by Calculated Risk on 5/17/2005 05:08:00 PM

I usually don't read Luskin, but pgl at Angry Bear refers me to these two posts by Don Luskin:

These people are so classy

Democrats misquote each other for fellow Democrats

Here is what actually happened:

1) I wrote a post titled Buffet and FDR on May 4th. I quoted Buffett from his appearance on CNN's Lou Dobbs.

2) On May 6th, Dr. DeLong quoted my blog. However, if you compare my post and Dr. DeLong's, you can see that he missed the delination between Buffett's comments and mine. I left Dr. Delong a comment, but he apparently missed it (see 2nd comment).

3) On May 12, Dr. DeLong blogged his Statement on Social Security Reform. Once again I noted the same error (see comment 4).

Obviously this is just a simple mistake that has been corrected.

But look how Luskin engages in name calling and makes several errors:

1) Luskin attributes the quote to '"musenla" on the De Profundis blog'. Wrong. I am the author.

2) Luskin asserts that "musenla" added the extra text trying to make "it seem that the words were Buffett's, not his own". Not true. The Buffett quote was indented, my comments were not. I did not "intend" to make it appear that those were Buffett's comments. I tried to correct DeLong immediately when I discovered he had misread my post.

Luskin owes me an apology. I will print Luskin's apology when he emails it to me.

3) I am a lifelong Republican and former youth delegate to the RNC. I am getting the feeling that moderate Republicans aren't welcome in the GOP anymore.

by Calculated Risk on 5/16/2005 11:04:00 PM

Speaking to the Australian Business Economists in Sydney tonight (via videoconferencing), Federal Reserve Governor Donald Kohn made several remarks concerning US interest rates:

"We have not yet finished this task," [Kohn] said.

"The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run.

"And if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace."

Further Fed changes to interest rates should induce an increase in the personal savings rate, by increasing a return to saving and dampening the upward momentum in housing prices, Dr Kohn said.

Higher rates would thereby lessen one of the significant spending imbalances in the US economy.

Dr Kohn said there were a number of spending imbalances in the US economy, but that at the most aggregated level there were a large and growing discrepancy between what the US spent and what it produced, as measured by the current account deficit.

"The growing current account deficit has been associated with a pronounced decline in the savings proclivities of the private and public sectors over the last year," he said.

"Households have saved only about one per cent of their after-tax income, and that compares to about eight per cent on average from 1950 to 2000."

Hat tip to The Housing Bubble's Ben Jones for the article.

by Calculated Risk on 5/16/2005 04:32:00 PM

Today, the Office of the Comptroller of the Currency, the FED, the FDIC and other agencies issued a new credit risk management guidance for home equity lending.

UPDATE: See MarketWatch's Rex Nutting: "Lenders warned of home equity risks"
UPDATE2: WaPo: U.S. Warns Lenders To Elevate Standards

In the late '90s, the FED was criticized for not using higher margin requirements as a tool to prick the stock market bubble. Economist Simon Kwan of the San Francisco Federal Reserve Bank argued that using margin requirements as a policy tool would not be effective, because "Investors can use financial derivatives to obtain exposure to equities without owning stocks, and they also can substitute margin credit with other types of credit."

These arguments do not apply to the housing bubble: investors cannot use derivatives to invest in homes, and rarely are other sources of credit sufficient for a home purchase. Today the various agencies have acted and tightened lending requirements, primarily to protect lending institutions, but indirectly to prick the housing bubble.

In the guidance, the agencies point to several "product, risk management, and underwriting risk factors and trends that have attracted scrutiny":

· Interest-only features that require no amortization of principal for a protracted period;

· Limited or no documentation of a borrower’s assets, employment, and income (known as "low doc" or "no doc" lending);

· Higher loan-to-value (LTV) and debt-to- income (DTI) ratios;

· Lower credit risk scores for underwriting home equity loans;

· Greater use of automated valuation models (AVMs) and other collateral evaluation tools for the development of appraisals and evaluations; and

· An increase in the number of transactions generated through a loan broker or other third party.

All of these areas of concern are addressed with tighter lending requirements in the various provisions of the new guideline. These include tighter controls to detect mortgage fraud, better controls on third party originations, more stringent appraisal guidelines and more.

Probably the two most important provisions concern HELOCs (home equity lines of credit) and HLTV (High Loan to Value) loans. With the HLTV loans, the agencies remarked that "in recent examinations, supervisory staff has noted several instances of noncompliance with the supervisory loan-to-value limits ..." In addition to more controls to address this noncompliance, they added a new requirement:

"Loans in excess of the supervisory LTV limits should be identified in the institution's records. The aggregate of high LTV one- to four-family residential loans should not exceed 100 percent of the institution's total capital. Within that limit, high LTV loans for properties other than one- to four-family residential properties should not exceed 30 percent of capital."

Lending institutions that are over or close to the limit of allowable HLTV loans must stop making these types of loans.

For HELOCs, lenders are now advised to consider the borrowers ability to pay over the life of the loan. This is a key difference in lending standards; previously lenders only considers the current interest rate and the borrower's income. Here is the key passage:

"... underwriting standards for interest-only and variable rate HELOCs should include an assessment of the borrower's ability to amortize the fully drawn line over the loan term and to absorb potential increases in interest rates."

The agencies must be very concerned when they caution lending institutions as follows:

"... prudently underwritten home equity loans should include an evaluation of a borrower's capacity to adequately service the debt."

Altogether, this is a clear warning shot across the bow of the housing bubble.

by Calculated Risk on 5/16/2005 03:52:00 PM

From the Federal Reserve today:

Agencies Issue Credit Risk Management Guidance for Home Equity Lending

PDF File: CREDIT RISK MANAGEMENT GUIDANCE FOR HOME EQUITY LENDING

Press Release:

The federal bank, thrift, and credit union regulatory agencies today issued guidance that promotes sound risk management practices for home equity lines of credit and loans. The agencies have found that in some cases credit risk management practices for home equity lending have not kept pace with the product's rapid growth and eased underwriting standards.

The rise in home values, coupled with low interest rates and favorable tax treatment, have made home equity lines of credit and loans attractive to consumers. To date, delinquency and loss rates for home equity portfolios have been low, due at least in part to the modest repayment requirements and relaxed structures of this lending. However, the agencies have identified risk factors that, along with vulnerability to interest rate increases, have attracted scrutiny, including:

Interest-only features that require no amortization of principal for a protracted period;

Limited or no documentation of a borrower's assets, employment and income;
Higher loan-to-value (LTV) and debt-to-income ratios;

Lower credit risk scores for underwriting home equity loans;

Greater use of automated valuation models and other collateral evaluation tools for the development of appraisals and evaluations; and

An increased number of transactions generated through a loan broker or other third party.

The agencies note that active portfolio management is especially important for financial institutions that project or have already experienced significant growth or concentrations in higher risk products, such as high LTV, limited documentation and no documentation interest-only, and third-party generated loans.

Like most other lending activity, home equity lending can be conducted in a safe and sound manner with appropriate risk management systems. This guidance outlines the agencies' expectations for sound underwriting standards and effective credit risk management practices for a financial institution's home equity lending activity.

by Calculated Risk on 5/16/2005 12:19:00 AM

My most recent post is up on Angry Bear: "1,346 Days".

I ask a simple question:

It took 1,346 days to win WWII. 1,346 days after 9/11, what have we accomplished?

In addition to the ongoing human tragedy, I am concerned about the economic impact of the poorly defined "war on terror".

Also, I just read Paul Krugman's NYTimes piece "Staying What Course?". It is excellent.

Best Regards to all.