means going to — GASP! — community/state colleges. Where a student gets the same education as a private school costing 40 times more — because in the end, it’s the effort the student puts in that controls what he learns.

I think education is yet another poorly thought out decision for most people. For very specific jobs, the name of the school might count — you want to join NASA/JPL, you’re best shot is going to one of the top tech schools. You want to be a CEO, you need a Harvard or Stanford MBA. People continually repeat the mantra that education is an investment. Then why aren’t they applying cost/benefit analysis that befits an investment? Will getting Harvard on your degree increase your earning power and will it be enough to pay for $200K in student loans?

(There’s plenty of online college cost calculators available — what we now need is a reality check calculator that determines what the value of your education will be on your earning power.)

]]> By: John M. http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1060 John M. Sat, 09 Sep 2006 12:40:33 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1060 William - Congratulations to you and your wife on being savers. The Fed could use another 10 million or so households like yours about now! Just pray everyone stays healthy and your child(ren) win(s) scholarships at university. The middle class need vs middle class greed debate is almost unanswerable. Sometimes you really need to consume overpriced/inflating healthcare and education for family members. Sometimes you even need to keep up with the Joneses just to stay in the middle class. Ugh. Today is a reminder that it's even worse to be poor. A report is out showing that the use of nonprime (more expensive) mortgages jumped sharply in 2005, with the lion's share of the burden falling on minorities. William -

Congratulations to you and your wife on being savers. The Fed could use another 10 million or so households like yours about now! Just pray everyone stays healthy and your child(ren) win(s) scholarships at university.

The middle class need vs middle class greed debate is almost unanswerable. Sometimes you really need to consume overpriced/inflating healthcare and education for family members. Sometimes you even need to keep up with the Joneses just to stay in the middle class. Ugh.

Today is a reminder that it’s even worse to be poor. A report is out showing that the use of nonprime (more expensive) mortgages jumped sharply in 2005, with the lion’s share of the burden falling on minorities.

]]> By: William http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1059 William Sat, 09 Sep 2006 09:58:45 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1059 For the poor in this country, yes their expenditures are almost 100% living expenses. But for the middle class, you can pretty much classify everything as consumerism or greed. My wife and I (and our 10 month old son) live in San Francisco. We rent a condo in the SOMA district -- the hottest and trendiest housing market. (Although this is changing rapidly -- the new 45-unit condo just built across the street from me has about 4 occupied from looking at the lights that are on during the evenings.) Because we rent, we're not saddled with a psychotic mortgage payment. We don't have iPods or plasma TVs or whatever. Toys/clothes/car seats/furniture for our son are hand-me-downs or loaners. (Why buy when the stuff is outgrown in 3 months?) Our car is a MINI Cooper. (While there are more gas efficient cars, you can't beat the discipline it forces on you -- if you can't fit it in the car, you can't buy it.) Not that gas efficient matters much when you walk to work. We make average professional salaries for our age (35+30). And of our combined post-tax income, we currently salt away 59%! (This is after paying for a nanny who looks after our son during the daytime and also cooks for us.) So if an average middle class family living in the #2 most expensive place in the U.S. can put 59% of our post-tax income into savings and investments while raising a kid, the idea that middle class Americans are being forced to take out suicide loans to tread water is ludicrous. They've been taking out these loans to finance lifestyles beyond their means -- vacations, SUVs, bigger houses, whatever. Now the bill is due -- my only concern is there'll probably be taxpayer bailouts and stock market downturns due to the bubble bursting. For the poor in this country, yes their expenditures are almost 100% living expenses. But for the middle class, you can pretty much classify everything as consumerism or greed.

My wife and I (and our 10 month old son) live in San Francisco. We rent a condo in the SOMA district — the hottest and trendiest housing market. (Although this is changing rapidly — the new 45-unit condo just built across the street from me has about 4 occupied from looking at the lights that are on during the evenings.) Because we rent, we’re not saddled with a psychotic mortgage payment. We don’t have iPods or plasma TVs or whatever. Toys/clothes/car seats/furniture for our son are hand-me-downs or loaners. (Why buy when the stuff is outgrown in 3 months?) Our car is a MINI Cooper. (While there are more gas efficient cars, you can’t beat the discipline it forces on you — if you can’t fit it in the car, you can’t buy it.) Not that gas efficient matters much when you walk to work.

We make average professional salaries for our age (35+30). And of our combined post-tax income, we currently salt away 59%! (This is after paying for a nanny who looks after our son during the daytime and also cooks for us.)

So if an average middle class family living in the #2 most expensive place in the U.S. can put 59% of our post-tax income into savings and investments while raising a kid, the idea that middle class Americans are being forced to take out suicide loans to tread water is ludicrous. They’ve been taking out these loans to finance lifestyles beyond their means — vacations, SUVs, bigger houses, whatever. Now the bill is due — my only concern is there’ll probably be taxpayer bailouts and stock market downturns due to the bubble bursting.

]]> By: Mike http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1058 Mike Wed, 06 Sep 2006 04:52:30 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1058 WHEN THE HOUSEHOLD EXPENDITURES ON CELL PHONES, LOTTO TICKETS, BEER,COSMETICS, HBO AND CALL WAITING ARE ELIMINATED LETS TALK ABOUT HEATH INSURANCE,UNTIL THEN PAY THE MORTGAGE! WHEN THE HOUSEHOLD EXPENDITURES ON CELL PHONES, LOTTO TICKETS, BEER,COSMETICS, HBO AND CALL WAITING ARE ELIMINATED LETS TALK ABOUT HEATH INSURANCE,UNTIL THEN PAY THE MORTGAGE!

]]> By: Stephen http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1057 Stephen Wed, 06 Sep 2006 04:15:04 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1057 "Irresponsible Consumerism" is a misnomer. With wages stagnant, benefits like health insurance disappearing, and cost of living constantly rising, people are overborrowing as a last ditch effort to tread water. Of course, bait and switch on the part of the real estate industry, no, make that con artists called "Real Estate Professionals" are the primary culprit. “Irresponsible Consumerism” is a misnomer. With wages stagnant, benefits like health insurance disappearing, and cost of living constantly rising, people are overborrowing as a last ditch effort to tread water. Of course, bait and switch on the part of the real estate industry, no, make that con artists called “Real Estate Professionals” are the primary culprit.

]]> By: Mike http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1056 Mike Wed, 06 Sep 2006 03:27:01 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1056 John, to me the limits of slavery run from the african experience (both inside and outside Africa) to the Irish experience escaping from British genocidal policy. Modern asian sex trade slavery falls somewhere in between, but all are far more serious and coercive than Mr. and Mrs. American Six Pack having to pay back upside down loans they took out to support a lifestyyle that would be the envy of most Ukranians past and present. I do not buy the argument that borrowers in America require much more than the self descipline exhibited by their grandparents and 90% of the world to escape a "bondage" that vast numbers of our southern and carribean neighbors would gladly accept in exchange for 18 hour work days and grinding poverty. The more we spread the costs seeking a "humane' solution, the more we enable the behavior. John, to me the limits of slavery run from the african experience (both inside and outside Africa) to the Irish experience escaping from British genocidal policy. Modern asian sex trade slavery falls somewhere in between, but all are far more serious and coercive than Mr. and Mrs. American Six Pack having to pay back upside down loans they took out to support a lifestyyle that would be the envy of most Ukranians past and present. I do not buy the argument that borrowers in America require much more than the self descipline exhibited by their grandparents and 90% of the world to escape a “bondage” that vast numbers of our southern and carribean neighbors would gladly accept in exchange for 18 hour work days and grinding poverty. The more we spread the costs seeking a “humane’ solution, the more we enable the behavior.

]]> By: John M. http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1055 John M. Wed, 06 Sep 2006 00:44:37 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1055 A technical note: Mike, I see what your problem is now with the editor. It doesn't respect paragraphing like it should when you compose directly in the comments window. I'll pass the problem to our tech support. Usually I compose offline with HTML using P, BR, BLOCKQUOTE, etc. labels and apply HTML source to the window. The comments window clearly doesn't do the right thing with plain old text. A technical note:

Mike, I see what your problem is now with the editor. It doesn’t respect paragraphing like it should when you compose directly in the comments window. I’ll pass the problem to our tech support. Usually I compose offline with HTML using P, BR, BLOCKQUOTE, etc. labels and apply HTML source to the window. The comments window clearly doesn’t do the right thing with plain old text.

]]> By: John M. http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1054 John M. Wed, 06 Sep 2006 00:30:59 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1054 [for what it’s worth, Igor thought this effort was spam, so be warned] ;)Mike -Here's a rough draft of a response to the questions and points you've raised. I'm not really happy with how I dealt with your taking me to task on slavery (see below). I may try a seperate post on that if things come together and twist can fit it in. With luck that would be a tighter presentation than these first thoughts. It might not even be this week.First of all, I have few of the usual qualifications for standard macro analysis, so can't really comment on the inverted yield curve. I never really "got" statistics, calculus, diff equations, and so on although I pursued (with some futility) undergraduate measure theory and the calculus stream as far as early graduate level functional analysis. My better intuitive feel is for discrete subjects like graph theory and baby algebra. My macro analysis, such as it is, derives from extrapolating human "group dynamics", in the near-pop-psychology sense, into emergent behavior in the large. Basically, all I'm doing is randomly reading a lot of odd internet news stories and rants and detecting trends using a sense of "smell" informed by some funny diagrams I discovered. My posts contain a lot of links because I suspect the reader can often get more benefit following them than reading my opinions!That being said, the inverted yield curve <em>per se</em> wouldn't be helping borrowers, but the historic low yields on the 10 year treasury bond certainly would. The inversion appears to be a factor in the complete pandemonium engulfing the mortgage banking industry today. Mortgage lenders lend long and borrow short, so the inversion clearly impacts their profits. Combine this with the natural shrinkage in the loan business as the bubble winds down (as noted by Roubini in <a rel="nofollow" href="http://www.rgemonitor.com/blog/roubini/144500/" rel="nofollow">a post</a> yesterday) and you have some people talking about a "perfect storm". I hope to talk about this a bit in episode IX, with a dose of our current favorites, the appraisers, thrown in for good measure. But once again, I haven't a clue how the inversion would flow through the other parts of the macro economy.In <em>Harper's</em> for 01May06 there was a feature: "The New Road to Serfdom - An Illustrated Guide to the Coming Real Estate Collapse", by Michael Hudson. Here's the <a href="http://www.harpers.org/art/covers/2006-05_350x476.jpg" rel="lightbox[174]" rel="nofollow" rel="nofollow">cover image (JPG)</a>. That didn't have much content but was one of the very first alarmist articles in the MSM. They did note that the Japanese bubble and burst were symmetric, and we can count on something like that happening here, too. The bottom line is that we are looking at a lot of losses. Clearly the interested parties will try to make past present and future lenders, consumers, taxpayers, borrowers, and anyone else that comes to hand the fall guy. Equitably sharing out the pain is going to be difficult. Morality will be a critical driver, but so will be the practical limits of what each group can stand (not to mention how well they can defend themselves). Doom's primary purpose now that the bubble has burst will likely be to find some, in fact any, humane and practical way out of this mess.I understand that the new 2005 US <a rel="nofollow" href="http://www.newbankrupt.com/" rel="nofollow">Bankruptcy Act</a> makes it quite a bit harder for borrowers to shed their debts. My concern is that post-bubble, many middle class Americans will be over their heads and in danger of falling into <a rel="nofollow" href="http://en.wikipedia.org/wiki/Debt_bondage" rel="nofollow">debt bondage</a>. From vague things I've heard and read, I suspect that your average Joe Sixgoats early 19th century Ukrainian farmer might not share your opinion about the moral high ground occupied by his friendly neighborhood financial services guy relative to, say, an SC planter from the same era. [for what it’s worth, Igor thought this effort was spam, so be warned] ;) Mike -Here’s a rough draft of a response to the questions and points you’ve raised. I’m not really happy with how I dealt with your taking me to task on slavery (see below). I may try a seperate post on that if things come together and twist can fit it in. With luck that would be a tighter presentation than these first thoughts. It might not even be this week.First of all, I have few of the usual qualifications for standard macro analysis, so can’t really comment on the inverted yield curve. I never really “got” statistics, calculus, diff equations, and so on although I pursued (with some futility) undergraduate measure theory and the calculus stream as far as early graduate level functional analysis. My better intuitive feel is for discrete subjects like graph theory and baby algebra. My macro analysis, such as it is, derives from extrapolating human “group dynamics”, in the near-pop-psychology sense, into emergent behavior in the large. Basically, all I’m doing is randomly reading a lot of odd internet news stories and rants and detecting trends using a sense of “smell” informed by some funny diagrams I discovered. My posts contain a lot of links because I suspect the reader can often get more benefit following them than reading my opinions!That being said, the inverted yield curve per se wouldn’t be helping borrowers, but the historic low yields on the 10 year treasury bond certainly would. The inversion appears to be a factor in the complete pandemonium engulfing the mortgage banking industry today. Mortgage lenders lend long and borrow short, so the inversion clearly impacts their profits. Combine this with the natural shrinkage in the loan business as the bubble winds down (as noted by Roubini in a post yesterday) and you have some people talking about a “perfect storm”. I hope to talk about this a bit in episode IX, with a dose of our current favorites, the appraisers, thrown in for good measure. But once again, I haven’t a clue how the inversion would flow through the other parts of the macro economy.In Harper’s for 01May06 there was a feature: “The New Road to Serfdom – An Illustrated Guide to the Coming Real Estate Collapse”, by Michael Hudson. Here’s the cover image (JPG). That didn’t have much content but was one of the very first alarmist articles in the MSM. They did note that the Japanese bubble and burst were symmetric, and we can count on something like that happening here, too. The bottom line is that we are looking at a lot of losses. Clearly the interested parties will try to make past present and future lenders, consumers, taxpayers, borrowers, and anyone else that comes to hand the fall guy. Equitably sharing out the pain is going to be difficult. Morality will be a critical driver, but so will be the practical limits of what each group can stand (not to mention how well they can defend themselves). Doom’s primary purpose now that the bubble has burst will likely be to find some, in fact any, humane and practical way out of this mess.I understand that the new 2005 US Bankruptcy Act makes it quite a bit harder for borrowers to shed their debts. My concern is that post-bubble, many middle class Americans will be over their heads and in danger of falling into debt bondage. From vague things I’ve heard and read, I suspect that your average Joe Sixgoats early 19th century Ukrainian farmer might not share your opinion about the moral high ground occupied by his friendly neighborhood financial services guy relative to, say, an SC planter from the same era.

]]> By: Mike http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1053 Mike Tue, 05 Sep 2006 15:59:34 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1053 John, An informative posting but don't you think many lenders, and responsible consumers, are merely being set up to be the fall guys for irresponsible borrowers? In the last 10 years political types of both stripes have hammered on the need to make housing "affordable" either to promote an ownership society agenda(the Rs) or to pander to low income and public empolyee groups (the Ds). To make a profit in a very low interest rate environment and hedge rate increase risk by sharing it with the borrower, loans with adjustable rates and other new features were more widely deployed. Regardless, the lending institutions and their regulators responded with a whole variety of exotic products, stimulating unsound home purchasing demand across ALL income groups... with a predictable contribution to a price bubble. Ironically, and predicably, this resulted in housing being less affordable in both nominal and real terms. Today we need to remember that many people with so-called toxic loans can afford to continue paying them (for now) with spending restraint in other areas (really need that new cell phone and bass boat bubba?). Many are people who used these mortgage products with knowledge of the risks and hope for reward. How many people really didn't understand that a adjustable rate mortgage could adjust upward? The number of loans "upside down" is not a proper proxy for those that can, should or will default in the housing business any more than with loans on autos or boats. Truly "predatory loans" or lending practices have remedies, but I suspect that only a tiny fraction of recent loans are actually of that class. In a nation where obesity is a major health problem, even for those on public assistance, we need to be careful about urging citizens to "walk away" from upside down loans. Lending cannot be a heads we win, tails you lose proposition in favor of the borrower. We can blame McDonalds for obesity and the banks for so-called "predatory loans" but it would be interesting to know what percentage of borrowers "fudged" their income even without urging from a mortgage broker. In one of your prior postings on this topic you used an analogy to "slavery" of the "middle class" in discussing the effects of such lending. Are any consumers coerced into taking that next loan or buying that next double cheeseburger? Slavery is an evil and coercive practice, so far removed from even the most eggregious lending practice that such hyperbole is not helpful. Now a question: As a macro-guy, do you believe the inverted long yield has cushioned the effects on these borrowers to date and resulted in a strange situation whereby fear of a recession makes these loans more viable for a longer period of time? John, An informative posting but don’t you think many lenders, and responsible consumers, are merely being set up to be the fall guys for irresponsible borrowers? In the last 10 years political types of both stripes have hammered on the need to make housing “affordable” either to promote an ownership society agenda(the Rs) or to pander to low income and public empolyee groups (the Ds). To make a profit in a very low interest rate environment and hedge rate increase risk by sharing it with the borrower, loans with adjustable rates and other new features were more widely deployed. Regardless, the lending institutions and their regulators responded with a whole variety of exotic products, stimulating unsound home purchasing demand across ALL income groups… with a predictable contribution to a price bubble. Ironically, and predicably, this resulted in housing being less affordable in both nominal and real terms. Today we need to remember that many people with so-called toxic loans can afford to continue paying them (for now) with spending restraint in other areas (really need that new cell phone and bass boat bubba?). Many are people who used these mortgage products with knowledge of the risks and hope for reward. How many people really didn’t understand that a adjustable rate mortgage could adjust upward? The number of loans “upside down” is not a proper proxy for those that can, should or will default in the housing business any more than with loans on autos or boats. Truly “predatory loans” or lending practices have remedies, but I suspect that only a tiny fraction of recent loans are actually of that class. In a nation where obesity is a major health problem, even for those on public assistance, we need to be careful about urging citizens to “walk away” from upside down loans. Lending cannot be a heads we win, tails you lose proposition in favor of the borrower. We can blame McDonalds for obesity and the banks for so-called “predatory loans” but it would be interesting to know what percentage of borrowers “fudged” their income even without urging from a mortgage broker. In one of your prior postings on this topic you used an analogy to “slavery” of the “middle class” in discussing the effects of such lending. Are any consumers coerced into taking that next loan or buying that next double cheeseburger? Slavery is an evil and coercive practice, so far removed from even the most eggregious lending practice that such hyperbole is not helpful. Now a question: As a macro-guy, do you believe the inverted long yield has cushioned the effects on these borrowers to date and resulted in a strange situation whereby fear of a recession makes these loans more viable for a longer period of time?

]]> By: arizonadude http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1052 arizonadude Tue, 05 Sep 2006 14:07:56 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1052 Very great information on your blog. Most people are leveraged to the sky and are living paycheck to paycheck. They are pushing the limits to keep up w/ the jones. Consumerism is out of control and we need to have some people help us get back to helping thy neighbor. Very great information on your blog. Most people are leveraged to the sky and are living paycheck to paycheck. They are pushing the limits to keep up w/ the jones. Consumerism is out of control and we need to have some people help us get back to helping thy neighbor.

]]> By: John M. http://housingdoom.com/2006/09/05/safety-net-viii/#comment-1051 John M. Tue, 05 Sep 2006 11:20:50 +0000 http://housingdoom.com/2006/09/04/safety-net-viii/#comment-1051 <p> The bond market continues to have an insatiable appetite for less-than-prime paper, it would seem. This from a story [1] today in Realty Times. <blockquote><em>"'Alt-A' loan volumes rebounded to record levels in the second quarter after a first quarter downturn, according to Standard & Poor's 'Trends in U.S. Residential Mortgage Products: Alt-A Sector Second-Quarter 2006'."</em></blockquote> </p> <p align=left>________________________</p> <p>[1]: <a href="http://realtytimes.com/rtcpages/20060905_lendersrisky.htm" rel="nofollow">"Lenders, Analysts Don't See Risk In 'Risky' Loans"</a>, by Broderick Perkins, <em>Realty Times</em>, September 5, 2006.</p> The bond market continues to have an insatiable appetite for less-than-prime paper, it would seem. This from a story [1] today in Realty Times.

“‘Alt-A’ loan volumes rebounded to record levels in the second quarter after a first quarter downturn, according to Standard & Poor’s ‘Trends in U.S. Residential Mortgage Products: Alt-A Sector Second-Quarter 2006′.”

________________________

[1]: “Lenders, Analysts Don’t See Risk In ‘Risky’ Loans”, by Broderick Perkins, Realty Times, September 5, 2006.

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