The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”As the inequality gap grows, there is an ideological battle unfolding in the West.On the one hand, there are those who think government can fix things. It must do more, tax more, […]
On Feb. 7 the United States will once again reach its statutory debt limit, meaning it cannot legally borrow any more money. Since the obvious option of cutting spending to match the amount of revenue that the government collects is off the table for some inexplicable reason, Congress will have to pass a new, higher […]
The New York Times published an interminable article on health care recently. Plenty of facts — how scrupulous are these journalists! — but the article displayed absolutely no comprehension of the basics of cause and effect. I was left wondering about the whole point.The article details how the health care system rewards specialists to an […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Dr. William C. Padgett is a retired optometrist who has been trying to bring an elderly care facility to Beaufort County, North Carolina, for over a decade.“Our senior citizens,” he laments, “are finding that it is difficult and in many cases impossible to find an appropriate long-term care facility locally.” Though he has received several […]
If you don’t have the angst out of your system concerning Wall Street banksters, Government Sachs, and the Affordable Care Act, settle in with Matt Taibbi’s Griftopia to make your blood boil one more time.Investors should be reminded of 2008 as they shrug their shoulders and put their money back in the stock market. The […]
What do 8 of the 10 wealthiest people in the U.S. have in common?Aside from being able to fly in private jets, the common thread is that each of them has made their fortune thanks to a start-up.Let me explain…From tech titans like Bill Gates and Larry Ellison (founders of Microsoft and Oracle, respectively), to […]
“Inequality is the defining challenge of our time,” according to President Obama. It’s certainly the topic of the day for Paul Krugman, Joe Stiglitz and a whole raft of liberal pundits.But have you noticed that hardly anyone else is talking about it? When is the last time you heard a shoeshine person or a taxi […]
In December of last year, I left my career to travel the world for one year.My plan was to visit as many countries as possible on my Star Alliance Around-the-World ticket in the first nine months, then, for the remaining three months, return back to the country that most caught my eye and my curiosity.Nine […]
Economic history is primed to repeat in the nastiest of ways unless the government stops distorting the price of something we use every day.Every product, good, or service has a price, which is essential to rational decision-making. We use prices every day as vital data that guide us. Without true prices, prices not distorted by […]
A new survey from Harvard University found a large majority of young Americans do not believe the law will save them money, do not believe it will improve their health, and do not intend to sign up for insurance through the new exchanges.
Uh-oh!The new pope, Francis from the Pampas, has just warned us to beware the “tyranny” of capitalism.Each man worships his own gods. Some worship at the altar of Jesus of Nazareth. Some at the altar of the Almighty Dollar. The capitalists don’t bad-mouth Francis’ god. You’d think he would cut them the same slack.Bad-mouthing Catholicism […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
A president stands disgraced. Congress is scattering. Bureaucrats are baffled. Pundits are reaching. Industry is scared. Politicians are scrambling to do something, anything, to make it better. One political party is in meltdown and the other loving every minute of it, hoping to ride the calamity to electoral gains.The so-called Patient Protection and Affordable Care […]
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.