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[Renting in Mass]

I work in a software engineering group. I'm seeing tons of offshoring. I thought maybe writers would be safe, but now they've got us training a team of writers in India.

[Renting in Mass]

The Joint Center for Housing Studies at Harvard debunks the idea that the CRA is at the root of the credit crises: PDF

Highlights:

... data provided by the Home Mortgage Disclosure Act (HMDA) reveal that loans covered by the CRA accounted for only a fraction of mortgage lending to lower-income borrowers and neighborhoods.

CRA assessment-area lending accounted for only nine percent of subprime loans to lower-income borrowers and neighborhoods, while independent mortgage companies accounted for the majority.

The data suggest that far from being forced into risky corners of the market, the institutions under the scrutiny of the CRA were crowded out by unregulated lenders.

For another nail in the coffin of this theory, Paul Krugman points out that despite the fact that there was no federal act driving banks to lend money for commercial real estate, 55 percent of commercial mortgages that will come due before 2014 are underwater. In other words, "the lenders didn’t need government urging to dive deep into a property bubble, and drown."

[john p]

You guys are very bright so I totally appreciate your time.

I want to quantify this sort of thinking using real terms.

My wife and I decided to buy our house in 2006. We mostly stayed within Renting in Mass's metrics: 3.3 times our salary, 27% of our gross monthly income to pay the mortgage and I forget the debt ratio, BUT we only did a 5% down payment. We wanted to have more cash for an emergency fund because I am in an industry where you have short project life cycles and if there is a downturn there is a lot of risk to get laid off when your project is over. The down side to not having the 20% down payment was that we either had to pay PMI (mortgage insurance) or do what we did and get a second "piggyback" note for the 15% at a higher rate tied to the Prime Rate. Our two notes were 6.5% for 80% of the house price, and 8% for 15% of the house price.

The last part of the general strategy was that we decided to get a home that we would want for at least 10 years and wanted to avoid having to trade up or have to put a lot of money into a place, so we had to find the right place that we liked "as is". We did this so we could avoid transaction costs.

I bring this up because I will show you how I quantified this risk and modified the metrics to absorb this risk.

I broke our financial plan into 5 year increments.

The first five years (Pilgrim's Winter Planning)

I wanted to make sure that we could pay our monthly nut with a cash flow of one person being employed and the other drawing unemployment. We both make about the same amount... I wanted to be able to sustain that at a bleed rate (being in the red) less than $350 a month and then having a nice emergency fund to sustain the $350 per month for quite some time. The other reason why I opted for the big emergency fund versus the big down payment was for any unforeseen expenses on the house. The other thing was that when we computed our "salaries" we didn't just -plug in what we are currently making, but made assumptions as to what salary could we make pretty easily, meaning if we got laid off it wouldn't take too long to be hired at this rate of pay.

We're currently at year 3 and our house price is now 2.7 times our household income, so we've grown into it a bit.

The second five years

Because we bought using piggyback, the strategy is to pay off the piggy-back and refinance the larger note to something lower so that Daddy can swing the mortgage and Mommy potentially can stay at home. The plan was to, if possible, get into a 15 year note where we could have gotten a much more favorable rate and gives us a jump on saving for Junior's college.

The third five years

Is just getting a lot of daylight to save like mad men knowing that we will be at the peak of our earning potential. Further, having less of a nut, we could potentially take more risk with our careers and maybe start our own companies. Now I could branch out on my own now, but it would be for smaller projects and I'd rather work on mega projects so my house purchase plan tracks my career plans somewhat.


The danger of having a plan that seems to make sense and absorbs risk is that once your spread sheet that you've carefully put together all balances, it is kind of hard to acknowledge the gorilla in the room. Conventional Wisdom says that "You shouldn't time the market", but when you look at that Case Shiller or Admin's Chart, it is quite obvious that we were in for a nosedive. I acknowldeged this to some degree. I saw that because the money supply had grown so much, that eventually it would create wage inflation. I understimated the amount that was in derivatives i.e. the amount in someone's credit card account and how the economy was really running on borrowed money. Our family did face a lay off situation and we were able to withstand it because our plan had a weatherproof rating to some degree. Now, we're at full income capacity and were able to refinance.

I decided to not wait a couple of years to get into the 15 year note because I was fearful of government intervention and spending and inflation. I had to weigh the pay backperiod of the closing costs versus how many months of paying the higher mortgage rate it would take before it made sense and by that time would I either want to sell or be able to refinance into a much shorter term. My fear of higher inflation outweighed the hope of being able to be in a position to refinance in the future time. (Which, is why, Renting in Mass, I was so pissed about Obama; his spending and predisposition to government intervention posed too much of a risk for my plan....) Anyway, balancing all of that gave me a strike zone to do a 25 year note at 5%.

Planning and Negotiations:

The reason why having a plan helps you in negotiations is because it gives you the confidence to make decisions. I mean that is why I love Admin's Red Light, Yellow Light and Green Light Strategy. For me, I saw the Case Shiller curves and was like HOOOLY Shit. But I also saw how much money was being flooded into the Economy and I do believe in trickle down economics to some degree. But the point is that back in 2006 I lowballed like a bastard and didn't blink at anything because I felt comfortable with the risk at a certain price. Basically, I wasn't offering market price because I saw the house prices falling significantly, so I basically lowballed to where I felt it would drop within a few years. It did fall further than I paid significantly for a period of time, so I didn't time the market perfectly, but my house now Zillow's for more than I paid in 06 and our house appraised fine for our refinance, so I was able to buy my house at today's market price with today's low interest rate.... and I got to live in the house for 3 years versus renting. Now, of course we could have saved a lot more, but at some point you need to factor in quality of life. As far as refinancing, I told the guy when things were at 5.25%, "Hey, I need to be at 5% and 25 years because otherwise the payback is longer than it is worth to me because I will be in a position to refinance to 15 years in 3 to five years or so." Everyone was telling me, "Jump on the 5.25% while you can!". I was also afraid of hyper inflation due to government overspending, but that 15 year term was on my radar so I held out for the 5% and got it. I also knew that I got lucky due to the lower mortgage rates in the Spring that gave me favorable comperables on my street, so the stars aligned and I knew it.

From what I've gathered from some of the guys on this blog, I think that having a big down payment and having some cushion to weather some economic storms is essential because the IT Sector is a bit turbulent. I think if you don't have two earners things get pretty difficult and unfortunately, at the starter home price level, you're either looking at condos that have condo fees, or older home that can be cash money pits. We decided to get a younger home to avoid unforseen problems of an older place so because they haven't built starter homes in Massachusetts in like 3 decades because we had a ton for the GI's after WWII, we bought a house a bit bigger than what we needed just to be in a newer place. I offer what I did because I also was in a turbulent field and I was forced to learn how to quantify and game plan with that factored in.

[john p]

Renting in Mass:

I have read those reports (the nine percent). My point earlier was that that 9% Leveraged a lot more because the Government are supposed to be the "Grown-ups" and the Grown-ups were GUARANTEEING THESE!

It's like if Moody's or Warren Buffet invested in a company, you would think that they had done some due dilligence and that was the smart money right? Most people don't know what they are doing so they look to "Leaders" for their direction.

Renting, ask yourself, you even quoted the affordability benchmarks, why would the government say, screw it, these affordability metrics don't matter any more, we're guaranteeing this high risk stuff? That isn't leadership, that doen't acknowledge that most people are followers.

I think it is irresponsible for the Government to say, "You were idiots, you listened to us". Further, the leaders of that dumb 9% (Barney Frank Chris Dodd, Obama) are in power now and setting policy. Shouldn't we be listening to someone during the bubble years who was preaching what you are today regarding affordability benchmarks? I think if you do more research, you'll find it was more Republicans who were trying to slow this down when it it mattered. Keep in mind that not only was I a Democrat, but I was out there exposed in 04 to 06 and I was doing everything I could to reach out for guidance. I didn't get the right guidance from Democrats or Harvard University. Try to find Harvard School of Government Reports in the bubble years warning people; they didn't, I know because I looked like crazy for them. When it mattered most for my family, the Democrats gave me the wrong advice and Harvard was M.I.A. Also ask yourself, if Obama is some Robin Hood, why did the banks give him an overwhelming larger amount of money than McCain? Just like I didn't like Cheney when he had secret meetings about the oil in Iraq with big oil companies, I don't like Geithner having a ton of meetings with Goldman Sachs (a company that made a fortune while most of us dealt with hardship).

I think you (and Krugman) are totally right regarding the commercial real estate. I don't know much about commercial real estate to comment.

[john p]

Side Note:

I think Warren Buffet is investing in railroads because a weaker dollar means more exports so they need to get more stuff around the country and the old manufacturing plants are near the rail lines whereas the imports could follow roadways...

[Renting in Mass]

Thanks for posting that John. It's very helpful to get some insight into other people's decision making processes. I certainly wouldn't argue with your thought process or actions.

[Renting in Mass]

[john p]

It totally am appreciating your time as well.

As far as the bankers not behaving like grown-ups, yes, they were irresponsible, but when you look at the CRA, that is essentially why they allowed the Banks to securitize the subprime; otherwise the banks never would have agreed to giving many of these people mortgages.

Prior to the CRA, the banks used these affordability measures to approve or deny people for mortgages. The banks invented these benchmarks based on the track record of prior families going through their lending programs. In order for the government to get the banks to lend to those that the banks historically qualified as risky, they had to give them a way to shirk their obligation. It is no coincidence that the law include the securitization of subprime loans because otherwise the banks would have said no freaking way. It was a time of plenty so nobody was really paying attention and the surcharge of investment money was in equities so we didn't really see how bad the plumbing was until the money started flowing into real estate. The CRA is an example of how government intervention can deform fundamentals.

(side note story). I once renovated a building at a famous university.... anyway, tatooed all over my drawings was to not demolish the existing rain leaders (the pipes that carried the rain water from the gutters through the building to the drains under ground.) Anyway, the demolition crew did and once we got a big rain storm the water flooded the basement. In this situation, the rain leaders were broken in 1995 but the money started flowing through the pipes when real estate became the sanctuary from the stock market about 7 years later. We didn't find out the rain leaders were broken until the water showed up...

Being in the design and construction field, I am predisposed to growth. I care a lot about poor people, but bending the rules can just set people up for failure. My heart goes out to those that have had their dreams taken and I get angry at those who teed them up with false hope. I see that as cruel. I believe in spreading the wealth by creating abundance and providing opportunity to small businesses. What we see now is stagflation and larger companies pushing their employees to work longer hours for less pay because they know they are the only shop in town and nobody is out there to lure away their talent. As much as Bush was a train wreck, he did give a better life to those who were under Taliban rule and Saddam Hussein. I know it wasn't the United States problem, but when you sum up that guy's life in decades to come, I think he isn't a total screw up if he gave an entire nation a chance at democracy. That region of the world was on fire and if Iraq succeeds and people get a chance at freedom and hapiness, we won't have to fight as much again, people in that region will model us because they can see the benefits of democracy. Iraq was the perfect place to start based on geography and the fact that it was the most secular. As much as Bush had no statescraft skill or charm, at least people knew where they stood with him. They say betrayal is worse than rape, and my fear is that if you make too many promises to too many people just to get them to like you, it's like a guy who has too many girlfriends at the same time; eventually one will get their heart broken and feel betrayed. Corzine lost the election because he made a promise he couldn't fulfill (lowering property taxes in New Jersey). I am not saying that Democrats have to become like Darth Vader Republicans, I'm just saying that they need to have a bit of fiscal restraint and some arsenic in their blood when they deal with some countries that respect might over right. I see responsibility as withholding promises that you aren't sure you can keep. As much as we are a hopeful nation, we need to balance that with being realistic. Obama's excuse today is that he is mopping up Bush's mess. If he understood this ahead of time, he should have been campaigning with the results he thought he could deliver given and measuring the real resistance that the reality posed. In my industry, we have professionals who promise the moon and actually take work away from responsible people who give bids based on reality and honesty. The Big Dig had people lying about their bids, low-balling and then marking up change orders. Obama is doing the same, he lowballed to get elected and now he's using change orders to deal with reality that he should have been geared into ahead of time when he put in his bid for the Presidency. As a voter, be like a person who hired a contractor, and think about if you'd pay someone extra for a condition that was visible when they gave their bid. This is sort of the perspective I see the situation in; perhaps I'm wrong in many instances, but it gives you a sense to my disposition....

[Xenos]

[quote="john p"] ...Obama's excuse today is that he is mopping up Bush's mess. If he understood this ahead of time, he should have been campaigning with the results he thought he could deliver given and measuring the real resistance that the reality posed. In my industry, we have professionals who promise the moon and actually take work away from responsible people who give bids based on reality and honesty. /quote]

This is an excellent point. Obama would have had a good chance to sell the country on fundamental change. What a mandate he could have had! But it is not so much a matter of dishonest salesmanship on his part as plain ignorance about business and finance.. He lacks the expertise, and so lacked the guts to consider Geithner an enemy rather than a necessary ally.

Combine this with a failure manage and control the debate on health care reform, and I think you are right he is fated to be a one-term wonder. I am a fan of his, but he has screwed the pooch and does not know it yet. The second leg of a W shaped recession is going to kill his chance for a second term.

Either way, there is a lot more pain before the housing market stabilizes, and no one else left to blame it on.

[Renting in Mass]

[Renting in Mass]

In an attempt to answer my own question, the CRA was the beginning of mortgage backed securities (MBS) via Fanny and Freddie. OK.

I argue that it wasn't the MBS that caused banks to stop caring if people could afford their loans. It was CDOs.

I guess you could argue that you couldn't have CDOs without MBS.

I'm getting too deep into the weeds of the history of financial instruments. I'm gonna get some work done now!

[admin]

[john p]

This is an excellent read:

http://www.securitization.net/pdf/Publications/Sub-prime_Problem_8Jan08.pdf

http://www.discoverthenetworks.org/Articles/Watching%20the%20House%20Burn%20Down%20What.html

Yes, the CRA can in in 1977 but it was the Ammendments in 1995 that I'm talking about, the ones that allowed CRA subprime loans to be securitized.

from above:

[john p]

Xenos:

I think in some instances Obama is saying the right thing and people aren't listening. He is a lawyer and he does lay out language that gives him some flexibility. Remember the Primary when he would always be saying "I didn't say that", when the actual words he said implied one thing but gave him wiggle room to back out. Typical lawyer...

Take his speech at the UN, he tells other nations that we are moving from a period of unilateral action and that the downside for them is that they just can't expect that the United States is going to act for everyone and that they will need to contribute.

Everyone cheered because he wasn't Bush, but they all benefit from a world without Saddam Hussein but didnt' have to pay the full bill for it because Bush was the Lone Ranger. I believe that the same nations that cheered Obama will be disapointed with Obama for not acting unilateraly when we get another flare up. Bush provided many nations security, yet they bashed him anyway. Let's see how they react when we sit the next flare up out.