March 2, 2009

California to account for 66% of home value declines?

Here's a valuable new study that answers some questions I've brought up:

Foreclosures in States and Metropolitan Areas: Patterns, Forecasts, and Pricing Toxic Assets
William H. Lucy and Jeff Herlitz
Department of Urban and Environmental Planning, School of Architecture, University of Virginia
National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession. Most foreclosures have been concentrated in California, Florida, Nevada, and Arizona, and a modest number of metropolitan counties in other states. In fact, 66 percent of potential housing losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada, and Arizona, for a total of 87 percent of national declines in these four states.

The methodology used here is to assume prices fall back to their ratio to incomes in 2000. Of course, 2000 was a prosperous year, so that would be a pretty soft landing.

California had only 10 percent of the nation’s housing units, but it had 34 percent of the foreclosures in 2008. California was vulnerable to foreclosures, because the median value of owner-occupied housing in 2007 was 8.3 times median family income, while the 2007 national average was only 3.2, and in 2000 it was lower still at 2.4.

They're using RealtyTrac.com's foreclosure statistics as of November 2008. Also, they're using "family income" rather than the more usual "household income" income, which makes the housing price to income ratios less extreme (I believe the peak home price to household income ratio in California was 11X). They assume that if you are just a household, not a family, you probably shouldn't be buying a house, which seems sensible.

Another vulnerability to foreclosures was seen in the Los Angeles metropolitan area, where more than 20 percent of mortgage holders in each county were paying at least 50 percent of their income in housing related costs.

But even in California, enormous variations existed among jurisdictions, such as in the San Francisco metropolitan area, where Solano County had 3.69 percent of housing units in foreclosure in November 2008, while only 0.24 percent of housing units were in foreclosure in the City of San Francisco, a 15 to 1 difference.

The exurban frontier got hit hardest. A lot of people in San Francisco have been there a long time, long enough to pay off even 30 year mortgages sometimes. Heck, they may have inherited the family mansion from a robber baron great-grandfather. But 80 miles out of town, there was nothing but dirt until recent years, so everybody has a mortgage. And everybody is scraping to get by. You wouldn't live that far out of town if you had other options. As I've said, the second quartile got the most overstretched and then hit hardest: the people trying to keep their kids out of the underclass.

... Potential housing value losses from 2008 foreclosures in 50 states, if values decline to year 2000 levels, were less than one-third of the $350 billion that has been provided to banks and insurance companies to cope with losses in mortgage backed securities.

Right, although there are lot more shoes left to fall. Subprimes went into foreclosure first. The Alt-A loans that are between subprime and prime in supposed quality start resetting in 2009 and finish resetting in 2012, so we're looking at a lot more foreclosures even after subprime calms down.

And then there's all the damage to come from the economic downturn, which will no doubt take down a lot of prime borrowers, too. Normally, foreclosure waves follow recessions. This time, foreclosures set off the recession.

Damage to the balance sheets of large banks and AIG occurred not mainly from losses on foreclosed residential mortgages, but because of borrowing short-range to buy long-range derivatives and from selling credit default swaps insuring derivatives backed by mortgage payments. These financial manipulations had high speed forward gears, but when the housing bubble burst, the banks and AIG discovered they had neglected to create a reverse gear with which they could separate foreclosed properties from some forms of mortgage backed securities. Obstacles to disentangling toxic components of mortgage backed securities magnified many times the actual housing value declines.

In Australia they call leverage "gearing."

... Foreclosure rates among states were highly skewed. The 2008 national foreclosure rate was 0.79 percent of 2007 housing units. Only seven states exceeded that rate, with an eighth, Idaho, tying it. The seven states exceeding it had considerably higher rates, led by Nevada 4.10 percent, California 2.57 percent, Arizona 2.26 percent, and Florida 1.99 percent (Table 1).

The Sand States.

The top 10 foreclosure states were in the West, except for Florida, Illinois, and Connecticut.

Foreclosure rates were low in most states in 2008. In three-fourths (38) of the 50 states, foreclosure rates were below 0.50 percent (1 in 200). In one-half of the states (25), foreclosure rates were below 0.25 percent (1 in 400). And in 11 states, foreclosure rates were below 0.10 percent (1 in 1,000) (Table 2).

...From 2000 through 2007, the relationship between housing values and annual incomes widened. In 2000, the average 50-state ratio of median value of owner-occupied housing to median family income was 2.4 to 1. By 2007, this average 50-state ratio had increased to 3.2 to 1 (Table 3).

So, that was a one-third increase in price to income ratio from 2.4 in 2000 to 3.2 in 2007, which doesn't sound outlandish. Of course, some of the income growth from 2000 to 2007 was derived from the Housing Bubble.

In 12 states, the ratio of [median] house value to [median] income exceeded 4.0 to 1, led by California at an extraordinary 8.3 to 1. The other 11 states exceeding 4.0 to 1 ratios were Hawaii, Nevada, Massachusetts, New York, New Jersey, Rhode Island, Maryland, Arizona, Florida, Oregon, and Washington.

... High foreclosure rates were influenced, but not controlled, by population growth. Of the 10 states with the highest foreclosure rates in 2008, six were in the top 10 population growth states from 1990 to 2000 and from 2000 to 2007 (Nevada, Arizona, Colorado, Utah, Idaho, and Florida) (Table 1). California, which was second in its foreclosure rate, was 18th in population growth rate, but first in the number of new residents.

High population growth would lead to high housing prices if supply lagged behind demand. Housing values to income ratios were higher than the national average in each of the top 10 states in foreclosure rates (Table 1). But six states in the top 10 in house value to income ratios (Hawaii, Massachusetts, New York, New Jersey, Rhode Island, and Maryland) were not in the top 10 in foreclosure rates or in population growth rates. These six states also were high household income and family income states, making high housing costs more manageable.

People in Massachusetts have a little more cushion, plus they tend to have relatives with cushions who might help them through a bad spell. The modern computerized system for evaluating creditworthiness don't seem to have direct measures of how much relatives could help out in an emergency, whereas the old relationship banking system for getting mortgages was less efficient, but bankers knew a lot about who was related to whom in their markets. So, today, an immigrant from a peasant family in Guatemala who is making $50,000 per year in America is assumed to be just as creditworthy as somebody making $50,000 per year who has lots of American relatives. But, when the crunch comes, the Guatemalan probably won't be able to collect much passing the hat back in Guatemala.

Foreclosure processes in four states—California, Florida, Nevada, and Arizona—constituted 62 percent of the U.S. total in 2008.

Wow, 62% in four states. And prices were higher in those four states, so total dollars defaulted must be enormous.

Within three of those four states, foreclosures were concentrated in a few metropolitan areas. In Nevada, Clark County, which constitutes the entire Las Vegas Metropolitan Area, contained 88 percent of Nevada’s foreclosures but only 72 percent of Nevada’s population. The two counties, Maricopa and Pinal, which comprise the entirety of the Phoenix Metropolitan Area, included 91 percent of Arizona’s foreclosures and 63 percent of its population. In Florida, the metropolitan areas of Miami, Orlando, and Tampa-St. Petersburg contained 62 percent of Florida’s foreclosures and 53 percent of its population. In California, foreclosures were more widely dispersed, as the metropolitan areas of Los Angeles, Sacramento, San Diego, and San Francisco contained 81 percent of California’s population and only 63 percent of its foreclosures.

The Central Valley of California got hit hard by foreclosures because dreamers had decided that it was really the exurbs of San Francisco and Los Angeles if they just closed their eyes and wished hard enough.

... If all the listed foreclosures and preforeclosures became repossessions, then these value reductions would cost $95 billion in California, $10 billion in Florida, $5 billion in Nevada, and $4 billion in Arizona, a total of $114 billion (Table 7).

This estimate overstates the crisis dimension of foreclosures.

But then there are all the foreclosures to come that Wall Street is finally worrying about.

From 1997 through 2006 the average foreclosure rate was 0.42 percent of mortgage loans, about one-third of the 2008 rate (HUD 2008, 73). It had become the normal cost of being in the mortgage business. Consequently, the foreclosure crisis should be considered, at most, the number and rate of foreclosures above the previous decade’s norm.

Right. That's an important point: that what's relevant is not the absolute foreclosure rate but the unexpected foreclosure rate.

An extreme perspective on pricing mortgage-backed toxic assets can be acquired by projecting 2008 foreclosure losses if housing prices decline to year 2000 ratios of housing values to family income. Calculating declines in the 34 states above the year 2000 national ratio of house values to family incomes (2.4) in 2007, the loss from lower house values would be about $143 billion. In all 50 states, the decline to year 2000 house values would be about $145 billion, with 87 percent in four states—California $95 billion (66 percent), Florida $18 billion (13 percent), Nevada $6.5 billion (5 percent), and Arizona $5.5 billion (4 percent) (Table 8). Declines of $1 billion or more also would occur in Illinois, New Jersey, New York, Massachusetts, Colorado, and Washington (Table 8).

Eight of the 12 states with house value to family income ratios above 4.0 had low foreclosure rates—Hawaii, Massachusetts, New York, New Jersey, Rhode Island, Maryland, Oregon, and Washington (Appendix 1). Consequently, the example above based on returning house value to family income ratios in 2000 exaggerates potential toxic asset losses in most states.

...The financial crisis was triggered by sub-prime mortgages, no down payment mortgages, resetting adjustable rate mortgages, and by some low income home buyers being manipulated by unscrupulous mortgage initiators. Herman Schwartz (2009,Chapter 8) identified a 16 percent default rate after nine months on 2007 subprime mortgages as launching the insolvency of several important lenders (including Countrywide and IndyMac) in 2007.

In addition, the financial crisis was caused by house value to income imbalances in a few states and a modest number of counties and metropolitan areas, by easy credit to support these imbalances, and by MBSs and subsequently by credit default swaps which ostensibly spread risk and reduced risk, but which actually greatly increased risk. They created an inflexible structure which neither lenders, packagers, central banks, nor national governments were able to access easily to repair the underlying delinquent mortgage payments. ...

... This inaccessible financial system was encouraged by home ownership policy goals. Frederick Eggers (2001) described the Clinton Administration goals as follows: “…the Nation’s home ownership rate actually declined in the early 1980s. Between 1985 and 1994, the home ownership rate remained virtually unchanged (at 64 and 65 percent)….In late 1994, President Clinton set as a national goal to raise the home ownership rate to 67.5 percent by the end of 2000. Beginning in 1995, the home ownership rate has risen almost steadily until, by the third quarter of 2000, it was 67.7 percent—surpassing the President’s ambitious goal….HUD used its oversight of Fannie Mae and Freddie Mac to encourage those entities to reach out to low-income borrowers and areas underserved by the private market.”

As an important part of his concept of the United States as an Ownership Society, President George W. Bush set a goal in 2002 of increasing home ownership by 5.5 million minority families. “We want everybody in America to own their own home,” President Bush said in October 2002 (Ferguson 2008, 267). Niall Ferguson (2008, 267) summarized Bush’s strategy: “Bush signed the American Dream Downpayment Act in 2003, a measure designed to subsidize first-time house purchases among lower income groups. Lenders were encouraged by the administration not to press sub-prime borrowers for full documentation. Fannie Mae and Freddie Mac also came under pressure from HUD to support the sub-prime market. As Bush put it in December 2003: ‘It is in our national interest that more people own their home.’”

Financial manipulations became overly clever and difficult to reverse. But they served public policy goals, which, in general, were supported by successive Democratic and Republican Administrations, members of Congress, federal agencies, and government sponsored entities (Fannie Mae and Freddie Mac). As the home ownership rate descends from its peak of 69.2 percent in 2004, the appropriate home ownership rate or range should be revisited. Based on more than 110 million owner-occupied dwellings in 2008, a four percent reduction to 65 percent home ownership would reduce owner-occupants by 3.5 million. The 64 to 65 percent home ownership rate was sustained for two decades without engendering a financial crisis. That experience is one place to look for guidance.

But the population of America isn't the same as back in the 1980s, so stabilizing back at 64% would be a soft landing indeed.

My published articles are archived at iSteve.com -- Steve Sailer

The Southern Poverty Law Center's postmodern Poverty Palace



The Southern Poverty Law Center has worked tirelessly to eradicate the last vestiges of poverty, Southern or otherwise, in the lifestyle of founder Morris Dees (a member of the Direct Marketing Association Hall of Fame) by smearing people like Dick Lamm, three-times Democratic governor of Colorado. Some of the moolah raised from the affluent saps Dees has terrified has gone into building this expensive but godawful-looking headquarters building in Montgomery, Alabama. The design was perpetrated by Erdy-McHenry Architecture. Yes, I know it looks like a high-rise trailer, but, trust me, it cost a lot of money to build something that ugly. The design won an AIA Gold Medal.

James Kunstler recently visited Montgomery, and reflected:
Here and there around the rest of the downtown, other weird experiments in American post-war anti-urbanism presented themselves, most notably a "building" designed to look like a small-scaled Death Star, all black reflective glass, canted concrete and steel walls – which turned out to belong to Morris Dees' renowned Southern Poverty Law Center ...

Joseph J. Levin Jr., an SPLC executive, wrote back to Kunstler to complain about their headquarters being criticized, and to enlighten Kunstler with a detailed explication of the complicated aesthetic and political theories behind the design. Kunstler responded:
The issue is what you did on the site you chose. (And by the way, in case you wonder, I am a registered Democrat and a New York Jew, not a conservative.) You put up a building that looks like the Fuhrer Bunker. It dishonors the site and it even dishonors your mission of social justice. The design of the building makes social justice appear despotic.

Aw, c'mon, Mr. Kunstler, you should give the SPLC a break for engaging in truth in advertising. Granted, the SPLC's headquarters looks like a Secret Policeman's Training Academy out of the movie "Brazil," but, hey, form follows function.

My published articles are archived at iSteve.com -- Steve Sailer

Petite Cops

David Simon, the creator of the HBO cop TV series "The Wire" complains in the Washington Post about a new Baltimore police policy of not releasing names of cops who shoot people unless the cops feel the shooting was unjustified (to prevent retaliation, ostensibly--which, indeed, is easier in the Internet age of looking up stuff about people):
On Feb. 17, when a 29-year-old officer responded to a domestic dispute in East Baltimore, ended up fighting for her gun and ultimately shot an unarmed 61-year-old man named Joseph Alfonso Forrest, the Sun reported the incident, during which Forrest died, as a brief item. It did not name the officer, Traci McKissick, or a police sergeant who later arrived at the scene to aid her and who also shot the man.

It didn't identify the pair the next day, either, because the Sun ran no full story on the shooting, as if officers battling for their weapons and unarmed 61-year-old citizens dying by police gunfire are no longer the grist of city journalism. At which point, one old police reporter lost his mind and began making calls.

No, the police spokesman would not identify the officers, and for more than 24 hours he would provide no information on whether either one of them had ever been involved in similar incidents. And that's the rub, of course. Without a name, there's no way for anyone to evaluate an officer's performance independently, to gauge his or her effectiveness and competence, to know whether he or she has shot one person or 10.

It turns out that McKissick -- who is described as physically diminutive -- had had her gun taken from her once before. In 2005, police sources said, she was in the passenger seat of a suspect's car as the suspect, who had not been properly secured, began driving away from the scene. McKissick pulled her gun, the suspect grabbed for it and a shot was fired into the rear seat. Eventually, the suspect got the weapon and threw it out of the car; it was never recovered. Charges were dropped on the suspect, according to his defense attorney, Warren Brown, after Brown alleged in court that McKissick's supervisors had rewritten reports, tailoring and sanitizing her performance.

And so on Feb. 17, the same officer may have again drawn her weapon only to find herself again at risk of losing the gun. The shooting may be good and legally justified, and perhaps McKissick has sufficient training and is a capable street officer. But in the new world of Baltimore, where officers who take life are no longer named or subject to public scrutiny, who can know?

Of course, my attention was diverted away from Mr. Simon's no doubt worthy crusade to a question that just doesn't get asked much these days: Why do we have "diminutive" lady cops anyway?

Officer McKissick is courageous -- the previous time she lost control of her gun, it was after jumping into a car trying to speed away from an arrest -- but she apparently doesn't have the upper body strength to get her out of situations her bravery gets her into without shots getting fired.

As a general proposition, when a 29-year-old cop is so weak that she gets herself put into a headlock by a 61-year-old man, bad stuff is likely to ensue.

My published articles are archived at iSteve.com -- Steve Sailer

March 1, 2009

Why complaints about predatory lending usually lead to more predatory lending

My new VDARE.column:
Was the mortgage meltdown the fault of Republicans or Democrats? Was it caused by the ideology of deregulation or of regulation?

Questions like that are fun to debate because they follow the usual fault lines that divide the country into fairly equal and thus intensely rivalrous halves.

But let’s think about the Housing Bubble from a more general standpoint for a moment. Is it terribly likely that a disaster that long gestated and then ran amok in plain sight for over three years (from 2004 into early 2007) would turn out to be overwhelmingly the fault of a single party or ideology?

Why wouldn’t the opposition have sounded the alarm? Don’t the Republicans and Democrats, as well as the free marketers and the leftists, all have well-oiled publicity machines for pointing out the shortcomings of their enemies?

Isn’t it more plausible that a vast, slow-motion catastrophe would be the result of a noncontroversial bipartisan consensus?

In particular, the more everyone agrees that dissent on a particular topic is unspeakably evil, if not unthinkably unimaginable, the more likely the country is to stumble over exactly that blind spot.

When everybody tells you, “Pay no attention to that man behind the curtain,” you really, truly need to start paying attention.

In recent decades, “diversity” has become one of America’s sacred mantras, propagandized relentlessly in the schools and the press. Expressing skepticism about the diverse within internal business communications has become, in effect, a civil offense, punishable in anti-discrimination lawsuits.

Not surprisingly, self-interested manipulators learned to play the race card to justify their machinations.

Thus, the universally-endorsed societal necessity of lending more money to minority homebuyers was used to justify both regulation (such as the Community Reinvestment Act) and deregulation (such as the hands-off approach to subprime bucket shops). Any practice positioned as helping minorities achieve their fair share of the American Dream had the wind at its back.

Consider, for example, three huge Southern California originators of dubious debt—Ameriquest, New Century, and Countrywide—all of which collapsed in recent years when Wall Street and the big banks finally wised up to the mortgage-backed securities they peddled.

Yet, on the retail side, these were not new-fangled scams. As Elvis Costello pointed out, there’s no such thing as an original sin. They operated old-fashioned boiler rooms employing high-pressure salesmen to talk people who had no business being homeowners into taking out huge high-interest loans. ...

We’ve been down this path of fishy finance before. That’s why most states have usury and other laws on the books to prevent lenders from targeting marginal borrowers. Whether these laws are kept up to date and whether they are enforced are different questions, however.

It doesn’t matter whether you call them anti-predatory lending laws or pro-prudent lending laws. The point is that loans that are unlikely to be paid off hurt everybody. Wise public policy attempts to balance off Type I errors of excessive credulity versus Type II errors of excessive skepticism.

So, surely, the rise and fall of the subprime peddlers demonstrates the iniquity of the rightwing ideology of deregulation? We needed more regulation, not less!

Wrong! Please notice that minority lending regulations primarily pushed in what turned out to be the wrong direction: too much gullibility. When it came to mortgage lending to minorities, as regulated by the Community Reinvestment Act and other anti-discrimination laws, excessive skepticism was made illegal. Lenders and investors were only allowed to err in one direction.

Not surprisingly, excessive credulity came to dominate the system.

By no means were all the subprime peddlers sincere believers in the dogmas of multiculturalism. Instead, they knew they could wield political correctness like a club to scare off regulators.

Thus, to avoid inconvenient investigations, the owners of subprime mortgage originators tended to present themselves to politicians and the press as financial statesmen, moral leaders in the war on bigotry against minority borrowers.

February 28, 2009

Everybody loves a winner and everybody hates a loser

It's ironic that Obama gets elected with big plans to soak the rich at the very moment that the rich are suddenly much less soakable, but it's not really a random fluke. After all, if the markets hadn't collapsed, the margin would have been much closer, and Obama might even have lost.

In theory, it makes sense to squeeze the rich when the rich are riding high, and coddle them when they are down, but that's hard for human beings to do. We root for winners and despise losers, so we usually spoil businessmen and financiers when they are going great guns and smack them around after they stumble. (See "1920s-1930s, History of").

The success of Reagan's 1981 tax cuts stemmed from reversing the usual timing and giving the business class a boost when they were down and feeling unloved and unmotivated. But that's rare.

My published articles are archived at iSteve.com -- Steve Sailer

February 27, 2009

Two predictions about Obama's budgets

Obama's economic thinking remains stuck in 2007. He assumes he can turn American into a social democratic state by taxing the top two percent, by closing loopholes on hedgefund managers, and the like.

Yet, the problem of the rich getting richer largely solved itself in a few days in early autumn of 2008. I suspect that hedge fund managers won't be a bottomless source of taxable income in 2009, and for a number of years to come.

So, Obama will eventually realize that he'll have to squeeze the upper middle class: families making from, say, $90,000 to $250,000. He'll have to raise income tax marginal rates on this broad expanse.

But a lot of Obama voters fall in this range. Moreover, in the Blue States, $90,000 to $250,000 isn't necessarily a huge amount of money. A family of four making $150,000 in Tulsa is probably living well, while one in Manhattan is not.

So, I predict that eventually, Obama will be tempted to try to adjust the tax code for the local cost of living: impose higher tax rates on the Oklahoma family making $150k than on the New York family making the same income.

My published articles are archived at iSteve.com -- Steve Sailer

The Armenian route to a cheap but prestigious diploma

With everybody looking to cut down on expenses, I'm passing along a way that some Californian families could save a fortune on higher education. My wife heard this from a young Armenian-American lady. Armenians tend to to be high IQ but not as marinated in the Stuff White People Like verities as other high IQ groups, so they can bring a fresh perspective to working the status game.

This young woman dropped out of a private high school after tenth grade, took and passed the GED, and then enrolled at the local community college. Community Colleges tend to have a mediocre but decent learning environment because the students there want to be there. If they don't want to be there, they stop coming to class, so JuCos are not like high school where kids who don't want to be in high school disrupt classes.

She got her Associates of Arts degree by age 18, and then transferred to UCLA. (Although UCLA is very hard to get into as a freshman, it takes about 3000 to 4000 transfers per year, typically from California's community colleges. In fact, she was probably more likely to get into UCLA as a junior than as a freshman.) She was on track to get her prestigious UCLA degree at age 20, and then get a job.

So, she saved the last two years of Catholic high school tuition at say, $10k per year. JuCo tuition is minimal and she lived at home. Tuition and room and board at UCLA will probably cost her affluent parents $20k per year over two years. She can probably get a job paying $30k at age 20. Net cost at age 22 (including the $60k earned working) versus four years of private high school and four years of UCLA: zero for this route versus $100k for the traditional route.

My published articles are archived at iSteve.com -- Steve Sailer

Offering Obama a hand

Louis Soares writes in "A Postsecondary Degree or Credential in Every Pot:"

In his speech to Congress and the nation Tuesday night, President Barack Obama set a bold goal of retaking America’s global leadership in the number of college graduates by 2020. ...

For many Americans, it may come as a surprise that their country is no longer number one in the world in college attainment, with over 14 million undergraduates enrolled in higher education institutions in 2008 alone. But just because students enroll in college doesn’t necessarily mean they finish and attain a degree.

Some insight into this puzzle can be provided by digging a bit deeper into the president’s startling statistic that only 50 percent of undergraduates actually finish their degrees. While the proportion of individuals enrolled in college in the United States has grown since the 1970s, the proportion of students receiving diplomas has declined during the same period. Currently less than 60 percent of students entering four-year institutions earn a bachelor’s degree, and barely one-fourth of community college students complete any degree within six years. As a result, the United States now ranks 10th in college attainment for its 25- to 34-year-old population, down from third in 1991, according to the Organization of Economic Cooperation and Development.

Well, it's not really a puzzle why this is happening, although Barack Obama will never, ever tell you it.

But, here’s a reform for making some degree of “college attainment” more feasible, one that I’ve never seen suggested before:

Why shouldn’t four year colleges give out two year Associates of Arts degrees?

For example, say you graduate from a Los Angeles public high school with a C+ GPA, and you average 450 on the SAT test. You could go to LA Valley Community College and get an AA degree after two years and then, if you are so inclined, transfer to a four year institution to pursue a bachelor's. But everybody tells you that a four-year college is much more prestigious, so you decide to enroll at Cal State Northridge. Over the next six years, you finish three years worth of classes, but you are really stumped by a couple of required classes that you’ve failed twice, and now you are 24 and your girlfriend is pregnant and wants you to work full time, and so you drop out.

And thus you will go through life as a mere high school graduate, whereas if you had gone to community college out of high school instead of to a fancier Cal State, you’d at least have an AA degree to your name.

So, why not have four year colleges award AA degrees as well as BA degrees? Why shouldn't this guy have an AA degree from Cal State Northridge?

Similarly, as I've proposed before, high schools could award Associate high school degrees to those who complete the requirements through tenth grade, which would give the low end kids a plausible goal to keep them motivated into sticking with school through tenth grade, and provide future employers with a way to distinguish the dumb but okay kids from the real losers.

My published articles are archived at iSteve.com -- Steve Sailer

February 26, 2009

Slippery slopes and boiling frogs

Casey Martin, who was born with a terrible birth defect that crippled one of his legs, leaving him in recurrent pain, starred on Stanford's famous 1995 college golf team along with the full-blooded Navajo Notah Begay, who went on to win four times on the PGA tour before alcohol brought him down, and with Eldrick Woods Jr., who, last time I heard, remains employed in a golfing capacity.

Despite his disability, Martin enjoyed enough success on the minor league Nike tour to qualify for the PGA tour in 2000. His lawsuit under the Americans with Disability Act to be allowed to use a golf cart on the PGA tour went all the way to the Supreme Court, where he won in 2001.

Martin's was not a popular victory with players, with both Jack Nicklaus and Arnold Palmer protesting that it would open the door to other players getting a note from their doctor to be chauffeured about the course.

It was easy to imagine a player with a bad back like Fred Couples trying to get permission for a cart, and then the whole thing descending into carts everywhere.

And yet, eight years later, the PGA Tour hasn't slid down the slippery slope. So far, as far as I can tell, a cart has only been used once by somebody other than the severely unlucky Martin: Erik Compton rode in one tournament last fall because he had gotten his second heart transplant only a few months before.

Essentially, golf has a fairly healthy culture of sportsmanship where top players don't want to be seen as abusing loopholes. So, it hasn't been hard so far to restrict cart-riding to rare human-interest stories like Martin and Compton.

In the early 1970s, the Wall Street credit-rating companies (S&P, Moody's, Fitch) switched over from charging bond-buyers for rating to charging bond-issuers. In the mid-1970s, the government started writing regulations requiring certain levels of ratings from the big three ratings firms: in effective, establishing a legal cartel.

Anybody with a suspicious mind can guess what happened next: right down the slippery slope. The ratings firms succumbed to this conflict of interest and exploited their protected position to get rich by rating crud as gold.

Except, that didn't happen right away. The slope wasn't all that slippery. Apparently, the culture was sound enough that it took a couple of decades for the ratings firms to fall prey to the incentives.

Unfortunately, by then, everybody had forgotten that the credit ratings firms have a huge conflict off interest. They'd had that obvious conflict of interest for so long that people had stopped worrying about it. When I Google for it, I can't find an article talking about their "conflict of interest" before May 2007. A 2006 reference book entitled the Euromoney Encyclopedia of Debt Finance blandly asserts:
Although there would appear to be a conflict of interest as a result of providing a supposedly independent rating in exchange for a fee, this risk is fully mitigated by the market discipline imposed by the need for investor acceptance of the ratings.

Or, perhaps more accurately, the conflict of interest won't be a problem until it starts being a problem.

My published articles are archived at iSteve.com -- Steve Sailer

Obama's budget will solve problem of rich getting richer.

Dave Leonhardt enthuses in the New York Times:

The budget that President Obama proposed on Thursday is nothing less than an attempt to end a three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters.

The Obama budget — a bold, even radical departure from recent history, wrapped in bureaucratic formality and statistical tables — would sharply raise taxes on the rich, beyond where Bill Clinton had raised them. It would reduce taxes for everyone else, to a lower point than they were under either Mr. Clinton or George W. Bush. And it would lay the groundwork for sweeping changes in health care and education, among other areas.

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years.

Moreover, Obama's budget, we are informed, will also the problem of increasing carbon emissions.

And, guess what? I bet that in 2009 the rich will be less rich than in 2007 and less carbon will be emitted.

My published articles are archived at iSteve.com -- Steve Sailer

February 25, 2009

Must Securitization Mean Secretization?

On this question of whether there's really a credit crunch, Robert Samuelson writes:

"So, we've gone from too much credit to too little. Contrary to popular wisdom, banks -- institutions that take deposits -- aren't the main problem. In December, total U.S. bank credit stood at $9.95 trillion, up 8 percent from a year earlier, reports the Federal Reserve. Business, consumer and real estate loans all increased. True, lending was down 4.7 percent from the monthly peak in October. But considering there's a recession, when people borrow less and banks toughen lending standards, the drop hasn't been disastrous.

The real collapse has occurred in securities markets. Since the 1980s, many debts (mortgages, credit card debts) have been "securitized" into bonds and sold to investors -- pension funds, mutual funds, banks and others. Here, credit flows have vaporized, reports Thomson Financial. In 2007, securitized auto loans totaled $73 billion; in 2008, they were $36 billion. In 2007, securitized commercial mortgages for office buildings and other projects totaled $246 billion; in 2008, $16 billion. These declines were typical.

Given the previous lax mortgage lending, some retrenchment was inevitable. But what started as a reasonable reaction to the housing bubble has become a broad rejection of securitized lending. Terrified creditors prefer to buy "safe" U.S. Treasury securities. The low rates on Treasuries (0.5 percent on one-year bills) measure this risk aversion.

Somehow, the void left by shrinking securitization must be filled. There are three possibilities: (a) securitization revives spontaneously -- investors again buy bonds backed by mortgages and other loans; (b) commercial banks or other financial institutions replace securitization by expanding their lending; or (c) the government substitutes its lending for private lending. Until now, it's been mostly (c). "

So, nobody is buying securitized assets anymore. Which is hardly surprising for two reasons:

1. American needs to pay off some debts, so we're buying fewer cars, etc.

2. The mortgage-backed securities fiasco shows that securitization too often equals secretization.

As the malaprop-prone brother-in-law (or, perhaps, the unnamed narrator) in my recent short story about the Housing Bubble in Southern California pointed out:
"In fact, I think I'm going to pick up one of these babies, too, and sell it in six months. We'll be neighbors! Sort of. The mortgage company get a little snottier about down payments and interest rates when you tell them it's an investment, so I'll just check the "owner occupied" box. The broker doesn't care. He gets his commission, then Countrywise bundles it up with a thousand other mortgages and sells it to Lemon Brothers. The Wall Street rocket scientists call this "secretization" because nobody can figure out what anything’s worth. It's a secret.

"Lemon sells shares in the package all around the world. The Sultan of Brunhilde ends up owning a tenth of your mortgage. Do you think the Sultan's going to drive around Antelope Valley knocking on doors to see if you're really living there?"

The geniuses on Wall Street have finally figured out that they can't use the Laws of Probability to convert a big pile of absurd IOUs into AAA securities. Worse, securitization means they can't figure out how bad it is.

So, the question is whether the entire process of securitization is salvageable? Would increased transparency help? Wired has an article by Daniel Roth called "Road Map for Financial Recovery Radical Transparency Now!" about XBRL, a standardized set of tags to make financial documents easily comparable. I don't know if this particular idea would work for securitized assets, but it doesn't sound impossible to develop standards that would get the job done.

I worked for many years for marketing research firms that used the huge amount of data from scanned bar codes on supermarket products. The UPC code was developed by a private industry cooperative initiative in the 1970s and has proved such a huge success that it long ago became a seamless part of life.

Is there really a credit crunch?

President Obama announced that the economy is hurting because of a credit crunch. But my teenage son, who recently got his first credit card, is still getting a couple of offers per week for a second credit card.

Perhaps he's the only one in the country. If so I really don't think he's going to be able to pull the economy out of the doldrums singlehandedly because most of his credit card bill line items look like this:

Burrito Barn $3.49
In-N-Out Burger $2.99

I think we need an economic strategy that goes beyond my son saying, "Why, yes, I will have fries with that."

My published articles are archived at iSteve.com -- Steve Sailer

February 24, 2009

Wall Street's infatuation with Gauss

Felix Salmon has a readable article in Wired called "Recipe for Disaster: The Formula that Killed Wall Street" on David X. Li's wildly popular 2000 financial economics innovation, the Gaussian copula function, which was used to price mortgage-backed securities by estimating the correlation in Time to Default among different mortgages.

Li has an actuarial degree (among others), and that appears to have been his downfall: he assumed mortgage defaults were like Time to Death to a life insurance actuary: largely random events that could be modeled.

Steve Hsu's website Information Processing has a 2005 WSJ article on Li's Gaussian Cupola, for looking at events that are mostly independent but have a modest degree of correlation:

In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities.

"Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."

Uh, maybe, maybe not. There just isn't much in the field of life insurance where selling more life insurance increases the risk of death. The life insurance companies figured out the basics of moral hazard a long time ago: don't let people take out insurance policies on their business rivals or their ex-wives to whom they owe alimony. No tontines. Don't pay out on new policies who die by suicide.

In contrast, giving somebody a bigger mortgage directly raises the chance of default because they need more money to pay it back. Giving them a bigger mortgage because you are requiring a smaller down payment, in particular, raises the risk of default.

His colleagues' work gave him the idea of using copulas: mathematical functions the colleagues had begun applying to actuarial science. Copulas help predict the likelihood of various events occurring when those events depend to some extent on one another. Among the best copulas for bond pools turned out to be one named after Carl Friedrich Gauss, a 19th-century German statistician [among much else].

The Gaussian distribution (a.k.a., normal distribution or bell curve) works like this: Flip a coin ten times. How many heads did you get? Four. Write it down and do it again. Seven. Do it again. Five. As you keep repeating this flip-a-coin-ten-times experiment, the plot of the number of heads you get each time will slowly turn into a bell curve with a mean/median of five.

Now, that's really useful and widely applicable. Processes where you randomly select a sample will tend toward a bell curve distribution.

But the Housing Bubble didn't consist of fairly random events that everybody was trying pretty hard to avoid, like with life insurance. Instead, human beings were responding to incentives. The closest actuarial analogy might be the big insurance payouts that fire insurance companies got stuck with in the South Bronx in the 1970s when decayed businesses that were now worth less than their fire insurance payouts developed a statistically implausible tendency to burst into flames in the middle of the night.

As I said last fall:

Human life really isn't all that random. That's because human beings respond to incentives. If you treat human beings as if they are just mindless probabilistic events, whose risks you can diversify away by dealing with large numbers of them at a time, they will outsmart you. They will put down inflated incomes on their mortgage applications. They will claim to be owner-occupiers when they are just speculators who will rent out the property to Section 8 tenants when they get into a cash flow bind. They will bribe appraisers to report a higher than actual value.

Life insurance companies are in the selection business, not the influence business. Watching other people get rich buying and selling houses, however, influences behavior.

The life insurance actuarial model fails as an analogy for mortgages on other dimensions as well. For example, people die from a very large number of causes, making the distribution of deaths over time more Gaussian. Mortgages, in contrast, are more like being in the earthquake insurance business in California.

Further, Jim Morrison pointed out, the thing about life is that nobody gets out alive. In contrast, lots of people can imagine themselves selling the three houses in Temecula right at the top of the market and retiring to Dallas in comfort.

And there's a tournament aspect to competitive fields, such as homebuying. If you're in the Olympic boxing tournament and you get away with a few defensive lapses in your opening round match against a pudgy guy from Bhutan doesn't mean you can likely get away with them in the gold medal round against the Cuban. Similarly, when the median home price in California gets to $500k, it's not the same as when it was $200k. You can't use default data from when homes cost 40% as much. The margin for error has vanished.

Finally, the idea that just because there hadn't been a giant housing crash since WWII means there can't possibly be a giant housing crash is about 180 degrees backward. It's where there hasn't been a crash lately that you have to worry. What, did everybody expect the government to discourage home buying?

Statisticians need to be good with analogies, as well.

Happy 92nd birthday to my dad

That's our old trailer.

And here's one from his mid-fifties:


My published articles are archived at iSteve.com -- Steve Sailer

February 23, 2009

A business opportunity (shutting the barn door division)

We’ve all read about all the hundreds of billions of dollars lost by lenders and investors on mortgages made during the housing bubble that should never have been written in the first place due to low rent lying: Mortgage brokers telling buyers to make up jobs, income, spouses, and forget about other houses they own, previous bankruptcies, and the like. Appraisers adding 30% to values. Buyers claiming spouses they weren't married to, etc. etc.

I got to thinking: “If Procter & Gamble were in the mortgage industry, would they let themselves be taken to the cleaners by countless cases of petty fraud, the way Lehman Bros. and Washington Mutual and Fannie Mae and so many others did?”

No way.

If P&G were in the business of giving out a hundred billion in mortgages or buying hundreds of billions of other people’s mortgages, they would hire market research firms to monitor trends in the mortgage marketplace. They’d pay survey research firms to call up recent homebuyers to see how onerous their payments were turning out to be. They’d hire focus groups firms to talk to buyers and realtors and mortgage brokers to spill the beans about their business. They’d hire "mystery shopper" firms to pretend to be in the market for houses and see if any of the professionals were pulling any funny stuff. They’d have appraisers on their own payroll who were paid the same no matter how low they appraised the houses.

Procter & Gamble would spend the money to monitor the trillion dollar mortgage business as closely as they monitor the billion dollar toothpaste business.

But I’ve never heard of anybody being paid to monitor the mortgage market for monkey business. Have you?

By the way, if you think there might be a business opportunity here, go for it. Of course, even better, figure out what’s going to be the next Bubble after mortgages (alternative energy?) and set up systems that can help investors not be such damn fools in the future.

UPDATE: On second thought, the financial industry would just use marketing research reports on growing irrationality and funny business in the market to jump into the next big bubble even sooner and harder. Oh, well ...

My published articles are archived at iSteve.com -- Steve Sailer

Rotten boroughs are back

The next Census is a year away, and then legislative districts will be redrawn to reflect the new population. A crucial C0nstitutional issue is whether resident non-citizens, including illegal immigrants, should be counted in determining representation.
Some interesting data on rotten boroughs from Craig Russell:

1) In the last election, an average of 301,200 presidential votes* were cast per US House District.

2) In California, the US state with the highest number of immigrants, only 255,900 votes were cast per district.

3) The 22 House members of the Congressional Hispanic Caucus averaged only 161,500 votes cast in their districts…

4) The 413 non-CHC US House districts averaged 308,700 presidential votes cast.

5) Of the 10 highest immigration states (by percent), 8 voted for Obama; of the 10 lowest, 9 voted for McCain.

We are told by Obama & Co. how crucial sampling is because an “actual enumeration” (the Constitution’s exact words) would unfairly exclude immigrants. Based on this data they’re already being overrepresented. Is it fair to give a dozen or more House seats (and electoral college votes) to people who aren’t even in this country legally, or who aren’t citizens?

In most states, illegal immigrants are counted in allotting legislative districts, but the highest court to consider the issue said that's wrong:

In the majority opinion of the 1998 7th Circuit federal case "Barnett vs. City of Chicago," Judge Richard J. Posner ruled, "We think that citizen voting-age population is the basis for determining equality of voting power that best comports with the policy of the (Voting Rights) statute. ... The dignity and very concept of citizenship are diluted if non-citizens are allowed to vote either directly or by the conferral of additional voting power on citizens believed to have a community of interest with the non-citizens."

That decision applies only to three Midwestern states, however. The Supreme Court has yet to rule definitively on the issue.

It would seem like if the GOP wanted to bring it up, they'd better do it now.

But, they'd get smeared as racists for mentioning it, so, never mind.

My published articles are archived at iSteve.com -- Steve Sailer

February 22, 2009

Phil Gramm on the Community Reinvestment Act

My new VDARE.com column explains what former Republican Senator Phil Gramm is talking about in last Friday's Wall Street Journal, when he says it wasn't his financial reforms that caused the crash: it was loose money and politicized mortgages:

If you aren’t a regular reader of VDARE.com, you’d need a secret decoder ring to understand what Gramm means by “politicized mortgages”. The closest he manages to come to explaining what he’s talking about in his Wall Street Journal op-ed is his euphemistic reference to Fannie Mae and Freddie Mac’s 35 percent quota that “targeted geographic areas deemed to be underserved”.

You know and I know that “underserved” is Diversity Speak for black and Hispanic neighborhoods. Yet Gramm still can’t come out and say it in public. (In his oral presentation at AEI, he had used the somewhat more revealing term “inner cities and depressed areas”. But he didn’t dare be even that clear in the WSJ, or maybe the editors wouldn’t let him)

Moreover, that raises a fundamental question: How can Respectable Republicans like Gramm ever hope to persuade the public when they are terrified of saying what they mean for fear of being branded a “racist”?

I guess Gramm would prefer to go down in history as the man who blew up the world than to be accused by the SPLC of uttering hatefacts.

For example, it would strengthen Gramm’s case to point out that Crash was kicked off not just by a subprime lending crisis, but one concentrated in merely four states: California, Arizona, Nevada, and Florida. In August 2008, these accounted for 50 percent of all foreclosures and the vast majority of defaulted dollars.

But if Gramm were to mention that, it would also raise the unmentionable specter of Demographic Change.

There was overlending going on all over the world—yet the collapse started in a few rapidly Hispanicizing states in the U.S. Why?

You have to look at both sides of the equation: lending and repayment. In California and Company, not only was too much money being lent relative to past rates (which was happening in lots of other places, too), but, also, the earning capacity of the new homebuyers to pay back their loans was declining—as Americans moved out and Latin Americans moved in.

That double whammy in the Sand States of increasing lending and decreasing human capital is, more than anything else, what blew the gasket on the world economy.

Of course, we also needed a third element—political correctness—to keep investors from noticing what was happening.

And that, judging from Gramm’s timidity, appears to be as strong as ever.

More, including the inside story on how Angelo Mozilo's Countrywide Financial got away with it, here.

My published articles are archived at iSteve.com -- Steve Sailer

"Benjamin Button"

Watching "The Curious Case of Benjamin Button" is like listening to a Barack Obama speech. It's obviously something of a higher quality than the norm, and it induces a not-unpleasant trance-like state as it goes on and on, but it's hard to remember what the point was.

My published articles are archived at iSteve.com -- Steve Sailer