Sunday, November 30, 2008

Need to Learn About Securitization?

Even if you know how debt is securitized, this video by Paddy Hirsch at the Wallet is worth watching. He presents an entertaining and informative video on how credit card debt is turned into asset backed bonds.
marketplacevideos November 25, 2008

Explosion in the Monetary Base Signals Future Inflation

The monetary base is equal to reserves at financial institutions plus cash in circulation. When these reserves are loaned out the money supply expands. Recent actions by the Fed to ease credit conditions have created a massive increase in reserves. Should an expansion occur these reserves, if they are not constrained, can result in a significant increase in the money supply and inflation. The relation between reserves and the money supply is indicated by the money multiplier which is basically equal to the money supply (demand deposits plus cash in circulation) divided by the monetary base. The decline in the money multiplier has offset the increase in the monetary base. These series indicate that the liquidity needed to expand loans exists, but that the loans have not been extended.

Monetary policy is often compared to a string. The Fed can pull it (tighten credit markets), but cannot push on it (expand credit markets). It can make the funds available but it cannot force institutions to lend or borrow.

Friday, November 28, 2008

New Homes Sold Continues Decline While FHA Financing Increases

The U.S. Bureau of the Census just released data on the October housing market. The number of new homes sold in the last quarter continued the previous decline. In addition, the dramatic increase in the percent of new homes receiving FHA financing rose to 17.05%

Wednesday, November 26, 2008

Decline Continues in Housing Price

This just released report from Standard and Poors on the Case-Shiller Index shows a continued decline in housing prices through September.

Gay Married Couples Entitled to Insurance Benefits in New York State

Now that gay marriage is legal is some states, states that do not recognize gay marriage must decide whether contractual obligations to gay spouses will be extended in those states. The Superintended of Insurance in New York has decided that they do.

"We expect insurance companies to provide the same rights and benefits to all legally married couples, regardless of the sex of the spouses," Dinallo said in a statement. He cited Gov. David A. Paterson's May directive to state agencies to afford gay couples married in jurisdictions where same-sex marriages are legal the same rights and obligations as heterosexuals.

See Law.Com for story

Spread Continues to Widen Between Fixed Rate Mortgages and Treasuries

The WSJ reports that government moves to ease credit in the mortgage market has succeeded in bringing down mortgage rates in the past few weeks. However, the spread between the rate on 30-year fixed rate conventional mortgages and 10-year treasures continues to widen. The spread reached 266 basis points in the previous week. The widening gap indicates the increasing inability of traditional monetary policy to affect credit market conditions in mortgage markets.

Tuesday, November 25, 2008

Are the Fuel Savings on Smaller Cars Worth the Increased Cost of Insurance?

M.P. McQueen in a WSJ article, Higher Insurance Costs Erode Fuel Savings on Small Cars states that smaller cars cost more to insure and suggests that fuel economy savings may be offset by higher insurance costs.

A 40-year-old male driver would pay an average of $1,704 to insure a 2009 Mini Cooper that gets 37 miles per gallon on the highway, according to a study by, an online insurance broker. That same driver would pay only $1,266 -- a difference of $438 -- to insure a Toyota Sienna Minivan, which gets 23 mpg.

Given this information we can calculate break even mileage at a range of gasoline prices. For example, at $4.00 a gallon the gas cost per mile for the Mini Cooper is 10.8 cents and 17.4 cents for the Toyota. That's a savings of about 6.6 cents per mile. Dividing $438 by 6.6 indicates that you would break even at 6,656 miles. If you drove more than this, the gas savings on the Mini Cooper would exceed the additional cost of insurance. Of course, this considers only the gas savings. If you factor in the purchase price of the car, break even mileage will differ. The table below provides break even mileage at alternative gasoline prices. At the current price of about $1.75 per gallon you would have to drive 15,214 miles before breaking even.

Learn about Nontraded REITS

John B. Corgel, Ph.D., and Scott Gibson, Ph.D. in Nontraded REITs: Considerations for Hotel Investors examine the operation of nontraded REITS. Nontraded REITS are registered with the SEC, but are not traded on stock exchanges. They are typically sold through financial planners. The market value of nontraded REITS is almost equal to that of publicly traded REITS. The major finding of the study is that the fixed share price feature of nontraded REITS diminishes returns to early investors ever after considering dividends.

Understanding How the Credit Crisis Affects You

The Joint Economic Committee Majority Staff has issued Main Street: Understanding How the Credit Crisis Affects You. It provides a nice brief explanation of the securitization process and the role of credit in the financial system.

Consumer Driven Health Care Plans Are a Small but Growing Share of the Health Care Market

The Employee Benefit Research Institute has just released the 2008 EBRI Consumer Engagement in Health Care Survey. The results indicate that consumer driven health plans (CDHP) include 3 percent of the populations, up from 2 percent in 2007 and 1 percent in 2006. CDHPs generally have the following characteristics:

  • They combine a high-deductible health plan (HDHP) with a tax-advantaged health reimbursement arrangement (HRA) or health savings account (HSA).

  • The employer pays a fixed amount toward the employee's health care benefits

  • Each employee controls an untaxed account that is used to pay health care bills

  • Unspent money in the account accumulates for future years

  • The account is accompanied by a high-deductible insurance policy that pays major expenses.

  • Help with the selection of health care services with web based information

Saturday, November 22, 2008

Changes in the Relative HAI. Do they signal anything?

The National Association of Realtors (NAR) publishes the Housing Affordability Index (HAI). The NAR provides the methodology used to calculate the HAI. Basically, it is equal to the ratio between the median household income and the income needed to qualify and purchase a median priced existing home.

To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite HAI of 120.0 means family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the HAI, then, shows that this family is more able to afford the median priced home.

The calculation assumes a down payment of 20 percent of the home price and it assumes a qualifying ratio of 25 percent. That means the monthly P&I payment cannot exceed 25 percent of the median family monthly income.

The NAR publishes three different HAI indexes. There is one for adjustable rate mortgages, one for fixed rate mortgages and a composite series for all mortgages. The series are available at the NAR website. In the figure below, I have plotted the ratio of the ARM HAI to the Fixed Rate HAI. The relative attractiveness of adjustable rate mortgages over fixed rate mortgages should be positively related to this relative ratio index.


One reason for taking out an ARM rather than a fixed rate mortgage is that given the lower initial rate the borrower can qualify for a larger mortgage. As indicated in the above diagram, the relative attractiveness of ARMs increased significantly in the first half of the 90s. It then fell and remained relatively constant until about 2004 with the ARM HAI about 10 percent above the fixed rate index. That relative attractiveness was largely eliminated by the mortgage crisis, with the relative ratio falling to 1 in 2007. The changes in the indexes do seem to indicate that ARMs are not as attractive as they once were.

There does seem to be a more interesting story waiting to be told. Both of the drops in the relative ratio were coincident with the flattening of the yield curve in 1995 and 2005.

I Thought Deflation Was a Fairy Tale

Is deflation just a fairy tale used to scare children, like threats of Hannibal? Not so, last month the CPI fell by 1% in October. Even after excluding food and energy it fell by .1%. Aron, Janine and Muellbauer, John (2008) in "The Next Collapse: U.S. Price Inflation," The Economists' Voice: Vol. 5 : Iss. 6, Article 9 foresee a record fall in prices over the next 6-12 months. They caution that this may not be all bad.

It seems unlikely that governments in China and similar emerging markets can compensate swiftly enough to boost domestic consumption. And with growing over-capacity, investment in goods production may fall even further, with serious implications for GDP. Hence the demand for commodities, which has been driven by emerging market growth, will fall sharply, and help decrease global inflation. Eventually through this channel, lower commodity prices and lower inflation will act like a huge tax cut for households, allowing interest rates to fall further and thus stabilise economic activity. Paradoxically, the faster oil prices now fall, the shorter will be the subsequent period of deflation, as further damage to the economies of industrial countries is avoided.

See also “U.S. price deflation on the way.”

Oh the Misery Index

No wonder you are feeling bad. The Misery Index tells me so. The Misery Index is equal to the sum of the the unemployment rate and the inflation rate. We are supposed to feel bad whenever either of these indexes rises and when they both start to rise, we really feel awful. Since the turn of the century the Misery Index reached a low of 5.8% in October 2006 when the unemployment rate was 4.4% and the inflation rate was 1.4%. Who knew that those were the good old days? Since then the Misery Index has risen to a high in August of this year. In October we were slightly off the peak with a Misery Index of 10.2% that included a 6.4% unemployment rate and a 3.7% unemployment.

We still have a ways to go before we achieve the all-time high of 21.98% in 1980. Too bad the index does not have a stock component. If it did, I am sure we would be setting new records.


Friday, November 21, 2008

Choose Your Home Price Index

An article by Carl Bialik Only One Person Knows a Home's Value: Its Buyer in today's WSJ discusses the several home price indexes that are commonly reported by the government and in the press. Which index is the best indicator of overall home prices? The indexes do not move together because each reflects a different selection of home sales. For example, NAR reports that 35 to 45 percent of sales consisted of foreclosures and other distressed property in the third quarter. The sales prices on those home, sold under distressed conditions, do not necessarily reflect the prices of homes sold by a non-distressed seller. This explains why the Case-Shiller Index, which includes subprime loans, has declined more precipitously than the FHA House Price Index, which includes on federally financed loans.

Thursday, November 20, 2008

Stocks as Lottery Tickets

When you purchase a lottery ticket you pay a small price for the possibility of a large gain. Gerald P. Dwyer Jr. and Cora Barnhart in Returns to Investors in Stocks in New Industries surmise that investors are doing the same when they purchase stock in new untested companies. This may be especially relevant when the firm’s product might generate network effects. Network economies exist when the productivity of a product is positively related to how many consumers purchase it. Based on their empirical analysis of selected industries they conclude the following:
Adjusted for risk, expected returns are not particularly high for firms in new industries.

Our evidence is consistent with new industries having distributions of payoffs across firms that are highly skewed. In this sense, new industries are similar to lotteries. As is well known though, this can be quite consistent with a log-normal distribution and our data across firms generally are consistent with a log-normal distribution of the cumulative values across firms.

Our evidence uniformly indicates that the expected return to owners of traded stock in new industries is positive and substantial. This is consistent with a supposition that investors receive expected returns that can be interpreted as compensation for the risk they bear. We do not address whether that compensation is consistent with a model of market equilibrium at the level of individual firms.

Get Extra Credit at the Federal Reserve Bank of Atlanta

Extra Credit is an online newsletter, produced twice a year, designed to help teachers looking for timely information on economic and personal finance topics, lesson plans, and ideas for use in the classroom. Each issue also includes a calendar of upcoming teacher workshops or other events offered by the Fed or its education partners.

U.S. retail store credit card comparison table lists the top issuers of retail store cards for 2007. Listed are both private label cards run by banks and in-store cards owned by the retailer. Among the top issuers the number of private label cards has declined from the previous year while the number of in-store cards has increased. expects a decline in the number of cards over the current year as credit tightens See related post.

Dynamic Maps of Bank Card and Mortgage Delinquencies in the United States

The New York Fed has posted interactive maps that let you interactively review changes in delinquencies by county all across the nation. It may not help the current crisis, but it might provide a little enjoyment as you click your way through the misery.

The Federal Reserve Bank of New York announce the availability of dynamic maps and data that show the rate of bank credit card delinquencies and mortgage delinquencies by county across the United States during the first quarter of 2008. These new measures complement the nonprime mortgage information released periodically since last March by providing a more comprehensive view of regional credit conditions.

Wednesday, November 19, 2008

HUD Announces New, Permanent FHA Mortgage Loan Limits

Beginning January 1, 2009, FHA will insure single-family home mortgages up to $271,050 in low cost areas and up to a maximum of $625,500 in high cost areas. The February 2008 Stimulus Package temporarily raised the FHA maximum to $729,750 through December 31, 2008. The new $625,500 maximum, however, represents a significant increase over the $362,790 limit that was in effect prior to the Stimulus Package.

HUD News Release

Tuesday, November 18, 2008

Consumer Federation of American Reviews State Insurance Department Websites

The CFA has issued State Insurance Department Websites: A Consumer Assessment by J. Robert Hunter, Director of Insurance. In addition to reviewing all of the state insurance department websites, the report provides links to all of the sites and a summary of the information posted by each state insurance department.

HUD Issues New Mortgage Rules To Help Consumers Shop For Lower Cost Home Loans

HUD will require, for the first time ever, that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. HUD estimates its new regulation will save consumers nearly $700 at the closing table.

Last March, HUD proposed reforms to the longstanding regulatory requirements of the Real Estate Settlement Procedures Act (RESPA) by improving disclosure of the loan terms and closing costs consumers pay when they buy or refinance their home.

HUD will require the new standardized GFE and HUD-1 beginning January 1, 2010. To view these documents, click on the following links:
HUD's standard Good Faith Estimate

HUD-1 Settlement Statement

Friday, November 14, 2008

Measures of Economic Distress

How bad are things in your state? lists the foreclosure rate, the unemployment rate and a food stamp participation in each state in one convenient table. The states are ranked so you can judge just how bad the economic environment is in your state.

Penn State Publications on Financial Literacy

The Financial and Consumer Literacy Web site at Penn State University has a helpful list of short publications on controlling your finances and making wise financial choices. There is a timely set of pamphlets entitled, "Bouncing Back When Income Drops."

Wednesday, November 12, 2008

Deceptive Practices in the Subprime Market

In a report to Congress last year the FTC cited many deceptive and illegal practices that were uncovered in the subprime market. This list of practices is disheartening, especially when you consider that borrowers in the subprime market were allready experiencing financial difficulties before they were duped.
  • Lenders told borrowers they would save money when consolidating their existing debts, but these "savings claims" did not take into account the loan fees and closing costs the company typically added to the consumers' loan amounts.
  • Lenders did not reveal that consumers would pay only interest and would still owe the entire principal amount in a "balloon" payment at the end of the loan term.
  • Lenders included single-premium credit insurance in loans, without disclosing its inclusion to consumers.
  • Lenders deceived consumers about key loan terms, such as the existence of a prepayment penalty or a large balloon payment due at the end of the loan?
  • Lenders falsely promised consumers low fixed payments and rates on their mortgage.
  • Lenders conducted business with his clients almost entirely in Spanish, and then provided at closing loan documents in English containing the less favorable terms.
  • Lenders deceptively induced consumers to purchase expensive add-on products to obtain costly refinance loans, and to pay fees to participate in a "direct deposit" program.

Report here

Monday, November 10, 2008

When is a gift card not a gift card? Answer: When the retailer goes bankrupt.

Would you ever lend money at a zero percent rate of interest? Even worse, would you ever lend money at no interest to a borrower with a poor credit rating? That is just what you are doing if you’re holding a gift card from a store that is headed toward bankruptcy. Circuit City stores have just filed for Chapter 11 bankruptcy protection. Owners of gift cards are creditors just like all other creditors that must get in line to collect when a company goes bankrupt. The best advice is to use it or lose it before the company actually enters bankruptcy. It is not clear whether Circuit City will continue to honor its gift cards. Once it enters bankruptcy it need no longer honor those cards. If you planned on giving a Circuit City gift card for Christmas, remember it is the thought that counts. The Wallet has links to helpful consumer information on the Circuit City bankruptcy.

In an interview with the News Observer an editor from Consumer Reports had the following good advice.

They take your money as a pledge against something in the store and then that money, in a bankruptcy, is going off to Joe the plumber, or some other secured creditor, who has priority over a gift card holder.

It's always a good year not to buy a gift card," he said. "I'm not sure what the benefit of them is anyway. They're not like a real thing the person wants, they're not as good as cash. ... Cash you can use. Uncle Sam is probably not going to file bankruptcy.

If you're buying presents ... offer to wax someone's car, get them something they really need, or just hug 'em. That's what the holiday is really supposed to be.

The California Department of Consumer Affairs provides this advice.

What happens if the seller of the gift certificate or gift card files

A gift certificate or gift card sold by a seller that seeks bankruptcy protection may have no value. However, the holder of the certificate or card may have a claim against the bankruptcy estate.

Sellers that file "Chapter 11" (reorganization) bankruptcy intend to stay in business, so they typically will ask the bankruptcy court for permission to honor gift certificates in an effort to maintain good customer relations. If the bankruptcy court does not allow gift certificates or gift cards to be honored, or if the seller files "Chapter 7" (liquidation) bankruptcy, holders of gift certificates or gift cards are creditors in the bankruptcy case. They have relatively high priority among unsecured creditors in a Chapter 7 case, and may receive some percentage of the certificate's or card's value, but only if the bankruptcy estate has enough assets to pay claims.

For information on filing a claim, and other basic information on bankruptcy, see "Consumer Tips on Retail Store Bankruptcies," under the "Publications" tab at, and then go to the "Consumer Publications" section, for the list of consumer publications. A recently adopted California law is intended to help gift certificate and gift card holders when the seller declares bankruptcy. It requires a seller in bankruptcy to honor gift certificates issued before the date of the bankruptcy filing.22 No court has ruled on the effectiveness of this law.

Update on Circuit City at the Wallet

Friday, November 7, 2008

Markowitz on What Went Wrong

The dean of diversity, Dr. Markowitz, comments on the recent financial crisis in this interview with the WSJ, The Father of Portfolio Theory on the Crisis

Now 81 and still teaching and advising funds, Mr. Markowitz has good news and bad news. The bad news is that bailouts to restore liquidity aren't addressing the real problem. The good news is that once we have the information to measure the losses of bad risk-taking, markets will recover.

TIAA-CREF Videos on Market Strategies

TIAA-CREF has a nice set of videos on investment planning.

The following list of materials provides commentary and insights on this tumultuous period in the financial markets, as well as information about TIAA-CREF's financial strength and stability. This content is available at and is updated regularly to reflect changing market conditions.

TIAA-CREF's Chief Executive Officer Roger Ferguson on keeping the long-term view (video).

TIAA-CREF's chief investment strategist, Brett Hammond, discussing Principles & Perspectives for Weathering Volatile Times (video) and The Importance of Asset Allocation (video).

A recent interview of Roger Ferguson on the volatile markets by NPR News' All Things Considered.*

Guidance for you:

Words of wisdom for navigating turbulent markets.

Should you save during volatile times?

Thursday, November 6, 2008

Stock Market Fluctuations and Retiree Incomes: An Update

Gary Burtless has posted a paper entitled, Stock Market Fluctuations and Retiree Incomes: An Update, at the Brookings Institution's website. He states that new retirees who have invested all of their savings in the stock market will see the value of their savings fall by more than 40% in the present market decline. His basic argument is that privatization programs will divert funds from a stable source of retirement income, social security, to unstable sources such as retirement income.

Gary Burtless backcasts how much retirees could expect to accumulate in individual retirement accounts if they saved 4% of annual income over a worklife. To calculate the replacement rate, he assumes that the retirement accumulations are used to purchase a single-life annuity at age 62. The cost of the annuity is based on the return on long-term government bonds. The results are dramatically illustrated with the replacement rate falling from almost 90% at the most recent peak to less than 30 percent.

Wednesday, November 5, 2008

FDIC Issues Final Rule on Financial Education Programs with Banking Services

A newly enacted rule will make it easier for FDIC-supervised banks to offer deposit and lending services as part of school financial education programs without having to file a branch application.

12 CFR Part 303
RIN 3064–AD28
Financial Education Programs That
Include the Provision

Monday, November 3, 2008

New BLS Publication on Cost for Health Benefits

The BLS has issued the inaugural issue of "Program Perspectives on Health Benefits." The latest data on access, participation, and premiums are also highlighted. Upcoming "Program Perspectives" issues will feature NCS data on Paid Leave and Retirement benefits and will be released over the next several months. For other BLS publications see the Office of Publications and Special Studies.

The Rich Live Longer

It should be no surprise that the rich do live longer than the general population. The IRS recently released Federal Estate Tax Returns Filed for 2004 Decedents. in which the following was stated.

The average age at death for men in the 2004 estate tax decedent population was 77.2, compared to 75.2 for men in the general population, while the averages for women were 82.0 and 80.4, respectively. This is consistent with research demonstrating that wealthier individuals live longer and are healthier than less wealthy individuals.

Figure C also shows the increasing longevity of both the estate tax decedent population and the general population over the past 12 years, particularly for men. In 1992, male estate tax decedents were 74.6 years old on average, about 2 ½ years younger than the average in 2004. For female estate tax decedents, the increase in longevity was slightly smaller, as female estate tax decedents in 1992 were an average of 80.2 years old, just less than 2 years younger than the average in 2004.

Sunday, November 2, 2008

Student Debt Data by Educational Institution

Interested in knowing what the typical graduate with loans at your school carries in student debt? You can find the information at the Project on Student Debt. The site also has data on the average debt and the percentage of graduates with student debt by state. The following is representative of the data you can find on each institution.

University of Dayton

Average Debt of Graduates 2007$ 20,438
Average Debt of Graduates 2006$ 20,731
Proportion of Graduates w/debt 200759%
Proportion of Graduates w/debt 200676%
Full-Time Enrollment Fall 20066,925
2006-07 In-State Tuition$ 23,970
2006-07 % Pell Grant Recipients11%

Full report here