Not to heft blame on any particular entity for the housing collapse (well, in this article anyway), but one of the instruments that allowed the bubble to run so high in the first place was the Collateralized Debt Obligation. The CDO, as it is known, combined separate tranches (levels of security risk) of mortgages into [...]
The last time we talked about the mortgage interest deduction, I shared with you a chart on the percentage of returns in each income group taking the mortgage interest deduction. Today let’s take it a step father and look at the mortgage interest deduction geographically.
Bells are ringing! I am finally worthless! With my paycheck today my net worth has finally passed the literal and psychological $0 barrier. My financial leverage given a net worth of $1 is about 45,000-to-1. Let this be a lesson to everybody: massively over-leveraged financial positions can only end positively. Look at Long-Term Capital Management, MF Global, Bear Stearns and AIG: their executives still managed to escape with millions of dollars!
A few months back we talked about the impending problems with the FHA reserve fund – namely, 417:1 leverage on their lending portfolio. Now, with the Post Office threatening to steal the federal bailout show, let’s look at this issue from a different angle – namely, from the perspective of the borrower.
It has been mentioned here and elsewhere that the mortgage interest deduction in the tax code is a roundabout way of subsidizing banks. If interest rates are determined by supply and demand then the demand for interest rates is only dependent on what a taxpayer’s “effective interest expense is”. A new study suggests that most of the benefits fall into the hands of lenders.
Here’s something interesting: even though there is a massive push to limit leverage in financial instruments controlled by private parties, Congress allows politically connected entities to drink from a different punch bowl. Today’s example of poor risk control? The FHA, better known as the Federal Housing Administration. Congress mandates that the FHA maintains at least 2% of their outstanding liabilities (they insure home mortgages) in the form of cash reserves. For those keeping score at home, that’s an implied leverage of 50:1. Fifty to one would be bad enough – but FHA’s reserves actually sit at just .24% of their $1.1 Trillion in insured mortgages.
We have dealt a lot recently with historically low interest rates and their implications on not only the cost of housing and mortgages, but also implications for consumer credit and inflation. Although we have explained home price affordability in the San Francisco Bay Area before, we haven’t discussed the large variance in regional real estate prices.
Well, S&P has finally done it – it cut the credit rating of nine European countries in response to the sovereign debt crisis in Europe. Two of those countries, France and Austria, formerly held AAA ratings, the highest grade which S&P assigns to sovereign debt (read: the lowest default risk). You know that DQYDJ thinks rating the debt of countries is silly because risk (default and debasement/inflation) is already priced in, but let’s humor S&P and take a look at how the world’s debt ratings now stack up. You can also see a similar map from the US debt ratings cut back in August.
As we occasionally point out here at Don’t Quit Your Day Job, inflation expectations are an interesting indicator that can be calculated from market data. They become even more interesting when we combine them with other measures. It becomes yet more interesting if you are in the market to refinance a mortgage or purchase a home. Read on for an interactive chart on the 30 year mortgage and the market’s 10-year inflation expectations.
A couple of weeks back, we here at DQYDJ tried to get some Bay Area street cred with our screed on how Bay Area house prices make more sense than one might think (please read that article if you are genuinely interested in our model). After being informed by the readers on the Bay Area home site Burbed that our definition of the Inner Bay Area (the ‘Real Bay Area’) was too large, we’re back for another pass. Thanks to Burbed’s super-intelligent head editor Madhaus and a huge amount of comments we’re back with two calculators we’re titling “The Burbed and DQYDJ Real Bay Area Calculators!”. Since all Bay Areans hope for 7.2% annual home value returns (check it – doubling every ten years!), we hope everyone will enjoy this little demonstration of the absurd amounts of wealth that the place we call home generates.