This was taken aboard a cruise ship on our trip to Alaska this summer. I really like this pic since it captures Ria having a blast with bubbles, completely indifferent to the world as it flies by.
Yes, I realize the title is very cliché, but I think it’s quite fitting – it’s used often when dealing with toddlers and young children who whine because they can’t get their way, and, in my opinion, that’s exactly what Wall Street is doing!
President Obama unveiled his administration’s plan to overhaul the financial industry today, and Wall Street isn’t happy about it. One of the points that has them throwing a tantrum is a measure that requires firms to “retain 5 percent of credit risk” whenever they package loans into bonds. A statement from the American Securitization Forum, which includes Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Citigroup, says this condition creates “undue restrictions” that may hamper “consumer and business lending via securitization” and “impair broader economic recovery”. Oh, puuhhleeeez!
To take a quick step back: most banks that issue loans (whether they are mortgage loans, credit card loans, home equity loans, or car loans) will take a bunch of loans they’ve issued and lump them together into a security that’s then sold to other investors. These securities are called mortgage backed securities (in the case of mortgages) and asset backed securities (in the case of the other loans types I mentioned). These securities then have a variety of payment structures – either they pass the payments from the loans directly on to the people that bought the securities (after the banks take their cut of the profit, of course), or have other exotic payment structures that are pretty complicated and aren’t really the point anyway. The point here is that the bank issued the loan, and then sold it as part of a pool to other investors. So, who’s really holding the credit risk (the risk that the borrowers won’t pay back the loan)? The investors. Since the banks themselves aren’t holding any of the risk, and since they collect fees for both issuing loans and selling the securitized product to investors, the banks are incentivized to issue as many loans as they can, regardless of credit risk. This is a part of what led to the whole mortgage problem in the first place – banks blindly turning an eye to whether the borrower is likely to repay the loan or not in the interest of earning fees.
So, the President’s plan would require banks to now hold 5% of the credit risk of these loans. Note, this doesn’t mean that banks have to hold 5% of the loan amount on their books, but just that they have to hold 5% of the risk exposure – a technicality that isn’t relevant here. The point is banks are unhappy because they can no longer blindly pass the risk on to others and collect fees. Now they will have exposure to the risk too (and it’s certainly debatable whether 5% is the right number or not).
What a minute, doesn’t this seem like a good thing? Well, I think so. Having the banks on the hook should result in them being more careful in who they issue loans to and thus result in fewer defaults, which ultimately protects the investors and homeowners since there would be fewer foreclosures. Sounds like a good structure to me, if you believe in the welfare of all over the profit of the banks.
It is true that there will be indirect costs to this. Loan processing costs may go up due to the additional scrutiny of each application (though I would argue that banks were already charging high fees and weren’t really doing any loan processing – having them do their jobs shouldn’t cost consumers more), and many people may not be able to buy homes. However, that may not be a bad thing. I’d rather pay a slightly higher cost (whether it’s buried in the interest rate or in up front fees) that is structured and known, rather than pay the very high costs associated with the financial distress we’ve seen for the last two years. It’s also sad that not every American can but a home, but then I don’t think every American should buy a home. If one can’t manage their credit or doesn’t have enough income to support the home they want, then they have no business buying the home and ultimately costing everyone else more when their loan defaults. I’d love to drive around in a Ferrari and have a Rolex glistening on my wrist, but I can’t afford it and so I shouldn’t have it.
So, yes, bank profits may fall a bit and yes the risk on bank balance sheets may go up a bit (though that’s debatable too – if banks are on the hook for the credit risk they are likely to be much more careful in which loans they issue, which in turn reduces the overall risk of the loan pool). But, Wall Street, I really think you should quit your whining and accept this gladly since it benefits all Americans, and ultimately you (since the banking sector is clearly benefited by a stable American financial system). And to those who would argue that such a measure is against all that capitalism stands for, I say: “so what?” Yes, this may be a bit socialistic. But I counter that a purely capitalistic society is not optimal for all its members. When people are motivated by profit alone, others suffer – that’s the bottom line.
Besides, such sweeping reforms were passed after the Great Depression and they were a boon to the country and helped us emerge ever-stronger. I think it’s hard to argue that such a social safety net would choke off capitalism.
Well, I finally decided to take the plunge on a new lens for our upcoming cruise to Alaska. To be honest, I had been so consumed with the CFA exam that took place last week that I hadn’t even thought about the trip, or any camera equipment I may need. It wasn’t until at work, after the exam, that the trip came up in conversation with my boss, who exclaimed “Dude, you have to get a new lens!”.
He’s right, I suppose. It’s not every day you take a week off and cruise Alaska. You don’t want to be trying to take a landscape shot of a awesome glacier but not be able to fit it in the frame. Likewise you don’t want to be trying to zoom into a bear catching salmon but not have enough reach. I’m pretty new to photography and so don’t have an elaborate setup – I have a used Nikon D200, a Nikon 50mm prime (meaning fixed – no zoom), and a Tamron 28-75mm zoom lens. I like both of the lenses – they are fast and sharp. But, they don’t offer me the range at either the wide end, or the long end, that I’d like for the trip. To remedy that, my boss and I started talking about the well-rated Nikon 70-200mm. It’s a great lens, and would certainly give me the reach I’m looking for. However at 8.5in in length, 3.25 lbs in weight, and $1,895 in cold hard cash, it’s not quite for me. Of course, I could rent it for a couple of hundred dollars, but there are still a few issues: firstly, no one has them in stock to rent, and secondly, it’s still bigger and heavier than I’d like (besides, I can’t use it for long-range shots without a tripod).
In talking to my good friend Aaron, we decided that maybe the Nikon 18-200mm is a better fit. He has one, and he’s happy quite with it. It’ll solve many of my problems for a more affordable (though certainly not negligible) amount. The 18-200 gives me all the reach of the 70-200, but also gives my good coverage on the wide end. In addition, it’s much smaller and lighter, and can be had for about $700.
I picked one up over the weekend and played with it a bit. My initial impressions are that I like the reach of the lens, but other than that, I’m not an incredible fan. Before you read into this too much, I would like to clarify that I haven’t yet had the opportunity to do a lot of shooting with the lens – my comments are based purely on my initial impression from playing with the camera and taking a couple of shots.
The range of this lens is great (and is in fact what makes everyone rave about the lens so much). At 18mm on the wide end, it allows me to capture much more area in a landscape shot than my 28-75mm does. I wouldn’t have though that going from 28mm to 18mm would make a huge difference, but I couldn’t be more wrong. At a distance of about 8-10 feet, the 18mm gives me about 40% more coverage than the 28mm. At the long end, the 200mm gives much better reach than my 75mm, as expected. This lens is well rated because it takes very good photos (albeit not great photos as one would get from the $1,900 Nikon 70-200) and because of its versatility – a single lens covering 18 to 200mm, all in a manageable size. I certainly concur with the versatility part and hope to experience the very good photos on the upcoming cruise. Though the quality may not be as good as the 70-200, I’m not certain I can see the difference yet.
So, what made me give the “not an incredible fan” initial rating? Well, it’s a few things. Firstly, the lens doesn’t focus as fast as my Tamron. Granted this lens does a lot more (in terms of range, adding vibration reduction (VR), etc), it takes a tad longer to focus, which is hard to work with when you’re used to a faster focusing lens. Note, the difference isn’t huge, but it is large enough for me to notice. If one were using this lens without having a point of reference, they may not notice. Secondly the lens makes weird noises when focusing. Now this is the VR doing its thing to my benefit, but it still is odd and takes some getting used to. I turned off the VR and the noise was gone. Finally the zooming is a bit stiff and uneven. It’s stiffer than my Tamron, and is certainly uneven – it gets tighter as you get to around 120mm, and then loosens up again as you get to 200mm. Again, this isn’t earth-shattering, but it is something I noticed. The lens does not have any creep, so that’s good.
I’m pretty excited to try the lens on the trip. After the trip I’ll decide what I want to do – keep the Nikon and sell the Tamron, keep both, or return the Nikon. I’ll post pictures from the trip so you can see what the lens (or, more likely, the photographer) was able to do.
So, as you’ve probably read or heard in the the news, evidence that the American housing market is stabilizing is beginning to present itself. Data from the National Association of Realtors showed that the number of signed contracts to buy previously owned homes climbed 6.7 percent in April (granted that not all signed contracts will turn into closings since financing could fall through, it’s still better to have more contracts than fewer). Furthermore the Mortgage Bankers Association’s index of applications to purchase a home gained 1.1% in the week ending June 5th (though total mortgage applications fell and refinancesdropped off with the now higher interest rates). Finally, the fact that rates are higher itself suggests more confidence in the housing market – if there was no demand for loans, rates would keep falling. So, we’re on the path to real estate recovery, no? Well, no. Not so fast.
We have all heard of the recent run up in foreclosures that started two years ago. One would think that with all the economic turmoil we’ve had over the past two years and the fact that we’ve seen so many foreclosures already, maybe we’ve flushed most of the bad loans and things get better from here. In fact, as the chart below shows, we are indeed experiencing a steady decline in the number of subprime mortgage resets (and thus foreclosures since not all borrowers who reset will be able to afford the new payment) – the blue line.
However, what should be a cause for concern are the yellow and orange lines – Options ARMs and Alt-A loans, respectively. Many people are familiar with Alt-A loans (they’re basically loans that are riskier than conventional mortgages, but not as risky as subprime mortgages). However, not as many people are as familiar with Option ARMs, which is of particular concern since they could be the next wave of foreclosures.
An Option ARM is something like a negative-amortizing mortgage. A negative-mortgage is one in which rather than the loan amount being reduced with each payment, it’s actually increased. For example, suppose you borrow $200,000 and your mortgage payment is $1,000/month. In a typical mortgage $800 of that $1000 may be for interest and the other $200 would pay off principal. Now consider the situation where someone wants to buy a house but can’t afford the $1,000/month mortgage payment. As an alternative, they get into an Option ARM that allows them to make payments of $250/month (yes, the difference between a conventional and option ARM mortgage can be that much!). What’s actually happening here is that they still owe $800 in interest, but since they’re only paying $250/month, the remaining $550 of unpaid interest gets added to the balance of the loan, bringing our hypothetical loan to $200,550 after the first month. Now, since the principal balance is higher, the interest due will be more than $800 next month. But, the borrower still pays $250, so they add an amount greater than $550 to their unpaid balance the following month.
Whereas in a conventional mortgage you pay down the loan a little bit each month, with the amount of pay-down increasing each month, an option ARM results in you increasing the loan a little bit each month, with the amount of the increase, increasing each month. You can see how this can turn into a troublesome situation very quickly, especially in an environment of falling home values. Our borrower continues to happily make his/her $250/month payment (usually completely oblivious to the fact that their loan balance is increasing) until one of two events occurs: 1) they go a certain amount of time specified in the loan agreement at which point they’re forced to start repaying principal, or 2) their loan balance reaches some predetermined amount (think 150% of the original loan balance – in our example $300,000) at which point they’re forced to start repaying principal. Either way, even if interest rates haven’t moved (heck, even if they’ve come down), since the loan amount is so much larger and they now have to pay the complete amount of interest and principal, their payment will radically spike – let’s say from $250 to maybe $3,000. So now the family that bought the home but couldn’t afford the $1,000/month has to pay $3,000/month. In most instances their income is not likely to have gone up enough to make this new mortgage affordable.
So, the family has a higher payment than they can afford, has experienced depreciation of their home, and has a loan balance that’s much higher than where they started, and likely much higher than the value of the house. They’re screwed, and this story does not have a happy ending.
As the chart above shows, the number of Option ARM resets will significantly increase until about the end of 2011. This means that there will be many properties that have depreciated (or even have had the good luck of not depreciating), but are married to loans that are considerably larger than they were at closing. This will most certainly result in more foreclosures, and thus further downside pressure on housing prices.
I certainly wish the worst were over in terms of housing, but unfortunately that just doesn’t seem to be the case. This is yet another example of creative financing, greedy lenders after fees, and uninformed consumers causing considerable damage.