Megan McArdle Disappoints Me
Robert Waldmann
I thought the only thing she knew was that she is a libertarian. Now I realize she doesn’t even know what the word “libertarian” means. She wrote
Will the new head of the CFPA crack down on mortgages that offer prepayment options? [skip]
Of course not. There is no constituency for such a thing except for a few crazy libertarians.
So libertarians think that the government should crack down on a product that consenting adults buy from consenting banks ? McArdle has some addled idea that she supports the market, by which she means, she opposes everything Democratic policians do. If one invented a product (the 30 year fixed rate mortgage with a prepayment option) with great success in the market, respect for the market requires banning it.
She thinks banning contracts that parties chose to sign is “libertarianism.” She has learned nothing and forgotten the one thing she learned once.
Amazingly the thorough takedown at the Irvine Housing Blog, didn’t mention this howler (target rich environments and all that). It does note that McMegan makes a plainly false claim about a time series, but that’s birdie for the course.
Two full paragraphs long McMegan quote in case I distorted meaning by removing context after the jump.
As of this writing, are we rethinking any of it? Will the new head of the CFPA crack down on mortgages that offer prepayment options? Will lawmakers finally break up Fannie and Freddie and cut off the flow of cheap capital they glean from the implicit government guarantee? Will it get the FHA out of the business of propping up the conventional loan market?
Of course not. There is no constituency for such a thing except for a few crazy libertarians.
OK so two out of three policies which she described as “libertarian” don’t display more love of regulation for the sake of regulation (or FDR bashing) that I’ve ever had. Is that a good average ?
Robert–Sir, aren’t prepayment options a good or at least a neutral thing in a mortgage? I don’t understand what evil she sees in this. Of course, I am no libertarian or even close. So, can you gloss this for me? Nancy Ortiz
She doesn’t even seem aware why banks exist. Hey Megan, they exist because by pooling many savers together they can hedge risks better than any individual can and because people want liquidity in saving but loans are very illiquid. She seems to think that since banks have to work to hedge interest rate risk (one of the very easiest things to hedge) its unfair and should instead be left to individual households who have neither the means nor the knowledge to really do so.
Rob–I see. She is as dumb as I thought. Well, I just had to be sure. I wonder if she will attract defenders here. Thanks. Nancy Ortiz
Nancy. I’m not a libertarian either. However, a libertarian (unlike McArdle) would say that pre-payment options must be good things as banks and borrowers agree to contracts with pre-payment options. Even a non libertarian such as myself would tend to oppose cracking down on something without a compelling argument either that there is an externality or that no rational person would sign such a contract (so bankers need to be protected from themselves by McArdle who understands their business better than they do).
I would assume that bankers probably know something about banking which I don’t, except that, like Rob, I would guess that pre-payment options are a way for banks to deal with part of interest rate risk (the risk interest rates fall) since they are more able to hedge such risks than borrowers. Banks certainly can hedge the risk they bear by offering pre-payment options. The fact that S&Ls failed to do this back when I was in high school doesn’t prove that the free market (so hated by McArdle evidently) is a failure.
I’m about as far from being a libertarian as a card carrying US trained economist can be, and, even I am way to libertarian to follow McArdle.
I conclude that she knows little and understands nothing and is motivated only by a determination to disagree with Paul Krugman (here standing in for a lot of us) about everything. I predict that, pretty soon, she is going to decide that Ito’s Lemma is a socialist plot, because Krugman uses it.
You should at least link to the person you baggering. Here it is. Their are ove 250 comments on ths one.
http://www.theatlantic.com/national/archive/2010/07/the-governments-role-in-the-housing-bubble/60333/#disqus_thread
Islam will change
Megan McArdle does not disappoint, in that she always lives up to expectations. Which are very low.
I am not an expert by any means in regards to mortgage contracts, but I’ve signed a few mortgages in my life. And I’ve paid a couple off early in the process of refinancing to get a better rate of interest. Call it pre-payment if one likes, but it is little more than simply paying the principal amount remaining on the loan at any point in time. I believe that that is a standard feature of all conventional mortgages. The only issue would be whether the bank seeks to extract a “pre-payment penalty fee” in such a transaction. If so the next question would be, did the borrower know (was it disclosed clearly) that the mortgage in question had such a pre-payment fee clause buried in its details. That would be unusual.
As noted, such fees are likely the exception. The real loss to the borrower in any early payoff is that any points paid at the inception of the loan could be considered to have been poorly spent money on a shortened term.
The issue of Ms McArdle’s incompetence when discussing economic and financial activities has come up previously. What seems strange is not so much her ineptness, but that there are likely editors at the Atlantic that would have the reponsibility of identifying stupidity before it reaches “print” and a public audience. That raises the question of why the Atlantic would harbor such incompetency at two levels. Are they trying to create a false controversy? Will Andrew Breitbart be joining their staff of writers any time soon?
To all,
I thought the real story was in the linked from teh Irvine Housing bubble blog. Note the graoph about a third down the article (I would copy it but couldn’t). It basically says we need to lose another 30-40% of the current housing values to get back to normal. Or $150,000 to $200,000 off your low-end $500K house in LA or DC.
Just wow…
Islam will change
She’s against pre-payment because it causes banks to have re-balance their balance sheet and undertake some corresponding transaction top unwind some postions(maybe). Just like the idea that customers can refinance fixed rates at lower rates being unfair. All this sounds like the putting to print of the harping of some not quite sober bank middle manager complaining about having to actually work to get that 4%.
Sigh. The point was that the product was created with heavy government interference/subsidies, not that the CFPA should be keeping banks from making loans they want to make.
Using that logic we should not use the internet, because it was created with “heavy government interference/subsidies.” Yet, here we all are, voluntarily buying the service that others voluntarily provide.
Sighhhhh. Banks only exist due heavy government influence.
“Will the new head of the CFPA crack down on mortgages that offer prepayment options?”
See? she wasn’t advocating that, just asking a question!
At first I thought that you were misreading her because she couldn’t be that dumb, but I was wrong, she IS that dumb.
Given that the big concern of the lender of the money is that the mortgage will be paid off earlier than planned, the prepayment penalty is a way to buy the right to prepay. In that sense it is like the difference in rates between a fixed and an adjustable rate mortgage you are effectivly paying for the interest rate swap with the higher fixed rate. The issue is that most people are unwilling to read the documents at closing, (perhaps they should be emailed a few days before for reading). Even 30 years ago the good faith estimate on a mortgage told about the penalty. Perhaps what should be done is the following:
The basic mortgage is a non prepayable for 7 years arm. (Given that thats about the average length a mortgage was held 10 years ago). If you want to go fixed it will cost x basis points more in interest. If you want to waive the prepayment penalty it will cost y, all spelled out on the good faith estimate.
“baggering”, or buggering? or badgering?
ilsm will not change
Yes, and prepayment penalties would mean it could be harder to jump off the downside of the price curve. Might as well ignore the penalty and walk.
Being military and GS I have always enjoyed the no prepayment penalty when PCS time arrived.
Maybe Ms Mc Ardle hates soldiers, no?
ilsm will not change
Central banks are a threat to liberty, just like standing armies.
Libertarians are opposed to manipulating money, whether by the government or by a semi (hardly) independent federal reserve.
Do prepayment penalties make small banks want to sell the notes to big banks? And does the prepayment penalty make fannie and freddie bigger? and is that the libertarian angst against prepayment penalties?
Also are libertarians agnostoc pacificists, not being against war just the instrument of war? Or do they just want Cincinnatuses around to drop the plow and save the republic, which is so small as to not need saving………………?
ilsm will not change
I am no libertarian.
ilsm will not change
If the note is repaid early the note holder gets cash and closes the note.
What does the note holder do, they lend it again, or they buy a government bond or they go on WS and gamble it if they are a mixed TBTF institution.
The banks win if the rates are higher than the rate on the prepaid loan, they lose if the returns are lower and they can break even.
That makes the bank income risk a bit edgy, but it is mainly lost expectations.
The note could be defaulted, too.
Do prepayment penalties encourage defaults? Penalties may increase default risk?
Or, if I have no penalty would I be more apt to refi, or take a minor lose than default and not pay the penalty?
Last mortgage I had closed in 2000 had no prepay penalty, as I sold the property.
Seems to me many years ago I paid a fraction of a point to have the no prepay penalty note.
Can anyone verify there was/is a charge to have a no penalty clause?
Or highways, railroads, piped water, sewers, electricity, airports…
Granted, highways have had some fairly ugly consequences, such as Houston suburbs.
And global warming.
Jimi, you forgot the punch line. The housing bubble bursting was all Bush’s fault. Dodd, Frank and al the other caring types had NO HAND in establishing the conditions or the bubble.
& then look it up & find – Surprise! – Dodd never said it
http://www.snopes.com/politics/satire/downpayment.asp
The point about pre payment penalties. Assume you had provided funds for a mortgage when the rates were 6%. You would like to think that you might get 6 years at that rate but today it would be re-fied and you would then get less money than otherwise. So you ask for a slightly higher interest rated to comphensate you for the risk. (If rates go above where they are you will have to wait longer for your money, but you would wave the pre-payment penalty, but no one would re-fi then). Recall that during the early 1980s people assumed others mortages for the lower rates.
So simply price the various options just like on a car”
Base price an arm with a prepayment penalty for some number of years:
x basis points more interest for a fixed rate
y basis points more for no-prepayment penalty.
Particulary once mortgages got put into bonds the traditional bond holder figures he has bought x years of income at a stated rate.
I had a pre payment penalty on a mortgage in 1978, (although I suspect it would have been waved given that the mortage was at 9.5 and rates went up to 12% the next couple of years).
It said you could pay no more than 20% per year off during the first 5 years. Of course back then doing a re-fi in an environment of increasing interest rates was sheer stupidity, the assumption was the way things were done.
But isn’t this the point? McArdle is a conservative first, and whatever ideology second. So, she is going to side with those who have authority, like bankers or corporations, in whatever question might arise. I think I remember Michael Lewis in Liar’s Poker talking about how much bankers hate it that prepayment is required by the Feds. Don’t you imagine this statement is just some conservative mouthpiece shilling for bankers?
If you quote please supply a link from the source, and if you can a link to the bill it would be interesting.
I think he did provide one, buff.
OUT OF CONTEXT!!!
Who made that up? You are not as good as Breitberg!!
Hey are you registered with selective service? Or did you ever get through basic/boot camp?
With the General Fund deficit in the stratoshere since 2001 maybe the US should be restricted to doing only wars it can afford, and fancy useless military stuff too.
ilsm will not change
It all takes away from the future.
I love you all.
Except for Megan. Well, actually, I do, but in a different way.
Sigh.
Jimi:
No, the issue is where I can make the most money and it always has been. Can I make more money writing and selling unregulated CDS or Naked CDS or making mortgages. One is unregulated and the other highly regulated. The issue of prepayment is a red herring.
Well Jimi, are you saying if anyone here quotes someone else it is okay to use quote marks (exact words assumed) to mark something that is quite clearly not a quote. Why is that nailing anyone and not simply necessary for accurate and honest debate??
And then the discussion can proceed to figure out Dodd’s words, not someone elses’s words they wished Dodd said.
I would say you owe downpuppy thanks for the correction, done in a somewhat neutral way.
It matters, and should matter, especially here where original sources are listed as a matter of course, and where others sometimes say we are obsessive about it…but it only takes a few extra minutes. We all make mistakes…
“as Senator Chris Dodd (D-Conn) explained, “Passage of such a requirement would restrict home ownership to only those who can afford it.”
😉
“& then look it up & find – Surprise! – Dodd never said it”
😉 😉 😉 😉 😉 😉 😉 😉 😉 😉
Your breath smells terrible because you’re so full of shit.
Quoting someone needs to be accurate, so quote marks are not the issue, the accurate reporting of actual words is important and is by convention indicated by the use of quote marks. You are taking offense needlessly. If you goofed the gracious response is to say oops and thanks, and you went and got actual words which can be debated. What you think the actual words meant cannot be the first order of business….actual words are not secondary to the debate, and you mis-quoted so makes responding to actual words that much harder.
Providing the approriate words then is quite important, and a pre-requisite to debating the issue and what is meant.
Some sort of manners is then asked, and the argument can be reset. Otherwise it looks like you are saying an inaccurate quote is of little consequence, and your intended interpretation is the way to truth. I don’t think you want to claim that, but I could be wrong.
Don’t make me link back to the 1,000,000,000 posts you have made claiming the only financial instruments (we need/should be offered) are plain vanilla financial instruments.
Both prepayment penalties, and the ability to prepay disqualify a mortgage as plain vanilla bullet security. Therefore, if you were consistent with your logic you would abhor them as being too complex for consumers.
I beg to differ in that a 15 to 30 year fixed rate loan with what amounts to a free put option is a bizarre financial instrument. They worked OK I suppose and there was no particular shortage of sellers in the post war years so as odd as they were the market worked.
What made the market work, the grease so to speak, was the virtual certainty that prices would rise at least as fast as overall inflation. (partly because people insisted on investing a lot of sweat and money into the asset) The put option was no big deal when the local lender held the paper but when the GSE’s and then private MBS pools took off the portfolios of these things became monsters. (well there was the S&L thing but let’s not go there now) Before the crash came thousands of green eye shade guys decended upon FRN and FNM and spent years trying to figure out what the books meant and they never did. The convexity, the expected rate of put exercises, was calculated based upon interest rates and other factors and hedges were put on and taken off to ‘smooth’ earnings, supposedly. When the books of the GSE’s got into the trillions insanity reigned.
I am giving no credit to Marie, my nick for Megan M, it’s a long story as in Marie Antoinette, for she as usual misses the forest for the trees. Like her 147 posts on the auto company bailouts as the entire financial structure was frozen, fixing her gaze on the unusual aspect of the conventional mortgage ignores the Godzilla in the room, the securitization of them.
I would point out that the fixed rate mortgages carry a higher rate than the ARMS, so in essence you are buying an interest rate swap plus a mortgage. The lender accepts the higher rate in exchange for the fixed rate.