"The [new appraisal] code bars lenders and their representatives from pressuring appraisers to supply inflated estimates of property values" according to the Wall St Journal. Wow. In a nutshell how the subprime mortgage mess was created. Lenders with a deathwish.
Mortgage is a simple deal. The bank lends money to buy the house. If the borrower doesn't pay it back, the bank takes the house. This simple deal breaks down if the house isn't worth the amount of the loan. When the deal breaks down, the bank looses all the money it lent and is left with a house. If the house isn't worth much, the bank takes a loss.
The bank wants to do the mortgage, in a real world it's a safe investment that pays good interest. But when the mortgage is more than the house is worth, it changes from a safe deal to a very risky deal. The home owner can walk away from the mortgage and save himself money. Any bank that isn't stuck on stupid knows this. Pressuring an appraiser to raise his appraisal is guaranteed to create an underwater mortgage, one where the house isn't worth enough to back the mortgage.
How did the banks get so stupid? Simple, they found another sucker. Fancy Wall St banks and brokerage houses began to offer "mortgage backed securities". They printed IOU's and their salesmen declared the IOU's were safe because they were "backed" by all these mortgages owned by the issuer. The Wall Streeters then went out to all the real banks and bought mortgages to "back" more IOU's. The real banks loved this deal. Make a mortgage and then sell it for cash. If the mortgage is risky, who cares, I got my cash. If the house seller wants an unreasonable price, no problem. Pressure the appraiser to appraise the house at the seller's unreasonable price and make the mortgage. Sell the mortgage quick before the borrower defaults.
The wheels came off this scam last summer when a German sucker got burned so badly he went out of business. That wised up the rest of the suckers, and now no one will touch an IOU even if it is backed with solid gold. The financial pundits call this situation "a frozen credit market".
To prevent this mess from reoccurring we ought to prohibit the sale of mortgages. The guy who makes the mortgage has to hold it, and assume the risk, because he is the only guy who really knows if the mortgage is any good. If the maker owns it, the makers will only do mortgages that are likely to get paid back.
Saturday, March 8, 2008
Friday, March 7, 2008
The world has plenty of oil (WSJ)
That's the title of an op-ed piece in Tuesday's Wall St Journal. It's something I'd like to believe, especially every time they deliver furnace oil, or fill up the car. To bad the author doesn't give any numbers that support his idea. The world is burning 86 million barrels per DAY right now. Emerging industrial superpowers China and India are going to increase that by a lot. But even this optimistic article (the writer is in the oil business) projects production of no more than 100 million barrels per day for the next 50 years. Demand is close to that today, and will surely far surpass 100 million barrels a day in a year or so. When demand exceeds supply, the price goes up until demand slacks off. That's why crude is at $104 a barrel now. Hold production level for the next fifty years, and the price will go up a lot higher.
Bernanke calls for FHA to offer Jumbo Mortgages
Fed Chief Ben Bernanke is worried about the housing market. The number of underwater mortgages (mortgage is more than the house is worth) rose from 2.5 million in 2006 to 6 million today, and it projected to go up to 14 million by then end of the 2008. Once the mortgage goes underwater there is a lot less incentive for the borrower to keep making payments. This is a disaster for the banks, 'cause it turns a mortgage into a piece of real estate worth a lot less. Mortgage holders that cannot make the monthly payments always attempt to sell the house rather than just mailing the keys to the bank. If the owner can't sell it, the bank won't be able to sell it either. Eventually the bank will dump the house at a really low price. The bank looses a barrel of money this way. A smart bank will deal with the mortgage holder so long as the deal saves the bank money in the end.
Bernanke was urging the banks to cut deals with mortgage holders. Then he veered off into a strange place. He urged Congress to raise the size of mortgage that FHA/Fannie Mae/Freddie Mac, the quasi federal home loan business's can issue or guarantee. Congress originally felt that Federal home mortgage assistance should be limited to low and middle class home owners, buying low end to middle value houses. They put a limit of $400,000 and some change as the biggest mortgage the the feds can assist. That's a pretty healthy mortgage, in the trade they call it a jumbo mortgage. Why does Bernanke think we need bigger jumbo mortgages?
Bernanke was urging the banks to cut deals with mortgage holders. Then he veered off into a strange place. He urged Congress to raise the size of mortgage that FHA/Fannie Mae/Freddie Mac, the quasi federal home loan business's can issue or guarantee. Congress originally felt that Federal home mortgage assistance should be limited to low and middle class home owners, buying low end to middle value houses. They put a limit of $400,000 and some change as the biggest mortgage the the feds can assist. That's a pretty healthy mortgage, in the trade they call it a jumbo mortgage. Why does Bernanke think we need bigger jumbo mortgages?
Thursday, March 6, 2008
Down with Badge Engineering
Badge engineering is the practice of selling the same car with different badges (Chevy or Saturn or Pontiac or ...) under different names. For instance GM is about to launch the Chevy Traverse, a badge engineered Saturn Outlook. GM has four midsized sedans, Chevy Malibu, Buick Lacrosse, Pontiac G6 and Saturn Aura which compete with each other. Only Malibu is selling, the others are losing money. Toyota competes with a single model, Camry. Right now GM's problem is it has more good car names than it has good cars to give the names too.
Rather than selling four slight different cars, running four different ad campaigns, stocking four different sets of repair parts, and operating four different production lines, it is MUCH cheaper to build just one good car, build up it's reputation, get the price down thru economies of scale.
Car buyers aren't fooled. They know that look alike cars from the same company are actually the same car with a few trim changes.
Rather than selling four slight different cars, running four different ad campaigns, stocking four different sets of repair parts, and operating four different production lines, it is MUCH cheaper to build just one good car, build up it's reputation, get the price down thru economies of scale.
Car buyers aren't fooled. They know that look alike cars from the same company are actually the same car with a few trim changes.
Lithium Ion batteries or fuel cells for cars?
At the Geneva auto show, Bob Lutz, GM's new product guru, said lithium ion batteries might make a 300 mile range electric car possible. Lutz then said "If we get lithium ion to 300 miles, then you need to ask yourself, why do you need fuel cells?" Good point. The WSJ article did not talk about costs of lithium ion, service life, and the fire risk. There is video kicking around the internet showing a lithium ion powered laptop bursting into flames on a conference room table.
Toyota president Katsuaki Watenabi expressed concern about fuel cell costs, and the availably of hydrogen to fuel them. He said fuel cell cars are unlikely in the next ten years.
On the other hand Daimler AG's president Dieter Zetsche (Dr. Z) announced plans to product a fuel cell car in limited quantities by 2010. So not all hope for fuel cells is lost.
Toyota president Katsuaki Watenabi expressed concern about fuel cell costs, and the availably of hydrogen to fuel them. He said fuel cell cars are unlikely in the next ten years.
On the other hand Daimler AG's president Dieter Zetsche (Dr. Z) announced plans to product a fuel cell car in limited quantities by 2010. So not all hope for fuel cells is lost.
New CEO for General Motors?
GM has given Frederick "Fritz" Henderson the title of "President and Chief Operating Officer" with responsibility for GM's operations. The WSJ article doesn't define "operations" but one would it assume it means running the car factories and selling the cars produced therein. Rick Waggoner, the current boss at GM, would retain his job, title, salary, and retirement benefits and plans to work on "transformational issues" such as lobbying environmental regulations and new technology. Is this retirement in place? Making and selling cars is GM's real business. Everything else is a side issue.
George Fisher, GM's lead director said that the board viewed GM management as a triumvirate of Waggoner, Henderson, and Vice Chairman Bob Lutz, the new products man. Fisher may call it a triumvirate, but I'd call it a committee. Real companies are run by a single Chief Executive Officer, who can call all the shots without endless meetings to hash over policy. Is GM still a real company?
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George Fisher, GM's lead director said that the board viewed GM management as a triumvirate of Waggoner, Henderson, and Vice Chairman Bob Lutz, the new products man. Fisher may call it a triumvirate, but I'd call it a committee. Real companies are run by a single Chief Executive Officer, who can call all the shots without endless meetings to hash over policy. Is GM still a real company?
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Wednesday, March 5, 2008
Professional vagueness from Harvard Law
Wall St Journal gave Harvard Law School professor Lawrence Tribe a place on the editorial page to air his views on the Washington DC gun ban case (DC vs Heller). DC has a drastic gun ban law that prohibits all handguns except those owned before 1974, and requires all guns to be unloaded, taken apart and locked up at home. Heller, with some help from his friends, brought suit, claiming the DC law violated the right-to-bear-arms second amendment. Heller lost in the first trial, then won on appeal, and now DC is appealing to the Supreme Court.
Tribe, in a longish column manages to say the court should not rule in favor of second amendment and not rule against it either. This sort of flip flopping is what gave us the 19 year long Exxon Valdez case, discussed here. After throwing out some vagueness to confuse the reader, Tribe suggests the Supreme Court rule that citizens can keep long guns, but not hand guns.
Let's hope the Court is wiser than Tribe. Brushing aside all the legalisms about well regulated militia, federal bans on automatic weapons (Tommy guns), and assault weapons (whatever they might be) the core of the matter is simple. Many of us citizens want arms for personal protection, and we want handguns that fit in the cash drawer, in the bedside table, and in the glove compartment, loaded and ready to fire, just in case. And, a majority of ordinary citizens feel that the second amendment guarantees us that right.
Tribe, in a longish column manages to say the court should not rule in favor of second amendment and not rule against it either. This sort of flip flopping is what gave us the 19 year long Exxon Valdez case, discussed here. After throwing out some vagueness to confuse the reader, Tribe suggests the Supreme Court rule that citizens can keep long guns, but not hand guns.
Let's hope the Court is wiser than Tribe. Brushing aside all the legalisms about well regulated militia, federal bans on automatic weapons (Tommy guns), and assault weapons (whatever they might be) the core of the matter is simple. Many of us citizens want arms for personal protection, and we want handguns that fit in the cash drawer, in the bedside table, and in the glove compartment, loaded and ready to fire, just in case. And, a majority of ordinary citizens feel that the second amendment guarantees us that right.
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