Washington’s population is the best-educated in America. Almost half of all adults in the Washington region have college degrees, the highest proportion of any metro area with more than 1 million people. The same is true of graduate degrees: almost 23 percent of Washingtonians hold them.
Category Archives: public choice
Mortgage Rules and Mortgage Risk
To much fanfare (it was the lead story in last Thursday’s Washington Post), the Consumer Financial Protection Bureau promulgated rules intended to reduce risky mortgage lending. My thoughts:
1. Horse. Barn Door.
2. Ed Pinto offers valid criticism.
3. Nothing has changed in Washington. Pinto notes that Freddie and Fannie are effectively granted exemptions from following the rules. To me, this leaves no doubt that the housing lobby is still setting mortgage policy. The CFPB may be a brand new agency, but it is caving into the same old rent-seekers.
4. The rules do not strike me as evidence-based. As I point out in a new essay, mortgage defaults are driven largely by the borrower’s loss of equity. Thus, the most important risk factor at the time the loan is made is the size of the down payment. The rules ignore that. Instead, the focus in the borrower’s debt/income ratio, which is far and away the least predictive of the major factors used in predicting default (the down payment is most useful, followed by credit score and then by loan purpose, although the effects of these variables interact with one another so that it is not so easy to rank-order their importance).
5. Later this month, I am going to be launching a course on the American housing finance system at Marginal Revolution University. Details to follow. But the course will be aimed at the sort of agency staff who work on housing policy issues. My goal is to share what I know about mortgage analytics and business processes within the mortgage industry. I am confident that my target audience is capable of absorbing this information. I am less confident that they will be able to have as much influence with policy makers as the industry lobbyists. But one can only hope.
The Capital of the Empire
From Deborah Nelson and Himanshu Ojha
The top 5 percent of households in Washington, D.C., made more than $500,000 on average last year, while the bottom 20 percent earned less than $9,500 – a ratio of 54 to 1.
…Two decades of record federal spending and expanding regulation have fostered a growing upper class of federal contractors, lobbyists and lawyers in the District of Columbia area. The federal government funneled $83.5 billion their way in defense and other work in 2010 – an increase of more than 300 percent since 1989, even after adjusting for inflation. Private industry poured more than $3 billion into lobbying to influence the government, nearly double what it spent a decade ago.
…The ranks of Washington-area workers with incomes above $100,000 rose to 22 percent of the workforce, up from 14 percent in 1990, adjusted for inflation, a Reuters analysis of Census data found.
…Today there are 320,000 federal jobs in the Washington area. Within the District of Columbia, 55 percent pay $100,000 or more.
Nearly 13,000 lobbyists registered with the government last year and reported $3.3 billion in fees, or about $260,000 per lobbyist. That’s 22 percent more lobbyists and 37 percent more inflation-adjusted revenue per lobbyist than in 1998, according to a Reuters analysis of data from the nonpartisan Center for Responsive Politics.
Read the entire article, which is well researched and provides food for thought.
On a loosely related note, Richard Green writes
we should pay to society our fair share of what we get from society. But the implication of this is not necessarily that everyone should sacrifice in order to put us all on a sustainable fiscal path.
The Reuters piece may tell us something about who it is that “gets from society” and hence deserves to give something back.
Activities vs. Results
The U.S. has six large programs — Temporary Assistance for Needy Families, Medicaid, food stamps, housing vouchers, unemployment insurance and the earned-income tax credit — spread across four Cabinet departments and the Internal Revenue Service.
Pointer from Reihan Salam. Salam also recommends an essay by Steven Teles on kludgeocracy.
Unfortunately, this is not an accident. There is a tendency in all organizations to focus on activities rather than results. Every program represents an activity. Managers of an activity seek to perpetuate and expand their domains.
Activities are easy to measure. The impact on results is difficult to quantify. Think tanks report on how many op-eds their scholars publish. How many think tanks report on their impact on results?
Corporations are often the victims of activity-centered thinking. Activities acquire a momentum of their own. One thing that management consultants do is challenge the mindset and power of departmental managers who focus on activities rather than results.
Fortunately, corporations face market constraints and competition. These forces serve to weed out mindless activities and re-focus attention on results. In government, those checks are missing. Thus, it is almost inevitable that government programs will be perpetuated without regard to results. That is the natural behavior in organizations, and only if there are countervailing forces will that natural behavior be overcome.
Evidence for Cronyism
Jordi Blanes i Vidal, Mirko Draca, and Christian Fons-Rosen write,
Lobbyists with experience in the office of a US Senator suff er a 24% drop in generated revenue when that Senator leaves office. The eff ect is immediate, discontinuous around the exit period, and long-lasting. Consistent with the notion that lobbyists sell access to powerful politicians, the drop in revenue is increasing in the committee assignments power held by the exiting politician.
The published version is available to subscribers. The link is to an draft.
What should be done about the revolving door? My instinct is that the door does not revolve rapidly enough. But I need to articulate that.
Mortgage Brokers and the Three Axes
Susan E. Woodward and Robert E. Hall write,
Untrained, inexperienced borrowers interact with specialist mortgage brokers in the mortgage origination market. Brokers earn two kinds of compensation, explicit charges the borrower pays in cash and a commission the lender pays based on the spread between the coupon rate the borrower agrees to and the par mortgage interest rate. Both types of broker compensation seem to confuse borrowers. The wholesale lender’s commission is determined by financial dynamics understood by a tiny group of professionals, and the rate sheet that summarizes the possible payments is never shown to borrowers.
…With respect to policy changes that might help achieve a more efficient equilibrium, we believe in evidence-based design. Disclosure law has historically been in the hands of lawyers, who designed dense forms that may help absolve their clients of blame for consumer error, but which did little to help consumers find better deals. A new movement to design disclosures that are proven to be helpful, through field experiments, may result in some progress. Whether these forms can overwhelm the persuasion of skilled expert salesmen remains to be seen. We are inclined to believe that simple admonitions, such as “mortgage brokers are salesmen and the only way to get a good deal is to shop and bargain” and “you are more likely to get a good deal if you shop for no-cost loans” are more likely to yield improvements than, for example, trying to teach borrowers enough financial economics to understand the tradeoff between cash and the interest rate.
(Note that the quote is from the published version, which is subscriber-only. The link goes to an earlier version.)
This can be viewed through the oppressor-oppressed narrative. Mortgage brokers can earn more money by luring borrowers into more expensive mortgages (usually, “more expensive” means a present-value cost to the borrower of $1000 or so, but it can be higher than that). Note, however, that as Woodward and Hall point out, this does not make mortgage brokers rich. The brokers operate in a highly competitive environment, and while they over-charge as many borrowers as they can, profits are competed away in marketing expenses used to try to lure those borrowers.
This also can be viewed through the civilization-barbarism narrative. This sort of business does not exactly attract and reward caring, conscientious sorts of people. I think of mortgage brokers as slick and deceptive salesmen, prone to sports cars, bling, and other signs of conspicuous consumption.
Of course, from the standpoint of the freedom-coercion narrative, nobody forces you to take a loan from a mortgage broker, and it is a highly competitive industry. However, I think you have to be at least in the 99th percentile for sophistication in legal and financial calculations in order to be able, as a consumer, to use the competition to your advantage and to get the best possible deal.
I am pessimistic that consumer education or rules-based regulation can prevent consumers from being exploited in these situations. I think that the best chance is with principles-based regulation. That is, rather than designing the disclosure form, introduce the principle that disclosure should enable the consumer to understand and compare fees from different lenders.
Market Failure in Government
Coming soon: The Tiebout model is wrong in fact, but how can it be wrong in theory?
The Tiebout model is a model of government competition based on exit rather than voice. If you do not like your local government services, then you leave. That forces governments to get better.
I think that the market for government services fails, for a number of reasons. First, exit is difficult. I would gladly trade my Maryland government for the government in Texas or for that of a Swiss canton. But my friends are in Maryland.
Second, there is a lot of bundling. Government is like cable TV. You have to buy the whole package, not just the channels you want. In the case of cable TV, the justification for this is high fixed cost. Once you have the cable hooked up, the marginal cost of a particular channel is low, so it makes some sense to charge a bundled price.
In the case of local government, I think that the bundling is more pernicious. It is not the case that bundling K-12 schools with snow removal serves to spread a high fixed cost that covers both.
In the third part of the widely-unread Unchecked and Unbalanced, I talk about steps that could be taken to make government more competitive by making it easier to exercise the exit option.