July 11th, 2008

interesting commentary on prepayment penalties

I've done some whining here about the things people sign up for in other-than-boring-old-fixed-rate-FHA-style loans (recourse vs. non-recourse, prepayment penalties, rapid changes in mortgage servicers due to repeated sales of the mortgage, loss of the ability to negotiate a workout because the mortgage has been bundled and sold to investors, etc. -- and that's not counting evils like negative amortization in Pick-a-Pay).

Here, Tanta, the other contributor to the Calculated Risk blog, presents an interesting take on prepayment penalties:


The gist is simple. Even ignoring issues of discrimination and lying (where people don't know what they are signing or don't know there are alternative choices), customers tend to assume the prepayment penalty won't be an issue for them (they don't plan to sell in this case) or that rare, negative events that change their plans won't happen to them (getting cancer, in this case).

Tanta's analysis is interesting, because she _doesn't_ agree with the rationale provided/implied by the victim, but absolutely opposes prepayment penalties because it's quite clear it is a component of the product that is misunderstood and misassessed by the customer.

I would extend this to all kinds of other situations deserving of regulation, but I recognize that everyone is going to draw the line somewhere. This, tho, seems like a pretty good one to ban.

QOTD: "there are certain boys in many city..."

"There are certain boys in many city neighborhoods who form themselves into little gangs with leaders somewhat more intrepid than the rest. Their favorite performance is to break into an untenanted house, to knock off the faucets and cut the lead pipe, which they sell to the nearest junk dealer. With the money thus procured they buy beer, which they drink in little freebooters' groups sitting in an alley."

I pulled part of it out of _Cash for Your Trash_, but when I saw the source, I wondered if the whole article might be available online. It is, here:


_Cash for Your Trash_ is about recycling and therefore, about the scrap/waste trades. This particular quote was drawn attention to as a way of highlighting the concerns that drove the scrap/waste trades out of residential neighborhoods and to African-American neighborhoods, the industrialized edges of the city and so forth. I glommed onto it, because it's so characteristic of the foreclosure crisis today, that vacant homes are stripped of their copper pipes and wires which are then sold to scrap dealers. Where the money goes next, of course, is perhaps a little different -- maybe to meth, instead of beer?

But the article as a whole is (I mean, come on, it's _Jane Addams_) absolutely as worth reading today as it was when the Atlantic first published it. In 1899.

It's long. There are some oddities that I suspect are scan errors not caught by a copy-editor. But absolutely worth it.

More gems from the piece:

"The charity visitor has broken through the natural rule of giving, which, in a primitive society, is bounded only by the need of the recipient and the resources of the giver; and she gets herself into untold trouble when she is judged by the ethics of that primitive society." See, when you call poverty ethics communal or communistic, you just don't get the same sense, now, do you? But Addams lays it right out there for you, complete with why the lack of generally-expected gratitude.

Of course not all of what she discusses could be readily found in the US today, no matter how poor the town. But it does seem that it isn't that hard to find parallels in developing nations to what she describes in terms of child labor.

It is through reading the whole piece in order, that we realize the young pirates quoted by Zimring in _Cash for your Trash_ are immediately preceded by this:

"The poor family which receives beans and coal from the county, and pays for a bicycle on the installment place, is not unknown to any of us. But as the growth of juvenile crime becomes gradually understood, and as the danger of giving no legitimate and organized pleasure to the child becomes clearer, we remember that primitive man had games long before he cared for a house or for regular meals."

So let that be a lesson to me. When I'm thinking about all the crazy spending of the HELOC on fun and games, leading to foreclosure and stripping of empty houses, I should take that little step back urged by Addams, and see that these things are, indeed, all connected -- and not just in a way deserving of condemnation. Reading on, Addams notes that the impulse to theft (in this situation, like the drinking and drugging parties going on in foreclosed houses now) and other minor misbehavior in the city has a less damaging parallel in the countryside (well, I guess _that_ could be disputed), and problems arise when juveniles are treated harshly by the justice system and/or led into much worse activities by older folk.

ETA: Substantially later in the article, there's this (I'm hoping I don't have to worry too much about Addams use of the term "race development"):

"Let us take the example of a timid child, who cries when he is put to bed, because he is afraid of the dark. The "soft-hearted" parent stays with him simply because he is sorry for him and wants to comfort him. The scientifically trained permit stays with him because he realizes that the child is passing through a phase of race development, in which his imagination has the best of him. It is impossible to reason him out of demonology because his logical faculties are not developed. After all, these two parents, wide apart in point of view, act much this same, and very differently from the pseudo-scientific parent, who acts from dogmatic conviction and is sure he is right. He talks of developing his child's self-respect and good sense, and leaves him to cry himself to sleep, demanding powers of self-control and development which the child does not possess. There is no doubt that our development of charity methods has reached this pseudo-scientific and stilted stage. We have learned to condemn unthinking, ill-regulated kind-heartedness, and we take great pride in mere repression, much as the stern parent tells the visitor below how admirably he is rearing the child who is hysterically crying upstairs, and laying the foundation for future nervous disorders. The pseudo-scientific spirit, or rather the undeveloped stage of our philanthropy, is, perhaps, most clearly revealed in this tendency to lay stress on negative action. "Don't give," "don't break down self-respect," we are constantly told. We distrust the human impulse, and in its stead substitute dogmatic rules for conduct. In spite of the proof that the philanthropic Lord Shaftesbury secured the passage of English factory laws, that the charitable Octavia Hill has brought about the reform of the London tenement houses, and of much similar concurrent testimony, we do not yet really believe that pity and sympathy, even, in point of fact quite as often precede the effort toward social amelioration us does the acceptance of a social dogma; we forget that the accumulation of knowledge and the holding of convictions must finally result in the application of that knowledge and those convictions to life itself, and that the course which begins by activity, and an appeal to the sympathies so severe that all the knowledge in the possession of the visitor is continually applied, has reasonably a greater chance for an ultimate comprehension."

Holy cow. Sleep training, and how Cry It Out is like refusing to provide assistance to those in need. I mean, who would _write_ a paragraph like that now, much less _have it published_? The ending is even good:

"which may mean to walk for many dreary miles beside the lowliest of his creatures, not even in peace of mind, that this companionship of the humble is popularly supposed to give, but rather with the pangs and misgivings to which the poor human understanding is subjected whenever it attempts to comprehend the meaning of life."

flipper has been head down for a while now

Since A. was head down last night and the previous visit, the midwives seem to be taking the attitude that everything is fine, despite my mentioning the flipping (which hasn't happened in a couple of days anyway). Next visit is in 4 weeks, which is an indication of just how calm they are about everything. On the last visit, I was moderately surprised that they didn't want to see me in two weeks; this time, I'm just kind of amused. I'm also wondering if I'll be having weekly or every two week visits after the next one; my money is on every two weeks until week 40, and then (because I'd bet a huge amount of just about anything that that won't be the end of it) weekly thereafter.

I think my ankles were less swollen yesterday evening than the midwife's. A really busy day in the heat, on your feet will do that to you, even when you aren't pregnant. Controlling sodium seems to be working well so far.

I even remembered to ask both of my questions: what was up with the weird pain (answer, which was as I expected, in order of likelihood: Round Ligament Pain, adhesion from the C-section, hernia) and, do you know of a good VBAC book? After some discussion of what was out there, we have concluded I will be loaning her the Diana Korte I ordered used when I am done with it, but I probably neither want to nor need to read _Silent Knife_ or similar. At least not now.

innumeracy in the lead (where? oh, you can guess)

Headline: Minimum Wage Increases Faster Than Median Wage

Lead sentence/paragraph:

"In the last few years, the minimum wage in New York State has increased almost 40 percent, while the average pay for hourly workers has risen much more slowly, not even keeping pace with inflation, according to a report released Thursday by the federal Department of Labor."

Believe it or not, the _headline_ is correct, at least, assuming the rest of the story is right.

But guys, come on. Median != average. Mean = average. Median is the number where half of the items are more and half of the items are less. Very, very, very different from average.

View the innumeracy for yourself at:


FDIC, IndyMac and news

You may have noticed that I spend a fair amount of time these days reading newspapers and other news sites/blogs online. Today, I perused the NYT, the Boston Globe, Calculated Risk (where I did not follow the link to the failed banks update from the FDCIC. Why? Because I am an idiot.). I also did some extensive commenting on an article published in the Atlantic in 1899.

Eventually, after catching up on Smart Bitches, I dropped in to the LA Times, where I went, wuh hunh? And backtracked to Calculated Risk where I _followed that link_ and realized, yes! IndyMac is so over. It is in conservatorship. Everyone spent today worrying about Fannie and Freddie, but here is the definitive news.

Read along at the press release, if you care:


If you are a depositor, you are screwed this weekend (ETA: correction -- you can use ATMs, debit cards and write checks), but, in theory, come Monday, you have access to your stuff once again. This bit is interesting:

"At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors."

People really do let more than the insurable limit accumulate in a single bank? Ooops.

ETA: And it's all Chuck's fault, apparently. Altho he says the OTC started it by being lax (paraphrase, of course).


Gotta love Reuters. They use the verb "swooped" to describe the Office of Thrift Supervision stepping in.

One of the wonderful things about Reuters is the little human interest bits that wind up on the most e-mailed list. The NYT never has great little bits about some Russian woman who killed her drunk husband by activating a mechanism that folded the couch into the wall.


Apparently, it wasn't intentional; she came back to check on him when he was unusually quiet (I'm guessing he normally snored. Loudly.). Someone should tell the Russians they should recall that kind of folding couch. Oh, wait. They may not _have_ A CPSC.

Fannie and Freddie in the line of fire

I've made a few negative comments about Chuck being irresponsible talking down IndyMac (not, mind you, that he was wrong). I'd like to float R.'s off-the-cuff theory as to _why_ Chuck might have wanted to limit the regulatory options for IndyMac.

Maybe some bank, somewhere, was under a lot of pressure to buy IndyMac, and they wanted an out -- or at least to push the price further down.

This is not quite as wacky as it initially seems. After all, we've already seen three purchases (Wachovia buying Golden West, BofA buying Countrywide and JP Morgan buying Bear Stearns) that have seemed like a good idea (at least to some CEOs, some of whose slots are now going begging) at the time, but that led to widespread mockery and or complaining later on. And not very later on at all. Some of the complaining has been by the purchaser, whether shareholders or Boards who then showed the CEO the door, some by other stakeholders, some by folk in the peanut gallery. I should also note that the price on each of these things has been dropping like a stone for the buyer.

So, if I were a CEO getting calls to see if I'd buyout IndyMac, or a shareholder or stakeholder or, oh, wait, I _am_ a member of the peanut gallery, I might very well want to drive the price down. By, say, talking up what a rotten piece of diseased crap this thing is that the regulators are attempting to pawn off on (somewhat) more solvent members of the financial community. That would be assuming any of them are. (There's a great quote from the 1929 crash, source not remembered. "Sell 'em all! They're not worth anything!." Dude made some money. Seriously. ETA: "Sell 'em" Ben Smith. He held on initially, then took up short selling in November.)

Beats the hell out of me if R. is right. And I have no way of knowing if we'll ever find out, either. Judging by how historians are still hashing out things like the Civil War, the economic tradeoffs of slavery, the Great Depression, etc., I'm not optimistic.

In any event, between Lehman and UBS (and given what UBS is up against right now with how they marketed auction rates? Be very suspicious of anything out of them), there's a whole lot of some scary talk out there about Fannie and Freddie. But it's not like anyone is going to buy _them_ out (other than all of us, which does seem completely inevitable). So what exactly is going on here? I was initially dismissive of a lot of it (I don't hold 'em, I don't hold their paper) and I knew they were going to get bailed out so why the panic? After scratching my head over a lot of discussion, I realized the real panic boils down to something like this.

The remaining financial community writes mortgages that get sold (to some string of fragile and possibly fraudulent companies who then sell them to) Fannie and Freddie. If they don't immediately get sold to Fannie and Freddie, they have loan guarantees from Fannie and Freddie (think of it as insurance, a la Ambac and MBIA -- yes, those guys, and the whole bond fiasco that followed on the auction rates fiasco) that encourage other people to think that these pieces of paper are worth something. If Fannie and Freddie have to pay up on those guarantees, they need to borrow money to do so, and currently, the cost of money to them is at a ridiculous spread compared to treasuries (after all, in theory anyway, they should be damn close to each other, given that the full faith etc. of the treasuries should be backing up the of-course-they'll-be-rescued-theory, right?). In at least one previous housing downturn, Fannie and Freddie bled at a horrendous rate because they had to satisfy guarantees and money cost them more to get than they were getting with what they were buying. Bad deal, all around. Bit of a fiasco.

The concern this time appears to revolve around a, um, lack of faith in the ability of the current Powers That Be to save Fannie and Freddie in enough time to avoid shutting down commercial house paper.

Short form: Fannie and Freddie bleed while Paulson and Bernanke drool and Congress gets stuck in some kind of procedural problem between the two parties prior to the election. And/or Congress _would_ act, but Paulson and Bernanke can't figure out what they want. And/or Paulson and Bernanke have a plan and Congress would implement, but Bush decides to pull the plug on it (not like he hasn't done _that_ before).

If commercial paper to buy houses grinds to a complete halt, houses just don't get sold. Period. (I mean, come on, how many houses don't have _some_ kind of paper on them?) You think you've seen free fall? Ha! Rather than wait for that to happen (and the risk arguably gets worse the closer we get to the election), the remaining members of the financial community have taken Fannie, Freddie, Hank and Ben out back and pulled out the Big Guns and said You Shall Goddamn Fix This Right Fucking Now. You will not wait for August vacation. You will not wait for the November election. You will -definitely- not be waiting for the Inauguration. *Now*.

Take Out the Trash Fridays have really been taken to a whole 'nother level lately.

ETA: While we all are quite certain that Fannie and Freddie will be protected, there is no statutory guarantee. There is a statutory guarantee with Ginnie. You'll notice no one is talking about GNMA.

ETA2: If you're _really_ paranoid, maybe you'll like this theory. The Neocons, or, at least, the current administration in its zanier moments, would _looooovvvve_ to make Fannie and Freddie just Go Away. After all, they Cost Government Money. And the Market Should Supply These Services. I mean, these are New Deal agencies that have been privatized. Kinda. One possible interpretation of what's going on could be: Bush Hates Fannie and Freddie and Is Hoping They Die. Hank and Ben are caught in the crossfire. The financial community, having finally gotten wise to how insane this administration is, isn't going to permit the murder of the GSEs.