Economy

One of the things I enjoyed about working with credit scoring in a prior job was the utter beauty of the interrelationships of the different variables coming together to make a prediction.  When you consider that beyond delinquency information, scoring relies on utilization, stability and breadth of credit, questions like “what happens to my score if I apply for a new credit card” become beautifully complex.

Similarly, one of the lessons I learned in that job was “watch out for the impact of economic changes on your credit model”.  While that’s a subject that has been reasonably well-hashed-out for banking and lending purposes, both domestically and internationally, American usage of credit data for insurance purposes is still comparatively new.  The current crunch is arguably the first test of the interrelationship between scoring and predictiveness.

So, it is with some interest that I notice a wire service story came out this weekend on how credit issues are starting to be reflected in (banking) credit scores:

At the same time, revolving credit usage — which includes credit cards — accelerated sharply to a year-over-year growth rate of about 8 percent in recent months. That’s the fastest rate in seven years and well ahead of the 2 to 3 percent rate of growth from 2004 through 2006 when home equity lines of credit were a bigger source of cash for consumers, according to Merrill.

But as credit cards are used more frequently, that often results in bigger balances left on the cards. What’s worrisome is that consumers who are faced with a number of ugly economic scenarios hitting at once — falling home prices, surging commodities costs and a weak job outlook — won’t be able to pay their bills.[…]

[C]ard companies including Washington Mutual, HSBC and Wells Fargo are lowering their credit limits, according to data from the consulting firm Institutional Risk Analytics.  Consumer advocates aren’t saying that is bad news — in fact, they believe it helps prevent cardholders from overextending themselves and is preferred to having a sudden surge in card interest rates. […]

Let’s say a cardholder has a credit limit of $10,000 and a balance on the card of $4,000. The card company worries that large balance may increase the prospects for default, so it lowers the credit line to $5,000. But in doing that, it completely changes what is known as the credit utilization rate, raising it from 40 percent to 80 percent. That is then factored into the calculation of one’s so-called FICO credit score, which measures creditworthiness, according to Craig Watts, a spokesman for FICO-creator Fair Isaac Corp.

In today’s New York Times, Paul Krugman has an interesting op-ed challenging the idea that homeownership should be a goal for Americans:

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.” Presumably, then, citizens who live in rented housing, and therefore lack that “vital stake,” can’t be properly patriotic. Bring back property qualifications for voting![…]

O.K., I know how some people will respond: anyone who questions the ideal of homeownership must want the population “confined to Soviet-style concrete-block high-rises” (as a Bloomberg columnist recently put it). Um, no. All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.

And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future.

In his monologue, Krugman gives three disadvantages to the institutionalization of homeownership –

• Financial risk
• Immobility of the workforce
• Increase in commuting / suburban sprawl

Before we bought our current home – or more correctly, contracted with a bank to let us live in our current home – I was rather rabid about not subscribing to the hype of owning one’s home.  Part of my reaction was due to my witnessing the real estate bubble inflating (and knowing it was a bubble), but a fair amount of my thinking was in line with Krugman’s.

Then my wife was disabled in a car accident.  I couldn’t find anyplace to rent which would be acceptable to her needs (extremely limited mobility, noise-sensitive), and we very quickly joined the ranks of “home-owers”.

Since that time, I’ve revised my opinion against home-buying hype.  Yes, I still think it’s hype, but there are some advantages to owning a home which justify somewhat the support provided the concept by the government.  These include:

• Acquiring real property, even if via a mortgage, is a means to build some measure of wealth.  True, it’s not the most efficient means of wealth-building around, and there are likely better investments available for those of us who try to save with an eye towards retiring in 30-40 years.   However, it seems that too many Americans are short-sighted in that regard.  
   
  I’d love to see the government strongly encourage citizens to save for a rainy day, preferably simplifying the process so that folks of limited means don’t have to go through the complexity of allocating their limited disposable income to specific savings goals.  
   
  If we aren’t going to have “mandatory” or “very strongly encouraged” saving programs, the institutionalization of home ownership is a tolerable alternative, I think.
   
• There is, I think, something to be said for the sense of stability that comes from owning your own home.  It’s mine.  It’s a little piece of the earth where I have extra freedom to live as I wish.  I don’t have to worry about a landlord kicking me out or raising my rent to ridiculous levels.  And, while I am at risk from the spectre of property tax hikes, at least that’s a threat I get a say in, thanks to municipal elections and referenda.
   
• Also on the stability front – haven’t I heard pundits bemoan the seeming death of “community” in some parts of the country?  Doesn’t “community” require some stability to form?  If “community” is seen as desirable for society, then shouldn’t society promote stability to help foster community-building?
   
• We have a heckuva lot of inertia behind the American dream of homeownership.   Recall that quite a bit of the foundation for our republic comes from the propertied interests seeking freedom to enjoy and profit from their property, and therefore needing protection from the tyranny of the property-less rabble.   True, the republic could be democratized by removing all of those protections…but isn’t it almost as democratizing to assist the rabble in becoming propertied?
   
• A more practical inertia argument could be made by observing that quite a bit of our economy is tied in supporting homeownership.  If some of the supports for that goal were removed, I’m not sure that the disruption would be any less than what we’re feeling from the credit crunch, and the real estate bubble’s deflation. 

  Surely, my wife and I aren’t alone in our budget relying quite a bit on the mortgage-interest tax deductions in the Internal Revenue code.   Remove that, and we could have a problem.  If enough homeowners develop such a problem…well, home values would presumably decline as the real estate market further imploded, and the resulting economic mess would presumably be extremely ugly.
   
  I could accept an assertion that federal support for homeownership is not justified in theory.  However, so much of our economy is built on the notion that Americans “should” own property, I think attempting to unwind it would cause more harm than good.

One of the reasons I started this blog…and why I recovered/rebuilt it after the crash this past weekend… is because I wanted to get in the habit of writing and improve my style.  For a while, I’ve been wanting to write a story/novel about a near-future world where consumer debt has become enough of a "problem" that a modern form of slavery has emerged in lieu of bankruptcy and collections.

So, you know that an article in today’s Wall Street Journal (free link) would catch my eye:

In a move that consumer groups say could increase pressure on people with unpaid medical bills, some hospitals are trying out a new tactic to recoup patients’ debts: They’re auctioning the debt online.

Hospitals have long relied on outside collection agencies to go after debtors. Under traditional arrangements, these agencies receive a percentage of any money they get from a debtor; the more they collect, the more they earn.

Now, some of the same collection agencies, as well as other firms that purchase debt outright, have begun participating as bidders in online auctions, in which they buy the debt or provide guaranteed payments to hospitals for access to the unpaid accounts. Some experts say this gives them more reason to aggressively pursue patients in arrears. Auctions can drive up the amount paid for debt, meaning a collector must recoup more money from patients to cover its initial investment and turn a profit. And the winning bidders often get to keep all the money they collect on the auctioned debt.

From a finance-and-net geek’s point of view, the idea of turning to (essentially) eBay to optimize selling bad debt to collection agencies is intriguing.  It’s efficient, permits free market principles to work, and having a central clearing house creates opportunities for a regulatory body to impose some consumer protections on the mess (if an agency misbehaves, they can be excluded from future auctions).

But is it too great a stretch of the imagination to see "debtor auctions" down at the bottom of the slippery slope flowing from "debt auctions"?

When I did my stint in insurance credit scoring, part of the gospel I preached was that the actual numeric score coming out of the model was meaningless without context.

The main reason I said that was because of the abundance of scoring models in use among insurers.  Fico had at the time 18 different insurance scores at each of the three bureaus, Choicepoint had its own fleet of models which, while designed for portability, could still vary somewhat depending on which bureau’s data was pulled, and many if not most large and mid-sized insurers were dabbling with their own proprietary models.

And that was just within the insurance industry.  Over in the banking world, where every bank of note seemed to have its own flock of statisticians building proprietary models for various purposes, even as Fico and the individual bureaus were marketing their own industry solutions….   Telling me that you have a 750 score doesn’t exactly tell me a heckuva lot unless you can also tell me something about the model, the distribution of scores, the potential use, et cetera.

But people believe in the illusion of concrete fact embodied by a magical three digit number, and my message tended to fall on deaf ears.

I feel a little vindicated, however, by a story that ran in the Wall Street Journal (subscriber link) last week:

These days, hardly anyone questions the power of the almighty credit score. Lenders use it to determine who qualifies for a loan and what interest rate they get, insurers calculate premiums based on it, and employers use it to help make hiring decisions. As a result, sales of scores, reports and credit-monitoring services to consumers by the three major credit bureaus — Experian Group Ltd., TransUnion LLC and Equifax Inc. — generated $488 million in revenues in 2006 and are expected to reach $864 million by 2010, according to research firm TowerGroup.

Yet the scores that consumers buy from the credit bureaus or heavily promoted Web sites like FreeCreditReport.com or TrueCredit.com — owned by Experian and TransUnion, respectively — aren’t the same scores that are sold to lenders, landlords, insurers or employers.

Take FICO, the credit score developed by Minneapolis-based Fair Isaac Corp. that the majority of lenders use. Depending on the type of credit a consumer seeks — a mortgage, installment loan, auto loan or credit card, for example — lenders will use different “flavors” to determine a consumer’s default risk. Auto-loan payments, for example, weigh more heavily in the formula that calculates a FICO score for auto lenders, while credit-card payments matter more in the score used by credit-card companies.

Adding to the confusion: Each time Fair Isaac rolls out a new version of its scores, some lenders implement them while others stick to the old ones.

I can imagine the consumer advocates now, howling “why can’t we have The Score”.

The answer, as much as no one likes it, is that there is no One True Score.  Users of credit data, be they banks, insurance companies, utility companies, cell phone carriers, etc. will tend to favor whichever model is most predictive for their purposes…or build a new model if they think they can get additional lift.

I can see where someone would argue that it sucks that consumers won’t always know The Answer beforehand, due to the abundance of scores in the world.  On the other hand, because of the difference in opinions among models, there’s always the room to shop around for a better answer, particularly if you have a so-so credit history.

Besides, the advice about what to do to optimize one’s score under any credit model is generally the same — if you pay your bills on time, have a reasonable number of credit accounts which you use sparingly, and if you don’t churn your credit needlessly…you’ll do OK.

One of the things I learned during my days working on credit modeling is that banks are very thankful for the freedom arising from the very light hand of federal regulation, and they are not shy at all in using that freedom to maximize revenue.

Considering some of the games banks play with credit card customers, I’m not at all unhappy with seeing some new rules proposed by the Fed:

The provisions addressing credit card practices are part of the Board’s ongoing effort to enhance protections for consumers who use credit cards, and follow the Board’s 2007 proposal to improve the credit card disclosures under the Truth in Lending Act. The FTC Act proposal includes five key protections for consumers that use credit cards:

• Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.
• Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
• Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.
• Banks would be prohibited from imposing interest charges using the “two-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.
• Banks would be required to provide consumers a reasonable amount of time to make payments.

For quite a while, I’ve been wanting to put together a chart examining the cost of gas in terms of something harder than the U.S. Dollar…but I’ve never gotten around to tracking down the hard data myself.

So, I was pleased to see that Rick Powell posted the average price in US Dollars of a gallon of gas and an ounce of gold at the start of each year from 1998 through 2008 in a discussion on oil prices on misc.transport.road.

Raw data like that can be used to make an interesting-looking chart:

I should admit that the chart is, arguably, a little “dishonest”, in that one makes some potentially inappropriate assumptions when assembling a chart like this.   Specifically, there’s an implicit assumption that an ounce of gold is a stable unit of value, which ignores some of the distorting effects of speculation, investment, and industrial demand on the commodity.

However, I think it does help make the point that the high prices we pay for petrol at the pump are somewhat distorted by other financial trends which also impact us.  For example, the real buying power of an American dollar is not what it once was.

A post I saw at CL&P Blog, which mentioned that Minnesota is seriously considering a moratorium on foreclosures, got me thinking.

Isn’t a simple moratorium just a postponing of the inevitable?   After all, unless something else happens, in all likelihood many of the potential “foreclosees” will be unlikely to catch up with their payments, the potential resale value of the potentially-foreclosed property dwindles due to lack of debtor incentive to maintain the property, and the lenders suffer a certain amount of balance sheet pain from having to keep bad debt on the books for that much longer.

I can empathize with the sentiment that something needs to be done to stop a flood of foreclosures.   Yes, I am a little disgruntled with the sentiment — my wife and I accepted a higher interest rate and bought less of a house than some of our peers, because we saw the potential downside of going with an ARM; therefore it’s tough accepting the apparent unfairness of folks being bailed out of their bad bets while those of us who made more responsible decisions are left to indirectly pick up the slack.  But I accept that a hard crash of the real estate market is not a good thing for the country, and I can definitely empathize with how life can suck when luck goes against you.

As part of bankruptcy reform a couple of years ago, Congress sought to make it tougher for individuals to seek bankruptcy protection, or to limit such protection, under the premise that there were too many folks abusing the system.  The pros and cons of the changes can be a subject of debate, but the fact remains — our leaders thought bankruptcy should be a measure of last resort, and therefore put a couple of extra hoops in the process, to attempt to get others to perceive it as a last choice and to be aware of potential, less extreme alternatives.

I wonder if those states and localities that are pushing for moratoria shouldn’t adopt a similar stance.

Rather than simply stop foreclosure actions for a time, perhaps legislators and regulators should be attempting to introduce new hoops, with an eye towards making sure that every other alternative has been exhausted.

For example, I could imagine lenders being obliged to seek to work out some form of alternative financing arrangements, or facilitating access to third-party counselors to provide guidance to delinquent homeowners.  

I could also imagine a rejiggering of laws or regulations to facilitate real estate transactions whereby a delinquent homeowner can sell a property to a qualified buyer, who would assume the outstanding mortgage as part of the deal.

Heck, I could also tolerate new laws/regs adopted to incent banks to flip foreclosed as quickly as possible, even if the house sells at a low price.   (A 900% property tax surcharge on foreclosed properties not reoccupied within 6 months, anybody?)  Structured properly, such measures should alter the banks’ side of the foreclosure equation enough to provided added incentive to seek alternative, less drastic solutions…as well as providing municipalities extra revenue to support the strain on services arising from having a large number of vacant properties.

I realize that several lenders already have become rather proactive about helping their clients avoid foreclosure, and that those lenders also routinely face challenges of customer avoidance, confusion, or unwillingness to seek to save themselves.   But I do question whether such practices are the exception rather than the rule, or that consumers are adequately aware of such alternatives.

However, if consumers have to go through extra hoops to seek any sort of relief from debt issues, why shouldn’t the lenders be similarly constrained?

There’s an interesting exchange at Donklephant in which Alan Carl takes issue with the tax provisions of Obama’s proposed economic plan:

It’s quite easy for a family of four to make $200,000 a year and sink most of that back into basic expenses with only moderate indulgences. Raising their taxes would force them not to eliminate yachts (they don’t own any) or $1,000 a night rooms during Las Vegas binges (they don’t do that) but to live in a smaller home or, most likely, reduce their personal savings, putting less in their IRAs and education funds and the like so the government can have a bigger piece of the pie. That is not only unfair it’s counter to the very notions of personal responsibility.

The key problem with Obama’s and most other Democrat’s economic plans is that they see the wealthy and even the kinda sorta wealthy as undeserving of their income. [...] They should not be obligated to forfeit a larger share of their income simply because they’ve worked hard and become successful. Payments into Social Security are capped because payments out of Social Security are capped. Unless we’re going to start paying higher earners more in Social Security after they retire, it is profoundly unfair to ask them to bear a greater burden while they are working.

We can debate the appropriateness and effectiveness of higher taxes for the ultra rich, but penalizing families who make $200,000 a year places the aspirational cap extremely low. It actually creates disincentives for people to strive for higher incomes and penalizes hard working Americans who’ve done nothing wrong but make good choices and become successful.

I was about to post a response at Donklephant when I noticed someone had already made the same observation I was about to make, the punchline of which is:

Either you get out of Iraq and cut defense spending, along with reforming Medicare, medicaid, social security, cut aid to Israel, etc.

Or you pay higher taxes, there is no free lunch

I agree with Alan’s assessment—shifting the tax burden is counter-productive, and/or unfair. Unfortunately, the situation the country is, itself, inherently unfair. Any solution will likely be perceived by someone as unfair.

We have a problem in this country—we have a massive amount of debt, and commitments that the country has made to spend more money will only aggravate that problem unless something is done.

Over the long term, “something” needs to include a helluvalot of spending cuts and unwinding of past commitments, so that government’s need for revenue can be kept at a more sustainable level. Making sudden, immediate cuts probably would be rather damaging to the economy right now, and as a practical matter, political and social forces will limit the amount of cuts that can be made.

In the absence of cuts, additional revenue needs to be scrounged up from somewhere. In an ideal world, the country would win some ultra-ultra-powerball, or the folks responsible for the mess would be relieved of funds to pay to return the country to fiscal sanity.

However, the fact of the matter is that we, the voters of America, are responsible for the mess. We haven’t demanded fiscal responsibility from our elected leaders, and we’ve let them get credit-happy while being distracted by bread and circuses.

We need to clean up that mess. That clean-up is going to suck, and it’s going to be perceived as unfair by at least some groups, especially since the clean-up needs to be done in a manner that doesn’t damage the country’s prospects post-cleanup.

That limitation necessarily means that the burden is going to be borne by folks of certain income levels. And the folks who will feel that the worst are those who appear wealthier on their tax returns than reality dictates.

It sucks. It isn’t fair. But the sooner we accept that life isn’t fair, the sooner we’ll be done.

Friday morning, I had the disturbing experience of watching gas prices rise as I watched. As I went to fill up my tank in the morning, the three closest gas stations were selling regular unleaded for $3.539, $3.639, and $3.659 per gallon. However, while I was pumping at the $3.539 station, I got to see the price on the sign change…and sure enough, the next person at my pump would be paying $3.659/gallon. The evening before, I saw one station in West Hartford selling premium unleaded for $3.999.

Last weekend, the New York Times ran an article mentioning that New Jersey’s gas prices were then under $3/gallon, and attempting an explanation why:

In a nation where some states could see the price of gas eclipse $4 a gallon this summer, New Jersey’s prices are often among the lowest in the nation, according to AAA, the automobile club, a fact that might surprise many from outside this region. In New Jersey — far from the oil fields of Texas or Alaska but where people love their cars and motorists buy 11 million gallons of gas daily — many stations still sell unleaded gasoline for a price that begins with a 2, not a 3.

The prices are lower here for a variety of reasons, one being that many of the state’s 4,000 stations are independently owned and drive up competition, which drops prices. Another is that New Jersey is flush with refineries and gasoline infrastructure like fuel pipelines and deep harbors to import petroleum from around the world.

But probably the biggest reason is that New Jersey has the nation’s third-lowest gasoline tax, at 14.5 cents a gallon, and it hasn’t gone up in almost two decades.

I’m not sure that I’d put the tax rate as the “biggest reason” for the lower prices…but I do have to admit that it’s tough continuing to believe that maintaining gas tax rates to help incent conservation when considering how expensive gas is, and how many doctors appointments my wife has with doctors who are 30-50 miles away…..

One of the more talked about news items in the past day has been in regards to new polling data indicating a record number of Americans think the country is headed in the wrong direction. (New York Times link.)

When looking through the NYT article, I the following point caught my eye:

The poll found that Americans blame government officials for the crisis more than banks or home buyers and other borrowers. Forty percent of respondents said regulators were mostly to blame, while 28 percent named lenders and 14 percent named borrowers.

I’ve joked about the SEP (Someone Else’s Problem) field being in full force at the lame-duck White House. However SEP seems to be contagious.

Whatever happened to the idea that the people who make mistakes should be deemed principally responsible for their actions?

True, there are many tragic stories in the credit crunch where people find themselves in trouble for reasons beyond (or mostly beyond) their control. However, there are also many, many tragic stories because people made bad decisions, or gambled and lost.

Is more regulation really the answer?

Personally, I think the Creator gave us brains for a reason. Maybe the finger of blame could be pointed at an educational system that apparently doesn’t do a good enough job educating people in fiscal realities. But the apparently prevailing attitude of seeking government regulators to come and protect us from ourselves is oddly disturbing.

Are we becoming “America, Land of the Sheeple”?