Mortgage Industry News

Great article from Reuters on the credit crisis:

By Mark Felsenthal

“WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is “shocked” at the breakdown in U.S. credit markets and said he was “partially” wrong to resist regulation of some securities.

“Despite concerns he had in 2005 that risks were being underestimated by investors, “this crisis, however, has turned out to be much broader than anything I could have imagined,” Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief,” said Greenspan, who stepped down from the Fed in 2006.”

Read the full article:”Greenspan “shocked” at credit system breakdown.”

The homeowner isn’t responsible because they didn’t know they were supposed to read paperwork and were a little fuzzy on that whole fraud thing.  “I totally trusted the guy… and frankly, when the settlement agent pointed out fees and terms… I stopped him and said “shhhhh, I like surprises!”  Then the broker told me I could call it my  primary residence, and it was totally cool to say I make $10K per month selling Amway.”

The broker isn’t at fault because even though they sold the product, how were they supposed to know if people couldn’t afford it.  “I didn’t make the crack, I didn’t fund the crack… I just dealt it.”

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From CNN Money.com:

“Fed chairman says financial crisis will dampen economy well into 2009 and hints at future rate cuts; says recent actions by Fed, Treasury should help economy recover.

Federal Reserve Chairman Ben Bernanke predicted that the global financial markets crisis is likely to restrain the economy well into next year and signaled that the Fed may be getting ready to cut interest rates.

But he said he believes the unprecedented steps taken to have the Treasury Department and the Fed intervene in financial markets were done in time to prevent more expensive and permanent damage to the nation’s leading financial institutions.”

Read the full article:  “Bernanke: Economic outlook weaker”

Crisis Hits Main Street as Employers Cut More Jobs (Update3)

Mortgage official: Federal government has power now to reduce foreclosures

Great article from Bloomberg yesterday giving another perspective on the current economy from Federal Reserve Bank of San Francisco President Janet Yellen.

“Federal Reserve Bank of San Francisco President Janet Yellen said there are “substantial” risks of slower U.S. economic growth, and inflation is likely to slow, declining to rule out the chance of an interest-rate cut.”

“Yellen is the second policy maker in two days to argue that the yearlong credit crunch has blunted the effect of the rate cuts. While most investors expect officials to keep the benchmark rate unchanged through December, there’s a higher likelihood of a cut than an increase, futures prices show.”

Read the full article “Fed’s Yellen Sees `Substantial’ Risks to U.S. Growth” here.

Despite the side-stepping of Labor Secretary Elaine Chow and others in Washington, there are very few people in the real world that don’t recognize that the economy is sick. And we just can’t spin it away. Unfortunately, we can’t even rely on the accuracy of the numbers produced by the Bureau of Labor Statistics to create sound policy. At issue is the slow and steady erosion of the meaning of these numbers by changing the formula, while leaving the definition unchanged. The entire country cringed when Clinton tried to debate the definition of the word “is.” It is because at our core we have to believe in the truism… by definition right? However, what if you could turn that into naiveté not by adjusting the definition but by adjusting the formula? Most econometric models rely on the sanctity of specific numbers, like the CPI, for setting COLA, rates, etc… and finding the real numbers involves editing out that spin.
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Ruth Lee

Kevin Phillip’s article in May’s issue of Harper’s (Numbers Racket: Why the economy is worse than we know) gives an excellent analysis of the underlying and less obvious factors that have led to our current economic situation:

“…the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances—inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits.”

Click here to read the article. While you can look to any media source for a complex discussion of how the mortgage originator was the cause of the meltdown, the Phillip’s article takes an interesting look at the critical statistics, like Consumer Price Index (CPI), unemployment and Gross Domestic Product (GDP), underlying our entire economy and how they have been systematically “adjusted” over the last 25 years. Seen in the harsh relief of the current crisis, the Harper’s article addresses a number of interesting economic conundrums and laws of unintended consequences that are involved in economic policy.

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This is a great article discussing the effects that tinkering with the CPI and economic indicators in order to give a positive economic outlook have on markets over the long term:

“In 1983 the Bureau of Labor Statistics was faced with an awkward dilemma. If it continued to include the cost of housing in the Consumer Price Index, the CPI would reflect an inflation rate of 15 percent, thereby making the country’s economy look like a banana republic. Worse, since investors and bond traders have historically demanded a 2 percent real return after inflation, that would mean that bond and money market yields could climb as high as 17 percent.

The BLS solution was as simple as it was shocking: Exclude the cost of housing as a component in the CPI, and substitute a so-called “Owner Equivalent Rent” component based on what a homeowner might rent his house for.”

Click here to read the whole article in the Rocky Mountain News.

I will be exploring the changes to the CPI and how they have falsely depressed interest rates which helped lead to the crisis over the next several weeks. Stay tuned!