KISS. If I were running for political office and someone asked me how I would govern, I would say: KISS. Yes, that is right, KISS. I am proud to say that KISS has served me well in my life and I’m confident it will continue to do so. If you’re not familiar with KISS then let me tell you what it stands for, Keep It Simple, Stupid.
KISS is not a new concept and I take no credit for this philosophy. In it’s more developed form it’s called Occam’s razor, developed by the English logician in the 14th century. Simply stated this principle says “All other things being equal, the simplest solution is the best.
“Now why do I bring this up? Because of what Fed Governor Randall S. Kroszner said yesterday at the American Securitzation Forum in Las Vegas, Nevada. In discussing the subprime mortgage issue and ways of solving the problem moving forward, here is what he said:
We were particularly interested in ensuring that protections remain strong over time as loan products and lending practices change. Our analysis of the data suggested that the troubles in the mortgage market generally arise not from a single practice in isolation, but instead from the complex ways that risk factors and underwriting practices can affect each other, sometimes called “risk layering.”
Now, I don’t disagree with what he is saying, but I am confounded that the big wigs don’t seem to understand the basic issue. I’m not a securitizies analyst, nor am I a stock actuary and I certainly do not understand the complex world of risk calculation. However, I do understand the dynamics of home mortgages.
First of all let’s look at the basics. A home buyer needs a loan because they don’t have the money themselves to purchase the property. The buyer goes to a lender and applies for a mortgage. The lender then looks at credit scores, employment/income, assets and property type to make a lending decision.
As a former Physics major I can confidently tell you the lender is not facing a very complex problem here. It sure as heck is not rocket science. At the point of decision the lender should be considered about two things and two things only. The first is: can the borrower pay the loan back in full and on time? /Second: what should I (the bank) charge to account for the risk of lending the money over such a long time horizon?
For the greater part of the 20th century, the first question was answered by a simple debt to income ratio (DTI). What does the borrower make and given his other debt obligations can he afford to make timely loan payments? The safest ratio was deemed to be 30/40 (front and back).
Also for the greater part of the 20th century, lenders looked at the borrowers past history and decided (with the prevailing interest rates – such as the prime rate – mind) how much interest rate to charge. Since prime rate was the rate offered by the banks to its best corporate customers, banks made a basic determination on what to charge an individual person based on their past history.
Simple. And for the greater part of the 20th century these two simple parameters worked fine. So, Gov Kroszner. Let’s review Occam’s razor here for a moment. “All other things being equal, the simplest solution is the best.” So all the Fed needs to do is remind lenders the importance of DTI and why this has worked so well in the past. In addition, also lets remind lenders that the market has already provided a baseline for risk in the form of the prime rate. If lenders strictly adhered to these two simple parameters (as they did for the greater part of the past century) they can pretty much KISS the mortgage mess good bye!
P.S. I think the APR calculations on the Truth In Lending (TIL) is fundamentally flawed. But the Government continues to tout it as a means towards preventing abusive lending practices. This is a topic for a different day.
Boomers retirement may be the true reason behind the labor shortage
(ECONOMY) Millennials and Gen Z were quick to be blamed for the labor shortage, citing lazy work ethic- the cause could actually be Boomers retirement.
In July, we reported on the Great Resignation. With record numbers of resignations, there’s a huge labor shortage in the United States. Although there were many speculations about the reasons why, from “lazy” millennials to the number of deaths from Covid. Just recently, CNN reported that in November another 3.6 million Americans left the labor force. It’s been suggested that the younger generations don’t want to work but retiring Boomers might be the bigger culprit.
Why Boomers are leaving the labor force
CNN Business reports that 90% of the Americans who left the workplace were over 55 years old. It’s now being suggested that many of the people who have left the labor force since the beginning of the pandemic were older Americans, not Millennials or Gen Z, as we originally thought. Here are the reasons why:
- Boomers are more concerned about catching COVID-19 than their younger counterparts, so they aren’t returning to work. Boomers are less willing to risk their health.
- The robust real estate market has benefitted Boomers, who have more equity in their homes. Boomers have more options on the table than just returning to work.
- Employers aren’t creating or posting jobs that lure people out of retirement or those near retirement age.
As Boomers retire, how does this impact the overall labor economy?
According to CNN Business, there are signs that the labor shortage is abating. Employers are starting to see record number of applicants to most posted jobs. FedEx, for example, just got 111,000 applications in one week, the highest it has ever recorded. The U.S. Bureau of Labor Statistics projects that the pandemic-induced increase in retirement is only temporary. People who retired due to the risk of the pandemic will return to work as new strategies emerge to reduce the risk to their health. With new varients popping up, we will have to keep an eye on how the trend ultimately plays out.
Is the real estate industry endorsing Carson’s nomination to HUD?
(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?
NAR strongly backs Dr. Carson’s nomination
When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”
At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?
The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.
In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…
Job openings hit 14-year high, signaling economic improvement
The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.
Job openings hit a high point
To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.
The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.
Good news, bad news, depending on your profession
That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.
Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.
If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.
If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.
Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.
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