Turn on the tube and economic ignorance seems to be everywhere. There is constant shilling for more government. Business is demonized. Man is said to be trashing the environment. “Workers and women are oppressed” is the constant mantra.And members of the clueless media nod their heads in unison.Only John Stossel has provided the fresh air […]
In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]
In the minds of many people around the world, including in the United States, the term “capitalism” carries the idea of unfairness, exploitation, undeserved privilege and power, and immoral profit making. What is often difficult to get people to understand is that this misplaced conception of “capitalism” has nothing to do with real free markets […]
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In 2012, money mandarins running the European Union chose stagnation over restructuring. Here’s a consequence of that choice: expectations for a self-sustaining economic recovery keep getting crushed.Two years ago, European Central Bank (ECB) chief Mario Draghi promised to do “whatever it takes” to hold the eurozone together. He bluffed nervous investors into believing in a […]
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Americans have come to believe that the IRS and the income tax are inevitable parts of our lives. After all, most everyone alive today has lived his entire life under federal income taxation.It wasn’t always that way. For some 125 years, the American people lived without having any tax imposed upon their income.The obvious question […]
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Franklin Delano Roosevelt famously used the term “forgotten man” in a 1932 speech to describe those at the bottom of the economic pyramid who, he felt, government should aid.But the originator of the phrase “forgotten man” had a whole different meaning in mind. He aimed to expose the seeming good intentions of government to reveal […]
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Whatever your views on the role of government, one thing is clear: There will be no way to pay for it if the economy doesn’t grow. And I’m not talking by a measly percentage point or two. If we can’t find our way back to 5% annual economic growth or above soon, America’s accumulated federal […]
According to the Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper.Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why […]
Politicians love raising the minimum wage because they don’t have to ask voters to pay more in taxes. They just dump the costs onto shop owners. But they don’t act like politicians and go into debt to pretend like they have all the money in the world. They face real world situations. And sometimes that means replacing workers with more affordable options...
Regulation is supposed to keep you safe and make the economy function smoothly. At least that’s what they tell you in the news. But there’s another cost to regulation. One that you won’t hear about unless you have to deal with directly. And for the people in the economy who do, they’re the ones who have to pay the final cost.
The experts will tell you the recession is over, but they’re only torturing the data to hide the truth. The economy never recovered from the downturn it experienced. But the downturn happened in 2000, not 2008. The country’s been in the middle of a 14 year recession and hardly anyone knows the truth.
Every time Bitcoin crashes, it winds up at a price greater than it’s previous high. Yet the experts still call it a currency fad that will fade away. But a little over a year since it really took up, the digital currency is still going strong, and is once again seeing its price rise. But is there another reason why people are buying Bitcoins.
All paper currency has a shelf life. It could be 5 years or 500 years, but at some point, the value of any paper currency eventually reaches zero. That's why, for centuries, people have turned to one shiny metal to safeguard their personal store of wealth. And, as Jim Rickards explains, you still have that option. Read on...
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It’s a destructive cycle that comes around everytime your politicians ask you to take to the polls. The government’s meddling creates unexpected problems that eventually overshadow the planners’ original intentions. But that only leads the way for even more interventions.
Politicians love inflation. It’s a way to pay for the government’s debts without upsetting the public by raising taxes, or their special interests by cutting government. So they’ll flood the economy with easy money and eat away at your savings. But that’s only part of the story...
You can count the number of people who went to jail over the 2008 financial crisis on one hand. Which is strange considering the U.S. loves to put people away in jail. But as one author discovered in his most recent book, having the right connections and a big enough bank account, can protect you from even the worst crimes.
Obama recently claimed this was the “Decade of the Brain”. But it not the first time the government made that promise. The last time they did it, they wasted millions of your tax dollars. Now they’re back for round two. But this time, their failure could mean more than squandered money. It could mean making Alzheimer’s even worse for those who suffer from it.
“So we have, indeed, had a disappointingly slow recovery, and our consistent expectations for a pickup in growth have been dashed over a number of years… And the labor market is behaving in some perplexing ways and showing patterns that are novel.”–Federal Reserve Chairperson Janet Yellen in a speech to the Economic Club of New […]
When Michael Lewis’ new book Flash Boys came out, the author caused a stir while making the media rounds to promote it. “The stock market is rigged,” he told 60 Minutes flatly. His comments set off a firestorm of debate as to whether sharp techies and their fast computers are screwing small investors.As titillating as […]
Last November, when the Environment Protection Agency (EPA) proposed moderating years of escalating mandates by reducing the amount of ethanol that must be mixed into gasoline, a top ethanol lobbyist seemed perplexed. “We’re all just sort of scratching our heads here today and wondering why this administration is telling us to burn less of a […]
In 2008, the American dream of homeownership turned into an incredible nightmare for millions. The government had been subsidizing this stuff for nearly a century, and it all turned to dust. As is typical, government has swung back the other way, seeking to discourage reckless borrowing on houses and to suppress mortgage rackets.
This time, however, the regulations, as harmful as they are, might work in your favor.
The Consumer Financial Protection Bureau (CFPB) has issued new rules on mortgage making, and any sort of interest-only mischief is just plain not allowed.
One must remember to put their Orwellian hat on to understand what the government means when it creates new rules. Take for instance the latest tax bill approved in the wee hours of Jan. 1. It’s called the American Taxpayer Relief Act of 2012. Meanwhile, it provides no relief at all, but, in fact, increased taxes on virtually every American.
Bear that in mind when you read: “Our goal here is not only to stop reckless lending, but to enable consumers to access affordable credit,” said CFPB director Richard Cordray. “We can draw up the greatest consumer protections ever devised, but if consumers cannot get credit, then there is nothing to protect.”
First, the regulations will not stop reckless lending. Second, it will make affordable credit harder to get.
The linchpin to the CFPB’s rules requires that lenders ensure that their borrowers have the ability to repay the loan. Now, you’d think lenders would do that because, well, they want to be repaid. But in fact, most originating lenders don’t stick around to collect payments. They sell the loan to Fannie, Freddie, or whomever. So the government is going to legislate proper loan underwriting. Can the licensing of loan underwriters be far off?
The definition of prudent underwriting will not be left to the market or limited by the customer’s willingness to provide endless amounts of paper. From now on, lenders must consider the borrower’s current income or assets, employment status, credit history, monthly payment obligations beside the proposed mortgage, and monthly debt-to-income ratio.
For loans to be classified as “qualified mortgages” the borrower’s debt-to-income ratio can be no more than 43%. Also, lenders must keep records for three years proving they complied with ability-to-pay rules.
But will this paper chase take the risk out of mortgages? A risk manager who goes by the name Nom de Plumber tells bank analyst Chris Whalen, “However, if risk is defined as value or cash flow volatility, please note how both real estate and personal incomes are far riskier than their associated mortgages — whose payments are typically static, rather than volatile.”
Mr. (or Ms.) de Plumber makes the point that people quit paying not because their payments exploded upward, but because the value of their home plunged or their income crashed or both. Besides, the government-mandated 43% debt-to-income ratio actually exceeds the pre-bubble norm of 30-35%.
What will really make mortgages less risky is to lower leverage. But the CFPB regs say nothing about down payments. Former Fannie Mae chief credit officer Edward Pinto points out, “Under its tortured definition of ‘prime,’ a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% as long as they are approved by a government-sanctioned underwriting system.”
And for all of this de-risking the CFPB says it’s doing, the government lenders’ underwriting systems, that according to Pinto “were instrumental in the housing market collapse,” have been grandfathered in for seven years.
Once the CFPB requirements kick in, bankers are going to only want to make “qualified mortgages” (QM), because if a mortgage is classified as qualified, it is guaranteed to comply with the ability-to-pay rules and thus the lender is shielded from future litigation that could be brought against them for making that loan.
“The core of the ability-to-repay rule rests on two basic, common-sense precepts: Lenders have to check on the numbers and make sure that the numbers check out,” Cordray said. And “Borrowers no longer will be sold mortgages that are predestined to fail.”
So what happens if a lender makes a loan to a borrower that the borrower later determines he couldn’t service?
“Specifically, the final rule provides that consumers may show a violation with regard to a subprime qualified mortgage by showing that at the time the loan was originated, the consumer’s income and debt obligations left insufficient residual income or assets to meet living expenses,” the bureau said in its summary.
“The analysis would consider the consumer’s monthly payments on the loan, loan-related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring material living expenses of which the creditor was aware.”
Now if the loan is blessed as QM and made at prime rates, it will get what lawyers call “safe harbor,” meaning, according to the CFPB summary, it is “conclusively presumed that the creditor made a good faith and reasonable determination of the consumer’s ability to repay.”
If the loan is made at subprime rates, the borrower has more legal options to sue the lender if they can’t pay. What’s interesting is that it’s not the risk of a loan that makes it prime or subprime, but the loan’s interest rate.
American Banker says, “The rule effectively eliminates the use of so-called no-doc or low-doc loans. It also prevents lenders from basing ability-to-repay decisions on teaser rates, instead requiring them to base it on the principal and interest of the mortgage over its life.”
Also, a QM, “cannot include certain characteristics of nontraditional mortgages, including interest-only and negative-amortization loans, as well as mortgages for a period of longer than 30 years.”
Qualified mortgages also have a 3% cap on the loan fees a borrower can pay. Loan fees are how mortgage brokers are paid. They generally take a couple points, and the actual lender also charges loan fees and passes on other costs. This cap may drive some mortgage brokers out of business. Debra W. Still, chairman of the Mortgage Bankers Association, said in a press release, “The 3% cap on points and fees appears to be overly inclusive,” and would cause some loans to surpass the limit just because the borrower used a mortgage broker or chose settlement services from a provider associated with the lender.
While the Center for Responsible Lending calls the new rules a “reasonable approach to mortgage lending — for the most part,” there is no way the CFPB is, in its words, “enabl[ing] consumers to access affordable credit.”
Leave it to government to miss the forest from the trees. Requiring a bunch of paperwork will not make the industry safer or sounder. But what could it really do? Undoubtedly, requiring large down payments and minimum credit scores that would really strengthen loan portfolios would run afoul of other credit social engineering such as the Community Reinvestment Act (CRA).
The CFPB regulations will not stop the next meltdown. As Mr. Pinto says, “Booms are fueled by excessive leverage. This rule does little to limit borrower leverage and lays the foundation for the next bust.”
But should you shed any tears because you can’t make a 30-year deal that only limits your options and keeps you tied down in a particular location? The CFPB is doing you a favor. If you pay $200,000 for a house, borrowing all of it at 4%, your total payments over 30 years will be over $340,000.
So just how much did you pay for that slice of heaven? We won’t even go into property taxes, maintenance, repairs, and who knows what all. Houses are black hole money pits that hold a psychic spell over owners, causing them to make irrational financial decisions because of the memories made at the house.
Travel light, avoid the intrusive paperwork, and rent. The money you save and flexibility you gain will be well worth it.