Author: Donald

The Problem with Loan Modifications

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 Continue reading “The Problem with Loan Modifications”

Good and Bad News for the House Health Bill

In my recent paper about how the Congressional Budget Office analyzes health proposals, I noted that one of the most important things that CBO does is to provide additional information about its cost estimates. Cost estimates often can’t speak for themselves, so it’s important that members of Congress and other interested observers ask for additional clarification about key issues.

Well, four leading House Republicans recently took this step, and CBO’s response is a doozy. It contains too much to summarize here, so let me focus on the two most important points:

  • CBO reiterated its conclusion that the introduction of a public plan (as specified in the bill) would not undermine private health insurance markets. Most Americans would continue to get their health insurance through employers.
  • CBO confirmed that the bill would worsen future deficits.

Supporters of the bill will emphasize the first finding as evidence that the public plan won’t gut private insurance markets. Opponents of the bill will emphasize the second finding as evidence that the bill is fiscally reckless.

Neither of these conclusions should be a surprise to anyone, since the basic facts were reported in CBO’s original cost estimate. However, the new letter does provide useful context.

Continue reading “Good and Bad News for the House Health Bill”

A Note on End-of-Life Health Care

It’s often said that end-of-life care makes up a disproportionate share of overall health care spending. For one very thoughtful discussion, see this article in Daily Finance.

Such claims strike me as plausible as an after-the-fact accounting matter. But I’ve always wondered how often patients and their caregivers know that they are providing end-of-life care? And how often do they have hopes – perhaps even expectations – that the patient will recover, but the treatments don’t succeed?

The recent passing of my father-in-law illustrates this question. He died early this morning after almost two weeks in intensive care fighting pneumonia and trying to recover from a recent stroke.

Until yesterday, the plan was simple: provide fairly aggressive treatment in the ICU to defeat the pneumonia so that he could return home. It would take time to assess damage from the stroke, but at least he would be able to get care at home from his extended family.

That plan collapsed yesterday as the pneumonia worsened, his kidneys failed, and he had a final stroke.

The record books will thus record about 10 days of ICU care for him in his final 10 days of life. From the perspective of Esther and her family, though, it really felt like 9 days of ICU care with the hope of improving and extending his life, and 1 day of ICU care knowing that the end was imminent.

Although my father-in-law likely didn’t benefit from that last day of ICU care, it’s also worth noting that some of his family members did, because they had an opportunity to come say their good byes in person (even if he couldn’t hear them).

All of which is to say that his end-of-life care provided some benefits – some probability of recovery plus some solace for family members – even as it ultimately failed at substantial cost. Spending on end-of-life care is a natural place to look for potential cost reductions as we try to “bend the curve” on health spending. The challenging part, however, will be balancing potential savings against the potential benefits of such care.

(For completeness, I should note that in our case, the balancing of these costs and benefits was entirely a private matter because Esther’s father had no private insurance and was not eligible for Medicare because he had moved back to Mexico. Similar episodes play out thousands of times every day, however, for people covered by private and/or public health insurance.)

Another Budget Blow to Health Reform

Policymakers are discovering that the road to health care reform in anything but smooth. The latest speed bump involves the Administration’s proposal to rein in future Medicare costs by empowering a new panel (the Independent Medicare Advisory Council) to recommend future spending reductions. If accepted by future Presidents, the commission’s recommendations would take effect unless Congress intervened.

As I mentioned the other day, there is some logic to this approach. Politics sometimes play an unseemly — and costly role — in decisions about Medicare payment rates. Limiting Congress’s role in setting those rates might therefore by a money-saver.

The devil is in the details, however, and earlier today the Congressional Budget Office concluded that the details don’t add up to much.

CBO estimates that the proposed legislation would save a paltry $2 billion over the next ten years, less than 1/500 of the 10-year cost of health reform. That estimate reflects CBO’s assessment of various possible outcomes:

[T]he probability is high that no savings would be realized, …, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

Advocates of the IMAC approach will clearly have to go back to the drawing board if they want to get larger savings in the first 10 years. The good news for them is that CBO explains why the estimated savings over the next ten years are so low and provides some guidance on what might be necessary to increase them.

Continue reading “Another Budget Blow to Health Reform”

The Politics of Oxygen

Today’s WSJ has a fun profile of Peter Orszag, the Director of the Office of Management and Budget, and the challenges he faces making cost control a key part of health care reform.

I particularly enjoyed this episode: 

The battle heated up in June, when Mr. Orszag visited Capitol Hill to discuss health care with a small group of House Democrats. The meeting started well, with one lawmaker after another echoing his message that spending controls were critical to any health-care overhaul, according to two administration officials.

Then one member said her top priority was winning higher payments for oxygen suppliers, the officials say. Mr. Orszag was taken aback. Officials had been trying for years to cut payments to suppliers of oxygen and other medical equipment, which critics say are inflated. Yet when a new competitive bidding process was set to take effect last year, industry supporters in Congress were able to delay the plan. They are still fighting to block changes.

“One of the reasons we currently have such disjointed and skewed incentives is that we have an excessively political process,” Mr. Orszag said in an interview.

I think Peter is absolutely correct.

When I first worked for Congress, I was stunned by the amount of time and effort that members gave to issues that struck me as minutiae. This was particularly severe in health care. Congressional staff — and, at times the members themselves — would worry about things like payment rates for wheel chairs, bidding rules for oxygen suppliers, and other micro-health financing issues.

Continue reading “The Politics of Oxygen”

House Prices by Price Tier

The St. Louis Fed has a nice one-pager that illustrates how the housing boom differed across homes in different price tiers.

In each of the four cities they examine (Boston, Cleveland, Phoenix, and Tampa), low-priced houses experienced the biggest boom (a relative concept in Cleveland, to be sure) followed by the biggest bust:

The authors interpret this as evidence that:

Middle- and upper-tier home buyers were more insulated from many of [the factors that drove the boom and bust in the prices of low-price tier homes]. They had less need for the newer mortgage products, as most of these consumers were not first time buyers. As homeowners, they had equity to put toward their purchase, in contrast to most lower-tier first-time home buyers.

The pattern is particularly striking in Phoenix, where the price index for low-price homes has now fallen below the indices for middle- and high-price homes.

(ht: Torsten Slok) 

Step One of a Housing Bottom

Last week’s report on residential construction provided more evidence that housing may be beginning to bottom. The headline evidence, noted by most media and economic pundits, is the rebound in housing starts over the past two months:

The rebound is from an extremely low level, so it’s hard to get too excited about it. But it does suggest that the plummeting of the past few years may finally be over.

As I noted last month, however, a bottom in housing starts isn’t a bottom in housing. From a macroeconomic point of view, the key thing is the amount of construction activity, which depends on both housing starts and housing completions. Not surprisingly, house completions plummeted along with housing starts, albeit with a lag reflecting the time needed for construction: Continue reading “Step One of a Housing Bottom”

A Glimmer of Fiscal Discipline

Yesterday delivered a small piece of good news on the budget front. As reported by the Washington Post:

The Senate voted Tuesday to kill the nation’s premier fighter-jet program, embracing by a 58 to 40 margin the argument of President Obama and his top military advisers that more F-22s are not needed for the nation’s defense and would be a costly drag on the Pentagon’s budget in an era of small wars and counterinsurgency efforts.

As I noted in a recent post, President Obama deserves kudos for threatening to veto any appropriations defense authorization bill that would include extra funding for the F-22. And the Senate deserves credit for agreeing. The House wasn’t as frugal, including $369 million in initial funding for additional fighters in its version of the appropriations authorization bill. So the next test will be to see what emerges from the House-Senate conference on the bill. (Update: And then, as Stan Collender reminds us, what happens in the actual appropriations.)

The amounts of money are, of course, small relative to today’s trillion-dollar deficits. But perhaps they are a first step toward some semblance of fiscal discipline. Budget hawks are rightly concerned about the growth of spending on the major entitlement programs — Medicare, Medicaid, and Social Security — but defense spending should also get close scrutiny. With annual appropriations reaching almost $700 billion, reductions in defense spending will almost certainly be part of any effort to put our fiscal house back in order (barring major new hostilities).

P.S. Back in 2006, I testified before Congress about some of the budget gimmicks that the Air Force was then trying to use to get funding for more F-22s. One trick was to try to get a small amount of initial funding for planes in one year, so that in later years it could go back and say “well, we already started these planes, so you have to give us $x billion to finish them.” Sounds like the folks in the House were considering something similar.

Disclosure: I have no investments in any aerospace company.

Citigroup & Efficient Markets

The Citigroup pricing anomaly may be in its final days (earlier posts here and here).

Investors must submit their offers to exchange preferred shares for common shares by this Friday (which may require contacting your broker several days earlier). The common shares will then be delivered to investors on July 30.

The pricing gap between the common and preferred shares remains large (about 10% at the close on Monday), but has narrowed as the exchange date has drawn near.

It thus seems an appropriate time to reflect on what, if anything, the Citigroup anomaly illustrates about economics and finance more broadly. Happily, this week’s Economist carries a quote from Dick Thaler (previously quoted in my post about Catherine Zeta-Jones) that summarizes the lesson perfectly:

Mr Thaler concedes that in some ways the events of the past couple of years have strengthened the [Efficient Markets Hypothesis]. The hypothesis has two parts, he says: the “no-free-lunch part and the price-is-right part, and if anything the first part has been strengthened as we have learned that some investment strategies are riskier than they look and it really is difficult to beat the market.” The idea that the market price is the right price, however, has been badly dented.

To me, the Citigroup anomaly illustrates the strength of the “no-free-lunch” part of the EMH, and the limitations of the “price-is-right” part.  Continue reading “Citigroup & Efficient Markets”

Exit mobile version
%%footer%%