Feeds:
Posts
Comments

Posts Tagged ‘Mortgage’

When Economists Run for President

Posted in Economy, Taxes, tagged , , , , on October 19, 2012 | 1 Comment »

In real life, economists never get elected president (sorry Larry Kotlikoff), probably with good reason.

In fiction, though, our odds are better. Jed Barlett is one of the most popular presidents ever, and a Nobel Laurate to boot.

And now the Planet Money team is offering up a new, faux candidate for 2012. His six-point plan for getting America going again – built on the suggestions of a diverse group of well-known economists — is five parts tax reform (repeal the mortgage interest deduction, repeal the tax benefit for employer-provided health insurance, eliminate the corporate income tax, institute a carbon tax, tax consumption not saving) and one part marijuana legalization.

Here’s his first campaign ad:

I don’t think President Obama, Governor Romney, or even Governor Johnson have much to fear.

Read Full Post »

Financial Literacy and the Subprime Crisis

Posted in Finance, Microeconomics, tagged , , , on April 22, 2010 | 7 Comments »

A new working paper from the Atlanta Fed identifies a key reason why some subprime mortgage borrowers have defaulted and some haven’t: differences in numerical ability (ht: Torsten S.).

In “Financial Literacy and Subprime Mortgage Delinquency,” Kristopher Gerardi, Lorenz Goette, and Stephan Meier examine how the financial literacy of individual subprime borrowers (as measured through a survey) relates to mortgage outcomes. They find a big effect:

Foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared with the group with the lowest measured level. The result is robust to controlling for a broad set of sociodemographic variables and not driven by other aspects of cognitive ability or the characteristics of the mortgage contracts.

…

20 percent of the borrowers in the bottom quartile of our financial literacy index have experienced foreclosure, compared to only 5 percent of those in the top quartile. Furthermore, borrowers in the bottom quartile of the index are behind on their mortgage payments 25 percent of the time, while those in the top quartile are behind approximately 10 percent of the time.

Interestingly, this effect is not due to differences in the mortgages that borrowers selected (e.g., it’s not that the less-numerically-able chose systematically bad mortgages*) or obvious socioeconomic factors (e.g., it’s not that the less-numerically-able had lower incomes).

Instead it appears that the less-numerically-able are more likely to make financial mistakes once they have their mortgages. As the authors note, this conclusion is consistent with other studies that examine how financial literacy relates to saving and spending choices over time. All of which is further evidence of the potential benefits of better financial (and numerical) education.

* The authors note one caveat on the conclusion about mortgage terms: The survey covered “individuals between 1 and 2 years after their mortgage had been originated,” but many subprime defaults happened more quickly than that. As a result, their results don’t address whether financial literacy played a role in determining which borrowers ended up in mortgages that blew up very rapidly.

Read Full Post »

Can TARP Be Used to Pay for a New Jobs Program?

Posted in Budget, Finance, Politics, tagged , , , on December 4, 2009 | 10 Comments »

Washington is abuzz with the idea that Congress, the White House, or both may try to use unspent TARP funds as a way to promote job creation (see, e.g., this WSJ story and this WaPo story). Over the past two days, many reporters have asked me about the mechanics of this idea–can the government really use unspent TARP money this way? Here’s my best answer (given what I have learned so far).

There are two basic ways that our leaders could try to use TARP money to pay for new initiatives: through executive action or through new legislation.

Executive Action

Treasury Secretary Geithner has the ability to use TARP funds largely as he sees fit, as long as those uses are within the boundaries set out by the original legislation. As you may have noticed, the exact location of those boundaries–well, even the rough location of those boundaries–has been a topic of great debate during TARP’s existence. But the basic idea is that TARP can be used to purchase troubled assets, which the bill defines as follows:

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

If our leaders want to use TARP through executive action, they will have to come up with programs that fit within these limits. Additional support for small-business financing or home mortgages could certainly be structured to fit within these parameters; indeed, TARP already has programs for both of those. It would require substantial ingenuity, however, to figure out a way to support some of the other ideas being floated (e.g., aid to local governments).

New Legislation

The second approach would be for Congress to enact legislation that would increase spending on various programs and then pay for it, at least in part, by reducing the amount of money in the TARP program.

There have already been at least two pieces of legislation that have taken this approach:

(more…)

Read Full Post »

Does Prevention Reduce Costs?

Posted in Budget, Health, Politics, tagged , , , , , on August 10, 2009 | 12 Comments »

One of the common memes in the health debate is the claim that increased spending on preventative medical care (e.g., cancer screening) can reduce overall health spending.

That idea is very attractive, since it seems to offer a free lunch: greater health at lower cost. It has just one small problem, though: it isn’t true.

As the Congressional Budget Office describes in an analysis released on Friday:

Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. In such cases, an ounce of prevention improves health and reduces spending—for that individual. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Even when the unit cost of a particular preventive service is low, costs can accumulate quickly when a large number of patients are treated preventively. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs for the many who would make greater use of preventive care.

In short, an ounce of prevention may save a pound of cure for the patients it helps. But those ounces of prevention can add up to tons of costs when spread over millions of patients.

And that’s not all.

(more…)

Read Full Post »

Follow-up: Defense, Mortgage Modifications, and Yahoo/Microsoft

Posted in Budget, Economy, Finance, Internet, Macroeconomics, Politics, Regulation, Technology, tagged , , , , , , , , on July 30, 2009 | Leave a Comment »

This morning’s headlines include some important follow-ups to recent posts:

Read Full Post »

The Problem with Loan Modifications

Posted in Economy, Finance, Macroeconomics, tagged , , , on July 28, 2009 | 8 Comments »

Over the past two years, many policymakers have identified loan modifications as key to fighting the mortgage crisis. The rationale for encouraging modifications appears quite simple: foreclosure is expensive for both the borrowers (who lose their home and their credit worthiness) and lenders (who often recover only a fraction of what they are owed). It would therefore seem that loan modifications — reducing payments so that owners can avoid foreclosure — are a potential win-win for both sides.

From that perspective, the slow pace of modifications appears rather mysterious, with potential causes including (a) stupidity on the part of lenders and servicers, (b) flaws in servicing contracts for securitized mortgages, and (c) borrower reluctance to even speak with their lenders.

Both the Bush and Obama administration have initiated a series of policies to encourage modifications, yet results have not lived up to expectations. The Washington Post has a nice article this morning that walks through one of the reasons for this failure. The basic problem is that the argument in favor of loan modifications focuses on only one kind of borrower: those who would make payments with some help but won’t make payments without that help. However, those borrowers are outnumbered by two other types: those who would pay without help and those who won’t pay even with help.

Foreclosure (more…)

Read Full Post »

Follow

Get every new post delivered to your Inbox.

Join 82 other followers