The trouble is that the prominent economic tools do not pattern reality and they thus cannot be used to predict accurately. Market moves are discontinuous, often erratic and markets can stay “out of equilibrium” for many years, viewed in retrospect. Were that not so, Warren Buffet would not be very rich and Long Term Capital Management would not have failed. It should be remembered, I think, that markets are as complex as human beings, insofar as they are a human artifact. This is why they are so challenging and intriguing. And that’s why economics is boring.
Extending the idea, Yves Smith (http://www.nakedcapitalism.com/) is one of the most thoughtful and knowledgeable bloggers “out there” today, and he had this to offer toward better understanding the impact of information on markets and their nonlinear nature.
Perhaps a lesson to be learned here is that liquidity acts as an efficient conductor of risk. It doesn't make risk go away, but moves it more quickly from one investment sector to another.From a complex systems theory standpoint, this is exactly what you would do if you wanted to take a stable system and destabilize it.One of the things that helps to enable non-linear behavior in a complex system is promiscuity of information (i.e., feedback loops but in a more generalized sense) across a wide scope of the system.One way you can attempt to stabilize a complex system through suppressing its non-linear behavior is to divide it up into little boxes and use them to compartmentalize information so signals cannot easily propagate quickly across the entire system. This principle has been recognized in the design of software systems for several decades now, and is also a design principle recognizable in many other systems both natural and artificial (c.f. biology, architecture) which are very robust with regard to exogenous shocks. Stable systems tend to be built from structural hierarchies which do not share much information across structural boundaries, either laterally or vertically. That is why you don't die from a heart attack when you stub your toe, your house doesn't collapse when you break a window, and if your computer crashes it doesn't take down the entire internet with it.Glass-Steagall is a good example of this idea put into practice. If you use regulatory firewalls to define distinct investment sectors and impose significant transaction costs at their boundary that will help to reduce the speed and amplitude of signals which will propagate from one sector to another, so a collapse in one of them will be less likely casue severe problems in the others.It worries me that we’ve torn down most of these barriers in the last several decades in the name of arbitrage, forgetting that the price we paid for them in inefficiency was a form of insurance against the risk of systemic collapse. This is exactly what I would do if I wanted to take a more or less stable, semi-complex system and drive it in the direction of greater non-linearity.I think this was to some degree inevitable - it is a symptom of the decay and loss of trans-generational memories from our last great systemic shock in the 1930s. I suspect that something like this is bound to happen every 3-4 generations as we unlearn the lessons our grandparents and great-grandparents learned to their cost.
If the thought is correct, there are of course major implications for the role of regulators insofar as unregulated markets tend to crash. We have recent evidence of this with the March bailout of Bear Stearns, engineered by the Fed. Had they not intervened, the consequences for all of the world financial system could have been, in my opinion would have been, dire. And there is, in my opinion, more turmoil in our future.
Mortgages are, however, still available to strong borrowers and for the not-so-strong, FHA and VA still remain. Subprime is very expensive and very hard to find.
Fascinating stuff to me, but enough for now. Feel free to comment, call or e-mail me.
H. F. Pete NelsonSenior Loan OriginatorLicense #510-LO-34002Cell (206) 890-6815pnelson@normandymortgage.com
The War On Mortgage Brokers
In my 29 November 2007 blog, I took heated exception to the charges leveled against mortgage brokers from all corners of the media to the effect that we had been guilty of fraud. As I pointed out, one fact only is necessary to rebut this nonsense and that fact is that we do not make credit decisions. With time, it has become apparent to all that the summer 2007 subprime-related blowup was a triggering event evidencing far wider financial system vulnerabilities resident in the truly massive, unregulated derivatives markets.
There is now an important ruling by Judge Tchaikovsky in which the mortgage broker is found guilty of nothing while the lender is found effectively guilty of ignoring what should have been known, which is to say, their credit standards were deficient. As to why they were deficient, the short answer seems to be that they erroneously relied on the Bankruptcy Reform Act of 2005 to shift the burden of their knowing, bad credit decisions to the borrower.
Much of that anti-mortgage broker media sentiment was/is driven by the fact that we brokers do over half the mortgage business in this country, in my opinion. Our dominance of the mortgage market would not make sense if we were indeed the bad guys the pundits claimed that we are. It does make sense, however, in light of the fact that, according to a recent study, we save borrowers about 1/8% in rate on mortgage loans to prime borrowers. It is the mortgage bankers who have been hurt by the competition that promote this misinformation and lobby Congress to pass laws that punish the mortgage brokers. What you should know is that punishing the brokers effectively punishes you, the consumer.
Here’s the detail on the recent ruling referenced above.
Tanta writes:
This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. Our own Uncle Festus sent me this decision, in which Judge Leslie Tchaikovsky ruled that a National City HELOC that had been "foreclosed out" would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not "reasonably rely" on the misrepresentations …
Jas Jain writes:Tanta: “I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan--knowing perfectly well that it is doing so--while shifting responsibility onto the borrower, who is the one "stating" the income and--in theory, at least--therefore liable for the misrepresentation.”
CalculatedRisk: BK Judge Rules Stated Income HELOC Debt Dischargeable http://calculatedrisk.blogspot.com/2008/05/bk-judge-rules-stated-income-heloc-debt.html
Mish: Bankruptcy Reform Act Finally Blows Sky High http://globaleconomicanalysis.blogspot.com/2008/05/bankruptcy-reform-act-finally-blows-sky.html
On a 30-Year Fixed Rate mortgage loan, 1/8% in rate is roughly equivalent to ½% in Loan Fee. On a $300,000 mortgage loan, ½% in Loan Fee is equivalent to $1,500, a significant savings. And I can’t remember the last time someone used my services without first comparison shopping. I expect to continue to beat the banks and I expect to be around for quite some while yet serving you.
H. F. Pete Nelson
Senior Loan Originator
License #510-LO-34002
Normandy Mortgage, Inc.
pnelson@normandymortgage.com
(206) 890-6815
More on StagFlation … Ambrose Evans-Pritchard is one of my favorite financial writers. Here’s his recent article. Quoting:
“ … The current stagflationary phase will turn out to be longer and more serious than most people believe.”
Back to the 1970s, or the early 1920s? http://blogs.telegraph.co.uk/business/ambrosevanspritchard/may2008/backtothe20s.htm
More Ambrose with Yves Smith’s commentary as a lead-in:
My own view … is that the M3 surge is a false alarm … This rise is almost entirely due to a “bearish” flight from stocks and suchlike. Nervous investors have parked their wealth in money funds for safety until the crisis blows over. These money funds are distorting the M3 data … It reinforces my fear that we are heading into a deflationary crunch. No doubt the Fed, ECB, the Bank of England , et al, will ultimately flood the system with money and set off another asset bubble. We are not there yet.
Has the Fed really flooded the world with dollars? http://blogs.telegraph.co.uk/business/ambrosevanspritchard/may2008/fedfloodeddollars.htm
I am inclined to agree. If/When there is a money flood, both private investors and foreign central banks will see future inflation and further Dollar decline, and that may push interest rates and gold (and oil?) further upward. The Fed really is between a rock and a hard place.
So much of the “Inflation versus Deflation” debate gravitates around definitions and in this complex financial world, it is confusing. Is inflation driven by the quantity of money (and how is “money” defined? – see below) or is it simply prices? What about the demand and supply of/for real goods? There is also demand and supply for the various forms of money.
So what is money? What follows may be boring to some, interesting to others, so you’ve been forewarned -- read on at your own risk.
Money
Printed on your Dollar bill is: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”. Technically it is a “Federal Reserve Note”, not specifically money, but we use it that way. It is because the Fed says that it is, although not in those words, and the Federal Reserve and Federal Government are powerful and not inclined to debate it with us. The language on the Federal Reserve Note is, well, tricky. Nonetheless, nice work if you can get it and who cares if it works?
J. P. Morgan, on the other hand, said, a long time ago: “Gold is money”. Who to believe? Well, we’re forced to believe both, I suppose, in varying circumstances.
Money isn’t all that complicated. It is, or is supposed to be, a medium of exchange, a unit of account (quantitative) and a store of value (http://en.wikipedia.org/wiki/Money). On the first count, the Federal Reserve Note (or in fact its digital counterpart) qualifies in spades. Money can move almost at the speed of light. On the middle count, it’s self-evident. Against the last standard, however, all of Washington, D.C., has its fingers crossed behind its back. Gas and food prices these days suggest that it’s not holding its value at all well. Gold seems to be doing fine, however. Food for thought …
I’m 65 and have been a “money guy” all my adult life, which is to say I’ve been involved with obtaining money and keeping it safe for others, including corporations, the essential point being that it gives some perspective on the subject, always assuming I’ve been paying attention. I remember Sunday, August 15, 1971, when President Nixon “floated” the Dollar, that is, de-linked it from gold and we have prospered greatly as a nation since then, have we not? (with the caveat that real wages have not increased since the 1970’s). More food for thought.
The role of gold has historically been to discipline the politicians. If they printed too many units of paper currency, the holder of that currency could demand a predetermined amount of gold. And gold doesn’t grow on trees, as we all know. That discipline is gone and it has had something greatly to do with the financial soup we now find ourselves in, in my humble opinion, but that is not to say that the concurrent vast expansion of credit that has not lifted our standard of living. But debt is a drag on our freedom and future. So how can that “just right” mix of the two, issuance of paper currency and debt, be found. I suggest that it cannot, that the politicians, being human and always “needing” to buy votes in a democracy, will always spend more paper wealth than they can tax away or borrow until someone or something says “stop”. Don’t expect them ever to admit it, though.
Now there is a demand and supply curve for the Dollar. It is always in balance; i.e. demand = supply, with “price” the adjustor. Price in what? Well, price in price. These self-referential conundrums are difficult, when it comes to economics. But the academics could have a field day. More Dollars for the same goods and services methinks. So then what do we have? Inflation and asset bubbles. To the extent those Dollars have been created by debt and the debt cannot be repaid … Poof! The Dollars disappear. The tricky part of the larger equation is that a substantial portion of those Dollars are unique in the world, a reserve currency pool of liquidity held by foreign central banks that is somewhat “sterilized” because they are a supposed holder of value, there to allow for later need on the part of the non-US holder. But they are ALSO debt, in that they are a claim on our future. How much is too much? Who knows? But that semi-sterilized pot has become very large and someday there is likely to come a tipping point. Paul Volcker would understand. Will it be reached before the rest of the world holds claims on us sufficient to buy every US asset, lock, stock and barrel? Who knows? But I think it is not controversial to say that there are now too many of them out there and that that will not be cured in any painless way. A man can eat only so many steaks. The world can eat only so many Dollars.
Feel free to post a comment or send me an e-mail if you wish to discuss any of this. Thanks.
PNelson@NormandyMortgage.com
My last blog, a week or so ago, began by focusing on interest rate indicators that tell us the mortgage market, indeed all financial markets, continue unsettled and that the Fed’s various initiatives have so far had limited favorable impact. Unease is therefore likely to continue later on. Yves Smith (http://www.nakedcapitalism.com/2008/04/credit-crunch-is-dead-long-live-credit.html) summarizes:
Perhaps I am inflexible and unable to adapt to new information, but I don't see what has been accomplished beyond kicking the can down the road three to nine months.
Nor do I.
So where are we as to today’s mortgage market? It continues tight but those with good credit who can document their income and assets will have no problem. Anything Fannie Mae or Freddie Mac will buy, including Alt-A type and the new “conforming jumbo” loans, can be done. Also, the FHA and VA routinely do what the conventional market considers to be sub-prime. We’ve done a lot of them recently. You can still borrow at or under 6.0% (note rate, APR is higher) on a conventional, conforming 30-Year Fixed Rate loan. Just be prepared to document your income and assets.
I’ve always been interested in understanding what lies behind what we see today, how we got where we are and were it’s likely to lead. Everyone seems to have an answer to these sorts of questions but few really do. One who has good, factual answers to what’s happened to the American family over the past generation is Elizabeth Warren. Here’s her recent YouTube presentation. She has a tendency to “talk down” to the audience, as do all academics, but she does use plain English and has come up with powerful insights. You will be rewarded for your time.
The Coming Collapse of the Middle Class
http://www.youtube.com/watch?v=akVL7QY0S8A
For those of you who are confused by the swirling “inflation versus deflation” debate, as I often am, I offer the following by Mike “Mish” Shedlock, that I think is very good. Those of us who buy groceries and fill up the tank know that inflation is more of a problem than our government will admit. Yet debt is deflating. We have, I think, both, StagFlation.
Deflation In A Fiat Regime? http://globaleconomicanalysis.blogspot.com/2008/04/deflation-in-fiat-regime.html
LIBOR is the London InterBank Offer Rate, the interest rate at which banks lend to one another. The TED Spread is the difference between 3-month US Treasury rates and EuroDollar rates (http://en.wikipedia.org/wiki/TED_spread). The TED Spread has widened considerably since the current credit crisis began last August. In recent days, it has been alleged that the banks that report the data on which the LIBOR index is based were understating their numbers in order to lower their borrowing costs. Today there is reaction.
Money-Market Rates May Rise on Threat of Libor Ban http://www.bloomberg.com/apps/news?pid=20601068&sid=auHuzk67W6Mg&refer=economy
My sarcastic comment is that LIBOR will get reliable but the TED will Spread …
And now the Bank of England follows the Fed …
It is understood that the Treasury about to finalise a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.
The Main Stream Media is not good with analyzing implications, which is to say that for every action there is an equal and opposite reaction. With the Fed now lending to Primary Dealers and exchanging Treasuries for (more questionable) Mortgage Backed Securities, the market is provided with a temporary palliative that degrades the US Treasury’s own credit rating. This is Moral Hazard in action. Mr. Volcker’s recent comments were spot on (http://calculatedrisk.blogspot.com/2008/04/volcker-video.html).
Transitioning now from interest rates to inflation, here is Chris Puplava’s long-term CPI graph taken from the Market WrapUp yesterday, a thread that is posted daily on Freedom4Um. I much favor multi-decade looks. Note the regularity and the higher highs and higher lows. We are currently much higher on the inflation curve than is shown on the graph, however, due to the understatement of the US Government’s numbers. Real CPI is at or above 10%.
http://www.financialsense.com/Market/cpuplava/2008/images/0416.h28.gif
Here’s the distortion:
http://www.financialsense.com/fsu/editorials/willie/2008/images/0416.h4.jpg
This is the functional equivalent of clipping coins, of stealing. The latter graph comes from Jim Willie’s article:
http://www.financialsense.com/fsu/editorials/willie/2008/0416.html
Yet the New York Times says:
“A credible case can be made that inflation is behaving as expected in a recession and starting to moderate,” Bernard Baumohl of the Economic Outlook Group wrote in a research note. “The healing process has begun.”
U.S. Inflation Appears to Be Retreating http://www.nytimes.com/2008/04/17/business/17econ.html?_r=1&ref=todayspaper&oref=slogin
Well, nonsense. Houses may deflate but demand and supply for food and energy are out-of-whack and will remain so for quite some time, if not indefinitely – there are too many people throughout the world competing for bread and gasoline.
And, finally, I’ve wondered for months how JPMorgan Chase, the bank with the largest derivatives book, had been able to avoid reporting massive losses. We see now that they are not exempt …
Double Take: JPMorgan Quietly Raising $6 Billion http://www.housingwire.com/2008/04/16/double-take-jpmorgan-quietly-raising-6-billion/
My thoughts for the day, Thursday, April 17th. These views are mine and do not represent those of the management or ownership of Normandy Mortgage. However, if you found this commentary to be worth your time and would like to have a Loan Originator “on your side” that can analyze the daily mortgage market equally as well as the world economy, or if you would simply like to discuss the above, please give me a call.
With Best Wishes,
There is a new Mortgage Loan Originator Licensing Law operative in WA this year and I would like to tell you about it. Also, there are ongoing efforts to blame the mortgage brokers for the current “subprime mess”. I would like to rebut that.
The Always Sensationalist Media, abetted by our esteemed Federal Reserve Chairman, have charged that the mortgage brokers are responsible for current subprime difficulties. This is nonsense. While brokers originate approximately 60% of the mortgage volume in this country, we do not underwrite loans, as charged by Mr. Bernanke; which is to say, we do not make credit decisions. My clients know this, as I have had to irritate more than a few of them by insisting you find some piece of paper wanted by the lender before they would lend. Why do we originate most of the mortgage loans? Because 1) we save you money, and 2) we are very service-oriented.
The newly effective Mortgage Loan Originator Licensing Law is relevant because it underlines our credibility. We now must adhere to a regimen of State-imposed standards. This is a good thing, one which I had hoped the State would adopt almost since I entered this business 12 years ago. Some 15,000 people have applied for a mortgage Loan Originator’s License. An estimated 3,000 have passed the State exam. I am one of them. It is also required that we take 2 Continuing Education classes each year and that this year 1 of those classes be Ethics. I have taken both classes. The initial license application must be accompanied by a set of fingerprints and is subjected to a background check. If the applicant has committed a felony within the past 7 years, the application is denied. I am proud to tell you that I am a Licensed WA Mortgage Loan Originator and that my License Number is 510-LO-34002.
Sr. Loan Originator
For those with average-to-good credit and reasonable equity or some money down, the “conforming” mortgage market remains liquid and competitive. 30-Year Fixed Rate mortgages can be done in the 6.0% range (with standard loan fees) and Jumbo loans, i.e. loan amounts over $417K, are in the 7.0% range. APR is of course in both cases higher. Sub-prime money is also available but it is scarce and expensive. “Stated Income” and 2nd mortgages are, however, harder to do across the board. But while mortgage markets are tight, those with good credit who can document their income will have no problem. Anything Fannie Mae or Freddie Mac will buy, including Alt-A type loans, can be done. And the FHA and VA routinely do what the conventional market considers to be sub-prime.
Interesting times, but the sky has not yet fallen.
May 29th
TEST
NORMANDY MORTGAGE, INC15525 1st Ave So. Suite One Burien, WA 98148-1049Phone: 206-242-3900 Toll Free Phone: 800-254-7893Licensed Mortgage Broker #MB-5556 Equal Opportunity Lender
Contact Us | Your FICO score | Company Profile | Normandy Escrow | Point Template Updates | Tell a Friend | News | Real Estate Glossary | Home | Loan App Checklist | Site Map | Loan Application | The Loan Process | What is a credit score? | Rates and A.P.R. | Mortgage Calculators | Customer Login | Disputing Credit Reports | Government Loan Programs | Debt-to-Income Ratios | Reverse Mortgages | Daily Rate Lock Advisory | My Blog | Win $1000
Copyright © 2010 Normandy Mortgage, Inc.Portions Copyright © 2010 a la mode, inc.Another XSite by a la mode, inc. | Admin Login| Terms of Use| Site Map
