Monthly Archives: December 2014

“Each year, our survey has asked: “On average over the next 10 years, how much do you expect the value of your property to change each year?” In 2004, a boom year, the average answer was a gain of 12.6 percent, but in succeeding years the figure began to decline, bottoming at 4 percent in 2012…

…Understandably, people back then were excited to think they could borrow 90 percent or more of a home’s value at around 6 percent interest and receive an annualized return of more than 12 percent. That would have been quite a coup. But those expectations were about as wrong as wrong could be. People were living in a bubble, and the bubble eventually burst……Expectations are rising again, but this is nothing like the run-up to the 2006 peak…The biggest housing boom in American history, from 1996 to 2006, came after the decline in overall inflation (and interest rates) since 1980…..So far, we’ve been talking about objective issues. But changes in our speculative mentality — the driver of all those long-term expectations for price changes — are likely to be much more important, because expectations can feed a self-fulfilling prophecy until a bubble bursts……Despite having no objective way to know the future — and despite an apparent disregard for the reality that housing hasn’t been a great investment over the long run — people are constantly changing their opinions about long-term trends. And, lately, they’ve become somewhat more optimistic.”, Nobel Laureate in Economics Robert J. Shiller, “Home Buyers Are Optimistic but Not Wild-Eyed”, New York Times

“There is much I take exception to in this article; in particular his negativity in regards to a home being a good long-term investment, without any historical return-on-investment data being provided. (The home-buying application I hope to launch in the next few months, will be my response.) I am blogging this article, because again the truth is emerging. This housing bubble/bust article barely makes mention of mortgage lenders and certainly debunks the incorrect mainstream view that they were a primary cause. Instead, Nobel Laureate Shiller mentions prominently the multi-decade decline in inflation expectations (and interest rates) engineered by the Fed, expectations of home price appreciation by consumers, and the fact that future nominal home price appreciation is impacted significantly by the Fed’s 2% inflation goal. (Roughly half of current consumer expectations for nominal home price appreciation is caused by the Fed.) So, its irrational consumer expectations (Shiller: “people back then were excited”, “no objective way to know the future”, “speculative mentality”) and the Fed that caused the housing bubble/bust; not the greedy and reckless bankers/mortgage lenders? I am also coming to the conclusion that Fama is right and Shiller is wrong. I don’t think consumers are irrational. In markets where asset prices are dominated by consumers, like homes, I just don’t think these consumers have access to cash flow models/scenarios that institutional investors would demand. And even worse, these consumers’ “advisors” (Realtors, mortgage lenders, appraisers) have a big conflict of interest; they need them to buy/sell to earn their revenue. (My home-buying application is designed to address this very problem and will hopefully help prospective homebuyers make more informed and rational decisions.)”, Mike Perry, former Chairman and CEO, IndyMac Bank

Home Buyers Are Optimistic but Not Wild-Eyed

Economic View

By ROBERT J. SHILLER

Most of us don’t add up the short-run investment pros and cons when we consider whether to buy a house; instead, we think about the long-term lifestyle we want.

That makes sense, because once a house is bought, the owner typically stays in it for a decade or more. And, after all, houses are homes as well as investments.

Yet at important points in our lives, we may nonetheless find ourselves focusing on the investment side of housing. Do we want the largest houses we can afford, or should we live modestly — maybe by renting — and invest more money elsewhere?

In making that decision, we’d benefit by knowing what would happen to a home’s value in 10, 20 or 30 years. Unfortunately, short-run changes in home prices are of virtually no value in answering this question. The best we can do is assess recent trends, and look further back into history.

So here’s an update on housing trends, compared with those of earlier years. Or, more precisely, here’s an update on what people think the trends will be. Despite having no objective way to know the future — and despite an apparent disregard for the reality that housing hasn’t been a great investment over the long run — people are constantly changing their opinions about long-term trends. And, lately, they’ve become somewhat more optimistic.

A home for sale recently in Los Angeles.  The number of Southern California homes bought for $2 million or more in recent months is the highest on record. Credit Nick Ut/Associated Press

Karl Case of Wellesley College and I have conducted an annual questionnaire survey of recent home buyers in the Los Angeles, San Francisco, Milwaukee and Boston areas since 2003. Since 2012, Anne Thompson of Dodge Data & Analytics has participated. Each year, our survey has asked: “On average over the next 10 years, how much do you expect the value of your property to change each year?” In 2004, a boom year, the average answer was a gain of 12.6 percent, but in succeeding years the figure began to decline, bottoming at 4 percent in 2012. The expected gain rose to 4.2 percent in 2013 and 5.5 percent in mid-2014.

In addition, the Pulsenomics U.S. Housing Confidence Survey, covering the entire country (and involving many cities that may be less volatile than our four), showed that homeowners and renters in July had slightly lower 10-year expectations: 4 percent a year for the next 10 years.

Still another measure of expectations can be found in the United States composite home price index futures contract on the Chicago Mercantile Exchange. At its close on Nov. 30, the contract predicted a 4 percent-a-year increase from November 2014 to November 2016.

These three reports are fairly consistent, and both our data and that of the Chicago Mercantile Exchange show higher expectations than they did a couple years ago. But these new expectations are hardly wild: If inflation ran at 2 percent a year, the Federal Reserve’s target, the expected appreciation in housing would be an inflation-corrected 2 percent to 3.5 percent a year. So at the moment, there is no evidence of extravagant bubble thinking.

Another way of looking at this is to compare mortgage rates with expectations for housing prices. Mortgage rates are low, only 3.93 percent for the 30-year conventional mortgage in early December, according to Freddie Mac’s latest report. Thus, the spread between 10-year expectations for housing prices and this mortgage rate is now very small. Contrast that with a spread of more than six percentage points in the home-price bubble just before the market peak of 2006.

Understandably, people back then were excited to think they could borrow 90 percent or more of a home’s value at around 6 percent interest and receive an annualized return of more than 12 percent. That would have been quite a coup. But those expectations were about as wrong as wrong could be. People were living in a bubble, and the bubble eventually burst. Expectations are rising again, but this is nothing like the run-up to the 2006 peak.

A property in San Francisco. Home buyers in that area, along with Los Angeles, Milwaukee and Boston, take part in an annual survey that asks how much they think the value of their property will change over 10 years. Credit Jeff Chiu/Associated Press

One wild card in housing prices is the future of the mortgage interest tax deduction. While it’s beloved by many taxpayers, it may not last — and if it doesn’t, short-term trends could be affected.

Dennis J. Ventry Jr., a professor at the School of Law at the University of California, Davis, calls the mortgage tax break “the accidental deduction,” put in place largely to help farmers, when there were more farmers than homeowners with mortgages. Back then, there was little if any discussion of the idea that the government should subsidize homeownership. An accidental tax break like this might well be repealed someday. A proposal in February by Representative Dave Camp, chairman of the House Ways and Means Committee, to limit a couple’s deduction to the interest on $500,000 of mortgage principal, is an indicator of what may be ahead.

But if you’re thinking for the long term, this shouldn’t be a major concern. With mortgage rates under 4 percent, and with the median home price under $200,000, according to RealtyTrac, the typical mortgage interest deduction is well under $8,000 a year, far below the 2015 standard income tax deduction of $12,600 for a married couple. Only about 30 percent of taxpayers itemize deductions, and unless you do so, you can’t get this mortgage break.

Edward Glaeser of Harvard and Jesse Shapiro of the University of Chicago found that the homeownership deduction has accrued overwhelmingly to people in the top tenth of the income distribution. What’s more, the deduction hasn’t figured significantly in home-price surges. The biggest housing boom in American history, from 1996 to 2006, came after the decline in overall inflation since 1980 had already made the mortgage deduction much less valuable than it was in previous years. So far, we’ve been talking about objective issues. But changes in our speculative mentality — the driver of all those long-term expectations for price changes — are likely to be much more important, because expectations can feed a self-fulfilling prophecy until a bubble bursts.

Ten years from now, there could be another housing boom or bust. But since 1890, the average appreciation of inflation-corrected home prices in the United States has been only a third of 1 percent a year. That’s why housing hasn’t been a great investment. And in 10 years, it may be almost equally likely that real home prices will be higher or lower than they are today.

Cultural changes — like those brought by the Internet — could also have a profound effect. When our social contacts are increasingly defined by social media, for example, the appeal of living in a permanent physical neighborhood could decline. We don’t really know. This is more sociology than economics.

In making the crucial choice of how much housing to buy for the long haul, we must keep in mind that owner-occupied homes aren’t a surefire investment opportunity. You may want to weigh whether you want to deal with a home’s maintenance, or whether you’re committed to staying in one neighborhood and, maybe, at a nearby job. Those factors may be a source of pleasure — or a burden — over the next decade. In any case, there’s a good chance they will outweigh the financial prospects of an investment in housing.

Robert J. Shiller is Sterling Professor of Economics at Yale.

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A version of this article appears in print on December 14, 2014, on page BU7 of the New York edition with the headline: Home Buyers, Optimistic but Not Wild-Eyed.

“The solution to Stockholm’s housing shortage is obvious; get well-intended government (mostly) out of the housing business. If you deregulate and let the competitive marketplace meet the demand for housing via market rents and increased housing stock, this problem will fix itself!!!” Mike Perry

Technology

Stockholm’s Housing Shortage Threatens to Stifle Fast-Growing Start-Ups

By MARK SCOTT

Fritjof Andersson, chief of a social media start-up in Stockholm. Because of a housing shortage, he has struggled to bring engineers to the city. Credit Martin Edström for The New York Times

STOCKHOLM — Tyler Faux thought finding a place to live in New York City was tough.

But when Mr. Faux, a 24-year-old New York native, moved here recently to work for one of the city’s fast-growing start-ups, he was in for a rude awakening.

Faced with Sweden’s labyrinthine rules on renting apartments and a decades-long waiting list for government housing, Mr. Faux, a Harvard computer science graduate, repeatedly came up empty when hunting for housing — no matter how much he was willing to spend.

“In New York, there are ways to find a good apartment if you’re willing to pay,” said Mr. Faux, who eventually signed a short-term lease for a one-bedroom apartment in the center of Stockholm for $1,700 a month, much less than what most New Yorkers pay for a similar apartment. “But in Sweden, that doesn’t exist. It’s difficult to find a place here.”

Mr. Faux’s housing troubles are becoming a common refrain in Stockholm and other technology hubs around the world. The Swedish capital has emerged as one of Europe’s most attractive tech centers in recent years, luring thousands of workers and developers to companies like Spotify, the popular music-streaming service that was started here.

In Stockholm, real estate developers are seldomly allowed to build skyscrapers. Credit Martin Edström for The New York Times

But the city also has become a cautionary tale about the troubles that arise when a booming tech sector runs head-on into city planning rules that have not changed for decades.

Swedish rent controls and other housing restrictions in place since the 1960s make it almost impossible for people to lease out apartments to foreign tech workers. And a backlog of new construction means that only 10,000 new homes are expected to be built annually over the next 15 years, though Stockholm’s local government has fast-tracked some new residential developments.

In contrast, roughly 40,000 people — both from inside Sweden and outside the country — are now moving to the city to work for tech companies, financial firms and other Swedish businesses each year, according to Stockholm’s city government.

“The system is completely broken,” said Billy McCormac, an American who moved to Sweden in the 1990s and now campaigns for housing reform as head of the Stockholm branch of the Swedish Property Federation, an industry group. “We can’t build a tech cluster here if people don’t have anywhere to live.”

The lack of housing was a regular hot topic of discussion at one of Stockholm’s co-working spaces — where early-stage tech companies swap ideas over games of Ping-Pong. On the fifth floor of a modern building in the main shopping district here, engineers at the space, called SUP46, grumbled that they could not find places to live.

“Renting something is almost impossible,” said Fritjof Andersson, 33, over a cup of coffee at the shared office. Mr. Andersson started his first tech company more than a decade ago, but now cannot afford to bring international developers to the Swedish capital to expand his small team.

“We don’t have the financial muscle to help them find an apartment,” he said, adding that he was recently forced to limit a search for new coders to people already living in Stockholm. “If the city wants to attract start-ups, someone needs to fix the housing problem.”

Many people in Stockholm welcome the new workers. But critics say the newly arrived, who often have salaries that dwarf local residents, should not be given priority over people who have lived in neighborhoods for decades.

“Rents going up will only force people to move out of their homes,” said Marie Linder, chairwoman of the Swedish Union of Tenants, which represents the rights of existing renters, many of whom live in low-cost government housing. “People will have to leave their apartments, but where will they go?”

The complaints are echoed in other cities with a heavy concentration of tech companies. In San Francisco, local residents have complained bitterly that 20-something engineers and developers have transformed entire neighborhoods, where upmarket wine bars and expensive yoga studios have replaced down-on-their-luck bookstores and family-run coffee shops.

Yet as the average salary rises in many cities, local planners say the often-rapid gentrification can benefit the majority of a city’s population.

In London, one of Europe’s largest technology centers, local tech companies are expected to create almost 50,000 jobs and add $19 billion to the local economy over the next decade, according to Oxford Economics, which provides economic forecasting.

Some of that money, though, is returned to the tech industry in the form of tax breaks for people starting businesses and government grants for local start-ups. That has led some urban policy researchers to argue that a level of inequality is inevitable if policy makers focus their attention on attracting people from a single industry over other priorities.

“In cities, competition for space and resources is fierce,” said Richard Florida, a professor at the Rotman School of Management at the University of Toronto, who tracks how cities like New York, Berlin and London have handled the tension between new industries and existing residents. “If you want to offer the right incentives to attract tech companies, you’re not going to maintain an equitable society.”

Local residents have felt the pinch in many cities with a growing tech industry.

In Shoreditch — a once run-down working-class community in East London — house prices now regularly top more than $1 million, roughly a 50 percent increase over the last decade. And as Berlin continues to be hit with a steady tide of tech workers, the country’s government has said it will now set price caps on rental apartments to protect existing tenants.

“In Berlin, there’s a tremendous amount of grumbling about foreigners moving in,” said Alex Farcet, a co-founder of Startupbootcamp, which offers short-term mentorship programs for tech entrepreneurs in places like Berlin, Amsterdam and London. “It can be super-difficult for people to find housing.”

The tension between the so-called global technorati and cities’ residents is a relatively new phenomenon. Tech giants like Apple, Microsoft and Nokia have long operated primarily in business parks located in the suburbs, or on the outskirts of a city.

But in recent years, a new generation of start-ups, like Twitter and King Digital Entertainment, the Anglo-Swedish game company behind the Candy Crush franchise, have elected to set up shop in the heart of a metropolis, catering to workers who crave easy access to a city’s fashionable bars, public transportation and quirky apartments, as much as stock options and six-figure salaries.

“I want to live close to where I work. I don’t want to commute very far,” said Lovisa Nilsson, who traveled from Uppsala, a city roughly an hour north of Stockholm, to her tech job in the Swedish capital for more than a year before finally securing a short-term contract for a small apartment here that she now shares with her boyfriend.

“I was lucky to find somewhere to live,” Ms. Nilsson said. “I wanted to move a lot earlier, but had almost given up.”

A version of this article appears in print on December 15, 2014, on page B3 of the New York edition with the headline: Stockholm’s Housing Shortage Threatens to Stifle Fast-Growing Start-Ups.

“It’s a good thing for the author of this WSJ article that the Consumer Financial Protection Bureau doesn’t have jurisdiction over bad reporting about mortgages (at least I don’t think so?) or she might be in for a big, arbitrary fine for misleading consumers…

…Sorry, I couldn’t help myself commenting about this. I looked at the lender fees in this article and while I have been out of the industry for six years, I knew immediately that this was the wrong way for home buyers to look at this issue. I had lunch today with a friend in the industry and he told me that lenders generally make, before expenses, three or four times the figures below and on larger loans the lenders can make $10,000 or more (on one mortgage loan!). How is this? The fees below are just the fees charged to the borrower, they exclude the profit on the mortgage when it is sold into the secondary market (and most mortgages are sold into the secondary market). Everyone in the industry, including the industry’s regulators like the CFPB, know that the fees below are just one part of the bigger picture and the big picture is summed-up in the government-mandated Annual Percentage Rate (APR) disclosure. This APR is a “yield” (a cost to the borrower) that includes both the contractual rate of the mortgage note and all the lender fees. It’s the ONLY way a mortgage borrower can properly comparison shop for a mortgage. Finally, I would like to make another important point. Since Elizabeth Warren’s CFPB was created by Dodd Frank (and is well on its way to costing a billion dollars a year and much more as the years go by), they have produced a bunch of regulations, mandated disclosures, audited the heck out of firms, and used their unchecked power to act as judge and jury and executioner….coercing settlements and arbitrarily fining a bunch of firms. But where is the beef? Are mortgage borrowers economically better off today because of the CFPB? Absolutely not. From what I read, mortgage lender costs have risen by several thousand dollars per loan (my recollection is like $4,000 since the crisis), largely due to increased regulation and compliance. These costs are fully passed on to (paid by) mortgage borrowers. Also, mortgage lending profit margins post-crisis (because of reduced competition) are much larger than they were pre-crisis. Again, this costs mortgage borrowers thousands of dollars. And these amounts don’t count the guarantee and insurance fee increases by Fannie Mae, Freddie Mac, and FHA (to recapitalize themselves)…they have doubled, tripled and more. And there is really no non-government alternative; they guarantee about 90% of U.S. mortgages. Bottom line, since the financial crisis, Dodd Frank and the CFPB’s creation, I am guesstimating that mortgage borrowers are paying at least $5,000 and possibly $10,000 (or higher) more per mortgage than they did pre-crisis. The truth of the matter is that Elizabeth Warren’s CFPB is mostly about compliance and regulatory form-over-substance and the substance they have provided has unfortunately resulted in reduced competition (and fatter industry profit margins) and increased mortgage costs; all of which are borne directly by American mortgage borrowers.”  Mike Perry, former Chairman and CEO, IndyMac Bank

Jumbo Jungle

How Home Buyers Can Lower Closing Costs

Tips on how home buyers can ease the sticker shock of closing costs, which vary widely across the country.

Chris Gash

By Anya Martin

It’s closing time: Last call for every entity with even a small role in a home sale to collect their fees.

Home buyers—eager to get the keys to their new place—must first cover myriad costs, including agent commissions, attorney fees, lender fees, mortgage insurance, a title search, recording fees, real-estate taxes, survey costs and an appraisal (sometimes two on a jumbo loan).

Closing costs can vary depending on which lender is used, what state you live in, the price of the home and even the day of the month the closing takes place. Jumbo-loan borrowers—where amounts exceed $417,000 in most places and $625,500 in high-cost areas—often face the steepest closing costs because many fees are calculated using a percentage of the loan amount. But a little research and comparison shopping can help buyers reduce these out-of-pocket costs.

Borrowers can get a sense of what they will owe in the good-faith estimate document, which federal law requires lenders to provide within three days of the loan application. Lenders cannot change their own origination fees, but they are given a 10% leeway in estimating third-party charges, such as appraisal, survey, inspection and title services, says Peggy Lawlor, a mortgage-strategy executive with Bank of America .

The three states with the highest average closing costs are Texas ($3,046), Alaska ($2,897) and New York ($2,892), according to a 2014 Bankrate.com survey of lenders based on a hypothetical $200,000 mortgage. Nevada had the lowest average closing costs ($2,265), the Bankrate.com survey found. The final charges can be much steeper because some of the highest third-party costs, including taxes, weren’t included in the survey.

Differences vary not just by state but by individual localities, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage. New York City, neighboring Westchester County and the Hamptons on Long Island have some of the highest transfer taxes, also called conveyance taxes, in the country.

In San Francisco, transfer taxes are graduated with a rate of $3.40 for each $500 portion of a purchase price between $250,000 to $1 million, says Mathew Carson, a broker with San Francisco-based First Capital Group. The rate jumps to $3.75 for purchase prices from $1 million to $5 million. In nearby Oakland, home buyers pay a county tax of $1.10 and a city tax of $15 per $1,000 of the home’s purchase price.

Some geographic areas also have different expectations as to whether a buyer or seller pays certain fees. In New York City, a condo buyer will typically pay conveyance taxes, but sellers pick those up for co-op purchases, as well as for single-family homes in Westchester County, Mr. Grabel says.

Title insurance also can vary widely across the U.S.—and even by type of home, says John Walsh, president of Milford, Conn.-based Total Mortgage, which lends in 33 states.

In New York City, Westchester County or the Hamptons, a $1 million condo may cost a borrower $5,900 in title insurance and recording fees, but co-ops may have closing fees as low as $500 because they don’t require title or mortgage insurance, Mr. Grabel says.

The day of the month when the mortgage closes can also affect costs, Mr. Walsh says. “If you close on Nov. 5, you have to pay the per diem interest from the 5th to the 30th, but if you close on Nov. 28, it’s only three days,” he adds.

Borrowers can also reduce out-of-pocket expenditures by wrapping the closing costs into the loan, but lenders will charge a slightly higher interest rate, Ms. Lawlor says. When considering that option, borrowers should balance how much cash they can bring to the closing table versus how long they plan to stay in the home, she adds

More tips that may help lower closing costs:

  • Shop around. Apply with more than one lender to compare origination fees quoted in good-faith estimates, says Greg McBride, chief financial analyst for Bankrate.com. “Be prepared to comparison shop and to negotiate to get the best deal,” he says.
  • Relationship discounts. Lenders may offer lower origination fees for their customers, Ms. Lawlor says. For example, Bank of America just rolled out a “Preferred Rewards” program that offers up to $600 in reduced rates depending on the dollar amount of a customer’s deposits.
  • Closing attorney. Many borrowers stick with a lender-appointed attorney to represent them at the closing, but they are not required to do so and can hire their own, Ms. Lawlor says.
  • Title insurance. Some states dictate the rate that title insurance providers charge, but not all, Mr. McBride says.

Corrections & Amplifications

An a previous version of this article inaccurately paraphrased Mr. McBride’s comment to say that some states require a borrower to use a lender-selected title insurance provider, but not all states do.

“When people stopped trusting any institutions or having any values, they could easily be spun into a conspiratorial vision of the world…..At the core of this strategy is the idea that there is no such thing as objective truth. This notion allows the Kremlin to replace facts with disinformation…

…The aim was to distract people from the evidence, which pointed to the separatists (Malayasia Airlines Flight 17), and to muddy the water to a point where the audience simply gave up on the search for truth. Sadly, this mind-set resonates well in a post-Iraq and post-financial-crisis West increasingly skeptical about its own institutions, where reality-based discourse has already fractured into political partisanship.”, Peter Pomerantsev, “Russia’s Ideology: There is No Truth”, New York Times

“Chapter Eleven of Nobel Economic Laureate F.A. Hayek’s famous tomb “The Road to Serfdom” is entitled “The End of Truth”….he talks about this very issue:

“The most effective way of making everybody serve the single system of ends toward which the social plan is directed is to make everybody believe in those ends. To make a totalitarian system function efficiently, it is not enough that everybody should be forced to work for the same ends. It is essential that the people should come to regard them as their own ends. Although the beliefs must be chosen for the people and imposed upon them, they must become their beliefs, a generally accepted creed which makes the individuals as far as possible act spontaneously in the way the planner wants…..This is, of course, brought about by the various forms of propaganda (that is not true).”, F.A. Hayek

I don’t know about you, but in recent years, it seems to me that whether it’s the conclusions of the majority party report of the Financial Crisis Commission (which included no Republicans and their vociferous dissent) or the conclusions about the CIA program, in the recent majority report of the Senate Intelligence Committee (which again included no Republicans and their vociferous dissent), recent legal settlements like the DOJ/Bank of America one (where there was an appendix of “facts”, but the document itself said “no facts had been determined by a court”) or issues like Ferguson (where our government officials and the mainstream media couldn’t bring themselves to discuss the facts and the truth)…..I wonder, are we reaching our own level of “The End of Truth” in America? I worry. Facts and the truth matter to me and I hope most Americans, but it sure seems like facts and the truth matter less and less these days, doesn’t it? I voted for President Obama in 2008, but it sure seems to me that liberal and progressive politicians from his party (and administration) are the ones who have little regard for the facts and the truth, doesn’t it? (Hayek says politicians like this are planners and planning leads to totalitarianism. I think he said every time in history.)”, Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages

Russia’s Ideology: There Is No Truth

By PETER POMERANTSEV

Red Square, Moscow. Credit James Hill for The New York Times

LONDON — IMAGINE if you grew up lying. Not a little bit, for convenience, but during every public moment of your life: at school, at work, at social events. You had to lie to survive, because the punishment for telling the truth was the loss of your academic or professional career, or even prison. For Russians who came of age before 1991, this is the only way they know. The mature generation grew up with this behavior during the later years of the Soviet Union: reading Aleksandr Solzhenitsyn and listening to clandestine BBC reports in private while pretending to be good Communist Youth League or party members.

When I went to work as a TV producer in Moscow in the early 2000s, I would ask my peers which of the “selves” they grew up with was the “real” them. How did they locate the difference between truth and lies? “You just end up living in different realities,” they would tell me, “with multiple truths and different ‘yous.’ ”

When members of this generation came to power they created a society that was a feast of simulations, with fake elections, a fake free press, a fake free market and fake justice. They are led by religious Russian patriots who curse the decadent West while keeping their children and money in London and informed by television producers who make Putin-worshiping shows during the day, and listen to energetically anti-Putin radio shows the moment they get into their cars after work.

It’s almost as if you are encouraged to have one identity one moment and the opposite one the next. So you’re always split into little bits, and can never quite commit to changing things.

But there is comfort in these splits, too. That wasn’t you stealing from that budget, making that propaganda show or bending your knee to the president — just a role you were playing. All cultures split the public and private selves, but in Russia that split is often total.

The Kremlin’s goal is to control all narratives, so that politics becomes one great scripted reality show. The way it wields power illustrates and reinforces this psychology. Take Vladislav Y. Surkov, an adviser to President Vladimir V. Putin who is said to manage, among other things, the public image of the Russian-speaking separatist leaders in eastern Ukraine. He helped invent a new strain of authoritarianism based not on crushing opposition from above, but on climbing into different interest groups and manipulating them from the inside. On his desk in the Kremlin, Mr. Surkov had phones bearing the names of leaders of supposedly independent parties. Nationalist leaders like Vladimir V. Zhirinovsky would play the right-wing buffoon to make Mr. Putin look moderate by contrast.

With one hand Mr. Surkov supported human rights groups made up of former dissidents; with the other he organized pro-Kremlin youth groups like Nashi, which accused human rights leaders of being tools of the West. In a novel presumed to be written by Mr. Surkov, who is also an art-loving bohemian when not waging covert wars, he celebrates the triumphant cynicism of a post-Soviet generation that has seen through the illusions of belief in any values or ideology.

“Everything is P.R.,” my Moscow peers would tell me. This cynicism is useful to the state: When people stopped trusting any institutions or having any values, they could easily be spun into a conspiratorial vision of the world. Thus the paradox: the gullible cynic.

As the Kremlin plays the West, we see it extend the tactics it uses at home to foreign affairs. The Kremlin courts the West’s financial elites, including the German and American business lobbies that opposed new sanctions; backs anticapitalist shows like Abby Martin’s “Breaking the Set” on the broadcaster RT (formerly Russia Today); and encourages the European far right with money and support to parties such as France’s National Front. The Kremlin can’t hope to dominate the West as it does the domestic situation, but its aim is to sow division, to “disorganize” the enemy through an information war.

At the core of this strategy is the idea that there is no such thing as objective truth. This notion allows the Kremlin to replace facts with disinformation. We saw one example when Russian media spread a multitude of conspiracy theories about the downing of Malaysia Airlines Flight 17 over eastern Ukraine in July, from claiming that radar data showed Ukrainian jets had flown near the plane to suggesting that the plane was shot down by Ukrainians aiming at Mr. Putin’s presidential jet. The aim was to distract people from the evidence, which pointed to the separatists, and to muddy the water to a point where the audience simply gave up on the search for truth.

Sadly, this mind-set resonates well in a post-Iraq and post-financial-crisis West increasingly skeptical about its own institutions, where reality-based discourse has already fractured into political partisanship. Conspiracy theories are prevalent on cable networks and radio shows in the United States and among supporters of far-right parties in Europe. President Obama, responding to Russian aggression in Ukraine, pointed out that Russia is not the Soviet Union. “This is not another Cold War that we’re entering into,” he said. “Russia leads no bloc of nations, no global ideology.” But perhaps he was missing the point.

Peter Pomerantsev, a British television producer, is the author of “Nothing Is True and Everything Is Possible: The Surreal Heart of the New Russia.”

A version of this op-ed appears in print on December 12, 2014, on page A35 of the New York edition with the headline: Russia’s Ideology: There Is No Truth.

“I think its un-American: anti-free markets and fair competition, if you are in business and you lobby the government for any other reason than to ask them to please leave you and your industry (mostly) alone. Crony capitalism; businesses that are dependent on government favors (revenues, subsidies, guarantees, monopolies, regulation, etc.) is too rampant these days…

…Jeb Hensarling is right and my kind of principled politician.”, Mike Perry

Potomac Watch

K Street’s Biggest Opponent

Jeb Hensarling has been a lonely figure fighting earmarks, subsidies and tax preferences. It’s time more Republicans joined him.

House Financial Services Committee Chairman Jeb Hensarling (R., Texas). Carolyn Kaster/Associated Press

By Kimberley A. Strassel

Texas gave America the Lone Ranger, and then—because it is a generous sort of place—in 2002 it gave the country an updated version of him: Rep. Jeb Hensarling. The Republican has spent a decade riding herd on cronyists who give capitalism a bad name by giving or taking special government favors. With the coming dawn of a Republican Congress, we’re about to see if the rest of the GOP sees the wisdom of joining Mr. Hensarling’s posse.

Washington’s Lone Ranger was at it again this week in the fight over reauthorizing the Terrorism Risk Insurance Program, a “temporary” program created in 2002 that requires taxpayers to absorb the costs of insurance payouts after an attack. Mr. Hensarling earlier this year set his sights on the program and methodically elevated the subject of its industry payoffs into a Washington hot topic, causing one unnamed industry lobbyist in October to gripe about the reauthorization delay: “If Jeb Hensarling were not in Congress, a bill would have passed with enormous support.” The Texan didn’t get all the reforms he wanted in the reauthorization bill that did pass this week, but he got some. And he made his point.

The episode was classic Hensarling. The congressman stepped down from the House leadership after the 2012 election to become chairman of the House Financial Services Committee, where he could be at the center of restoring what he calls the “bedrock” GOP principle of “free enterprise.” From that perch, Mr. Hensarling has doggedly worked to dismantle crony government programs that reward the well-connected business elite. While his efforts have rarely resulted in total victory, they have created flash points and forced his fellow conservatives to publicly justify their mercantilist tendencies.

Take his longtime fight to eliminate Fannie Mae and Freddie Mac, the government-backed housing giants that were central to the 2008 crash. Mr. Hensarling has yet to get a House vote on his proposal, though this focus has helped put uncomfortable attention on those pushing only watered-down reform. Earlier this year, he led a battle against plans to roll back reforms to the federal flood-insurance program. The House passed that atrocity, but only after former Majority Leader Eric Cantor (to great outrage) did the insurance lobby’s bidding and bypassed Mr. Hensarling on the way to a vote.

This fall he provoked a debate over reauthorization of the Export-Import Bank, which exists to provide cheap financing for select industry players. The bank was set to die; all the GOP had to do was nothing. The House instead caved and threw Ex-Im reauthorization into a September funding bill, though Mr. Hensarling was able to limit its extension to June—when he intends to have that fight all over again.

Such fights in the next Congress will be even more worth watching. Corporate America invested heavily this midterm in getting a Republican Senate, in part because it wants nothing more than to get back to the good old Tom DeLay days of mutual GOP-Fortune 500 back scratching. The K-Street lobbyists are about to put enormous pressure on Republicans. Lobbyists will line up three deep outside the offices of John Boehner and Mitch McConnell, demanding that the leadership ignore Hensarling-style reforms.

Which gets to the other reason the Hensarling battle over free markets is about to matter more: All eyes are now on the GOP. Republicans are happy to criticize obvious (and Obama -backed) recipients of government largess: the Solyndras of the world. Yet few have been willing to shut down larger programs that pay off entire industries and send dollars back to their state businesses. This is why many voters see the GOP as the party of the “rich and powerful” and Democrats get traction with their populist catchphrases.

In a May speech to the Heritage Foundation, Mr. Hensarling noted that the world of earmarks, subsidies and tax preferences has caused “many to view success with suspicion. That in turn makes it easier for liberals to mislead with calls for bigger government to ensure ‘fairness.’ ” Conservatives, he said, have ceded that word to the left, when they should be talking about how “everyone must be bound by the same rules.”

This ought to be the Republican rejoinder to the Elizabeth Warrens of Congress, who like to complain that Washington is rigged on behalf of billionaires and giant companies. It absolutely is. But Democrats are the ones who are champions of big government, which exists to reward the politically connected, and to hide those rewards within legislation and backroom bureaucratic payoffs. The left isn’t concerned so much about government payoffs as it is about controlling who gets them. The GOP has a yawning opening to make this case, and position itself as the party that truly represents Main Street.

Yet to do that, they’ll have to rediscover some principles. A lot of Republicans have used the excuse of a bottlenecked Democratic Senate as a reason not to follow Mr. Hensarling in his rides to kill off the likes of Fannie, Ex-Im or TRIA. They have no such excuse now.

“It is beyond irresponsible to restart these affordable-housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac,” Sen. Bob Corker (R., Tenn.)

U.S. News

Fannie, Freddie to Begin Payments to Affordable Housing Funds

Fannie and Freddie Will Send 0.042% of Every Dollar in New Mortgage Purchases to the Funds

Federal Housing Finance Agency director Mel Watt, shown last year. Bloomberg News

By Joe Light

The regulator of Fannie Mae and Freddie Mac ordered the mortgage companies to begin giving potentially hundreds of millions of dollars a year to a pair of affordable-housing funds, pleasing low-income-housing advocates but sparking anger among groups that say they are worried about the risk to taxpayers.

The two funds, one administered by the Department of Housing and Urban Development and one by the Treasury Department, enable states and other bodies to get money to build low-income rental housing or to rehabilitate existing housing.

In letters to the chief executives of Fannie and Freddie on Thursday, Federal Housing Finance Agency director Mel Watt lifted a suspension of payments to the funds put into effect in 2008, when Fannie and Freddie teetered on the brink of collapse.

The companies returned to profitability in 2012 and Mr. Watt wrote in the letters that “circumstances have changed [since the suspension was implemented] and the temporary suspension is no longer justified.”

The decision is the latest move to use Fannie and Freddie to bolster housing affordability. On Monday, Fannie and Freddie unveiled details of new programs that will allow some borrowers to get mortgages with down payments of as little as 3%, rather than 5%.

Critics contend that decisions on down payments and on giving money to the funds could make Fannie and Freddie vulnerable in the event of another downturn. Proponents of the moves have said they will provide a much-needed boost to efforts to lower housing costs.

Fannie and Freddie will make a payment to the funds each year of 0.042% of the unpaid principal balance of their new mortgage purchases in the previous year. If not for the suspension, the companies together would have made a payment of about $500 million in 2014, based on 2013’s volume. After Mr. Watt’s decision, the first payment won’t be made until early 2016.

Rep. Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, said his panel would call Mr. Watt to testify after Congress reconvenes in January. He called the move a “lump of coal in the stocking of every American taxpayer.”

In the meantime, the decision is a victory for low-income-housing advocates, who have sought the funding for years.

The Fannie-Freddie funding mechanisms for the funds are of special value to low-income-housing advocates, since they don’t need consistent appropriations from Congress. The budgets of other sources of low-income-housing money, such as the Department of Housing and Urban Development, have come under pressure in recent years.

“We are thrilled,” said Sheila Crowley, president of the National Low Income Housing Coalition. “This is the first new money for housing production for extremely low income people” in years, said Ms. Crowley, whose organization estimates that there were more than 10 million renter households in 2012 with income generally below 30% of their area’s median.

Fannie and Freddie don’t make loans. They buy them from lenders, wrap them into securities and provide guarantees to make investors whole in case of default. The companies were put into a conservatorship by the government in 2008 and received almost $188 billion in bailout money. Since 2012, they have been required to send nearly all of their profits to the U.S. Treasury, and as of the end of 2014 will have paid more than $225 billion.

The provision for Fannie and Freddie to make payments to the funds was established as part of a broader bill meant to stem the housing crisis in 2008. But the payments were almost immediately suspended by then-FHFA Director James Lockhart as the companies’ losses mounted.

As the companies returned to profitability, the FHFA came under increased pressure to lift the suspension. The National Low Income Housing Coalition and others last year sued the FHFA to force it to reinstate payments. That lawsuit was thrown out in September by a federal district court judge who said that the plaintiffs didn’t have standing to bring the suit.

On the other hand, many Republican lawmakers have repeatedly asked Mr. Watt to leave the suspension in place, citing the taxpayer backing of the companies and continuing legislative efforts to overhaul them.

“It is beyond irresponsible to restart these affordable-housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac,” said Sen. Bob Corker (R., Tenn.) on Thursday. Mr. Corker had been one of the primary proponents of a bill to overhaul the housing-finance system that stalled in May.

“While the bureaucrats at the Justice Department and the Securities and Exchange Commission do not like this articulation of the law of insider trading, the courts’ interpretation of the law is sensible and sound public policy…

…The next logical step for the government is to sanction overly aggressive and sometimes politically motivated prosecutors and bureaucrats who continue to ignore the law. Twenty-five years of prosecutorial overreaching is more than enough…The government indicted Messrs. Chiasson and Newman, the appellate judges noted, despite a complete lack of “evidence that Newman and Chiasson knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures…Many times previously, federal courts including the Supreme Court have said that there must be fraud or deception for an insider to be guilty of insider trading. In addition, for a “tippee” who receives inside information to be guilty, the insider passing along the information must have received a “personal benefit” by offering the tip.”, Jonathan Macey, Professor, Yale Law School, “An Insider-Trading Watershed”, Wall Street Journal

Opinion

An Insider-Trading Watershed

An appeals court warns the government to stop twisting the law to suit its own notions of right and wrong.

By Jonathan Macey

A ruling on insider trading on Wednesday by the Second Circuit Court of Appeals in New York sheds light on the deep rift between federal prosecutors and the federal courts—including the Supreme Court—about the law. The three-judge panel overturned a signature victory of federal prosecutors, the 2012 guilty verdicts of two hedge-fund traders, Anthony Chiasson and Todd Newman. The Court of Appeals ruling is itself a signature victory of another kind.

The government’s theory is that trading in stock or other financial assets is a crime if somebody trades while in possession of any sort of informational advantage over other traders. But, as the Court of Appeals points out in its decision, “although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.”

Under U.S. law, research analysts, even those who establish networks of contacts within companies to supply them with information, deserve to be rewarded for that work, unless their activities cross the line into fraud and corruption. A trader crosses the line between what is legal and what is not when he trades on the basis of information that he knows was obtained by fraud such as bribing a corrupt insider or lying or deceiving a company into divulging information that it wants to keep secret.

Many times previously, federal courts including the Supreme Court have said that there must be fraud or deception for an insider to be guilty of insider trading. In addition, for a “tippee” who receives inside information to be guilty, the insider passing along the information must have received a “personal benefit” by offering the tip.

While the bureaucrats at the Justice Department and the Securities and Exchange Commission do not like this articulation of the law of insider trading, the courts’ interpretation of the law is sensible and sound public policy. The government indicted Messrs. Chiasson and Newman, the appellate judges noted, despite a complete lack of “evidence that Newman and Chiasson knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures, or even that Newman and Chiasson consciously avoided learning of these facts.”

The record in the case was that the two defendants knew that analysts were talking to people who were talking to people who worked at Dell and Nvidia , the companies whose shares they traded. The prosecutors ignored Supreme Court precedents, such as Dirks v. SEC(1983), explicitly stating that disclosures of confidential corporate information can be consistent with the duties of insiders to shareholders, and that analysts who work to ferret out information about companies serve important social goals including identifying fraud and mismanagement, permitting enhanced monitoring of management, and improving the accuracy of share prices.

Hedge Fund Level Global Investors LP co-founder Anthony Chiasson in May. Reuters

As the Court of Appeals observed, investors such as hedge funds use “legitimate financial modeling” to estimate corporate performance. These analysts “routinely solicited information from companies in order to check” the validity of the assumption in their models. The record showed that Dell and Nvidia, like other public companies, “selectively disclosed confidential quarterly financial information” to “establish relationships with financial firms” that might invest in those companies.

The SEC and prosecutor Preet Bharara, the U.S. attorney for the Southern District of New York, who has a reputation for suing hedge-fund managers, nevertheless prefer that the law exalt vague conceptions of “fairness” above the more concrete goals of having robust, liquid and efficient securities markets.

The new opinion is a game-changer. It signals to prosecutors that they cannot bring flawed cases and then hide behind the excuse that the law is vague. The Court of Appeals admonished that “the Supreme Court was quite clear” in previous cases about what is required to establish illegal insider trading.

Specifically, the Supreme Court and the lower federal courts have been explicit in saying that trading on an informational advantage is not necessarily illegal. To be illegal, the courts have said, trading by insiders must involve breaching a duty of trust and confidence. Courts have been clear, as the Supreme Court noted in Chiarella v. U.S. (1980) and again in U.S. v. O’Hagan (1997), that there is no “general duty between all participants in market transactions to forgo actions based on material, nonpublic information” because it is possible to acquire such information legitimately.

Tellingly, the Court of Appeals pointed out “the doctrinal novelty” of the government’s “recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.”

The next logical step for the government is to sanction overly aggressive and sometimes politically motivated prosecutors and bureaucrats who continue to ignore the law. Twenty-five years of prosecutorial overreaching is more than enough.

Mr. Macey is a law professor at Yale Law School.

“I think about my father. He had a fifth-grade education. A great believer in our country. He wouldn’t recognize it today. The loss of freedom that we have imposed by the arrogance of an all too powerful central government, ignoring the wisdom and writing of Founders…

…that said: Above all, we must protect the liberty of the individual, and recognize that liberty is given as a God-given right.”, from Sen. Tom Coburn’s farewell Senate Address, Wall Street Journal

Notable & Quotable

Notable & Quotable: Tom Coburn

‘Freedom gains us more than anything we can plan up here.’

From a Dec. 11 farewell address on the Senate floor by Sen. Tom Coburn (R., Okla.), who is retiring two years before his term expires:

I think about my father. He had a fifth-grade education. A great believer in our country. He wouldn’t recognize it today. The loss of freedom that we have imposed by the arrogance of an all too powerful central government, ignoring the wisdom and writing of Founders that said: Above all, we must protect the liberty of the individual, and recognize that liberty is given as a God-given right. So my criticism isn’t directed personally. It’s because I purely believe that freedom gains us more than anything we can plan up here. And I know not everybody agrees with me, but the one thing I do know is that our Founders agreed with me. They’d studied this process before. They knew what happens when you dominate from a central government.

“While Buffett notes he “knew nothing about operating a farm,” he enlisted the help of a son — who was an avid farmer himself – and the two estimated the return on the investment would be 10% annually…

He joined two other friends to buy the property following the collapse of the commercial real estate bubble and once again estimated he could earn about 10% each year…. First, Buffett says, “You don’t need to be an expert in order to achieve satisfactory investment returns,”…. He adds that when an investment decision is made, it’s always critical to evaluate “future productivity” to determine if it’s a worthwhile investment. If an investor is unable to gauge a “rough estimate” of what the future return of the investment is, Buffett says the best step is to simply “forget it and move on.””, Patrick Morris, “Warren Buffet’s Brand-New Advice on How to Get Rich”, The Motley Fool

“I am building a software application to help prospective homeowners answer the following question: “If I buy this home, with this mortgage, am I likely to earn a solid return on my investment?” Why? Because it’s the most important question a prospective homeowner needs to ask and have answered and yet their Realtor, mortgage lender, and appraiser provide no advice to help them answer it. You can see from the above that Warren Buffett also believes it’s the key to investing….whether in real estate, stocks, bonds, or other investments.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Warren Buffett’s Brand-New Advice on How to Get Rich

By Patrick Morris
February 25, 2014 | Comments (21)

Two small investments Warren Buffett made more than two decades ago can teach us all something about how we should view our money.

Each year, investors anxiously await the annual report from Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , which contains a letter from Warren Buffett that contains indispensable insight into the decisions he’s made both over the last year and his entire life.

While his letter for 2013 has yet to be released in its entirety, Fortune Magazine recently obtained an excerpt where Buffett outlines how two small real estate investments he made more than 20 years ago forever shaped his view on investing, but can prepare everyone for a future of success.

Source: Richard Hurd on Flickr.

The investments
Buffett describes his purchase of a 400-acre farm 50 miles north of Omaha, Neb., in 1986. Just a few years prior, farmland in Nebraska and the entire Midwest was booming, but a bursting of the bubble caused prices to decline rapidly. Buffett was able to buy the land for $280,000, which was “considerably less” than what a failed bank valued it a few years earlier.

While Buffett notes he “knew nothing about operating a farm,” he enlisted the help of a son — who was an avid farmer himself — and the two estimated the return on the investment would be 10% annually.

He then describes the purchase of a “small investment” — the price wasn’t mentioned — of a retail property in New York City that was next to New York University in 1993. He joined two other friends to buy the property following the collapse of the commercial real estate bubble and once again estimated he could earn about 10% each year.

Source: Insider Monkey.

As typical with Buffett, he is somewhat muted on what he has actually made from the initial investments, but notes, “The farm has tripled its earnings and is worth five times or more what I paid,” and he now receives 35% of his initial investment in the real estate property annual in the form of distributions.

Although the investments were small — Berkshire Hathaway had a book value of more than $2 billion in 1986 and almost $9 billion in 1993 — and he has never seen the property in New York and the farmland only twice, Buffett notes that “the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.”

The lessons
First, Buffett says, “You don’t need to be an expert in order to achieve satisfactory investment returns,” and a recognition of personal limits while ensuring things are kept simple navigating along a “course certain to work reasonably well” is critical.

He adds that when an investment decision is made, it’s always critical to evaluate “future productivity” to determine if it’s a worthwhile investment. If an investor is unable to gauge a “rough estimate” of what the future return of the investment is, Buffett says the best step is to simply “forget it and move on.”

Source: Coca-Cola.

Buffett continues by highlighting that he focuses on productivity, not price, which is a critical distinction. Often investors are lulled into thinking it’s only the price that matters, but prices are merely speculations of a value, whereas the productivity of a business is where the actual value is created.

The final lesson Buffett extols from these two small investments is that he didn’t consider the broader macroeconomic or market predictions from others because those “may blur your vision of the facts that are truly important.”

Next, he says speculation surrounding future price and daily prices are superfluous when making a decision. Again, he harps on the truth that he “thought only of what the properties would produce and cared not at all about their daily valuations.”

Changing your life
In all five points, Buffett highlights things that can be taught to all investors, both those in real estate and those preparing for retirement through the stock market.

Investments are to be made in businesses that generate returns to their investors, not simply the names and numbers of stock tickers.

While it is easy to be swayed by daily trends, long-term investments at reasonable prices are always a winning formula. And if that sounds too daunting or difficult, Buffett says a very low-cost index fund is a wonderful solution.

Buffett concludes by reminding readers of his oft-repeated but immensely valuable advice he learned from his professor and mentor Ben Graham: “Price is what you pay; value is what you get,” which is something everyone must remember when making any investment.

More wisdom from Warren
While its value is seemingly infinite, the price of Warren Buffett’s wisdom is thankfully free. He is one of the greatest investors ever and through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway worth billions. If you want more from Buffett, now you can tap into the best of his wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

“Some studies have shown that moving from a 5% down payment to a 3% down payment doesn’t result in many more defaults. About 0.4% of borrowers in 2011 who made down payments of 3% to 5% on loans backed by Fannie Mae have defaulted – no more than borrowers who made down payments of 5% to 10%, according to the Urban Institute.”, Wall Street Journal

“This is too short a period of time to be statistically valid and also a period of time in which housing prices were mostly rising (and significantly). That said, I agree there is really not much difference between putting 3% down and 5% down. But making this point is like saying, “there isn’t much difference in health risk from smoking four packs a day or six packs!!!!”  Look, any down payment below 20% is risky and down payments below 10% are very risky. This goes to our federal/national housing policies. Maybe we want Americans to take this risk on, given the upsides of homeownership for individual wealth building and the economy? However, I think these low-down-payment government mortgages are just too big a risk unless there is an expectation that home prices are likely to rise (and not fall) in the first 3 to 5 years of homeownership. Also, I think it’s important for low-down payment borrowers to genuinely be first-time home buyers, who are relatively young and near the beginning of their work-life, because their incomes are more likely to rise over the years (making the mortgage payment easier to handle over time). Unbelievably, these two very important issues are NOT even addressed in lending guidelines and underwriting practices.  If it’s not the case, then let’s call a spade a spade; this relatively risky U.S. housing/mortgage finance policy is designed to support the industry and economic activity, not individual American homeowners. As part of a new business idea I am working on, I have studied the last 22/23 years of home price data from the U.S. government (FHFA data). Nationwide, there were five years (22% of the time) of home price depreciation averaging a negative 4% a year; -8.4% in the worst year. In my L.A. MSA, there were 10 years (46% of the time) of home price depreciation averaging a negative 7.1% per year; -25.3% in the worst year. Is it really prudent for Fannie Mae and other government sponsored entities to be encouraging homeowners to buy homes in say L.A., with just 3% down (and a mortgage), if they don’t think it’s highly likely housing prices are going to be rising, rather than falling? Regarding the new 3% down payment (and 620 FICO score!) program, when FHFA Director Mel Watts says that “these underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices”; with all due respect, I think he is another liberal politician who really does not have the experience or expertise to make that statement or these judgments (or even be in charge of FHFA) and after the taxpayers bailed out Fannie and Freddie to the tune of $180-something billion (they are still in government conservatorship!), why would he and his agency alone (which supervised Fannie and Freddie pre-crisis and made incorrect public assurances of their soundness) be able to make this important decision and not Congress? Finally, could it be any clearer that it is our own well-intended government that always leads the private lenders down the path of lower mortgage lending standards and increased risk? (Happily I admit, because they can’t help themselves. Loan volumes equals profits, until housing prices decline. There was an excuse pre-crisis, because the Fed’s Greenspan assured us all this was likely to never happen nationwide, without a Great Depression. And then it did. There is no excuse for private lenders to delude themselves of this real risk today.)”, Mike Perry, former Chairman and CEO, IndyMac Bank

“We should have learned from past experience that this is incredibly dangerous,” said Anthony Sanders, a finance professor at George Mason University. “Down payment matters, big time, and we’ve always known this.”, Wall Street Journal

“Mark A. Calabria, an economist at the libertarian Cato Institute, was not as sanguine about the financial stability of the targeted borrowers. Given closing costs, he said, “You’re essentially underwater when you walk away from the table.”“That is not a situation we should be trying to get people in,” he said., New York Times

Markets

Fannie, Freddie and FHFA Detail Low Down-Payment Mortgage Programs

Borrowers Could Get Mortgages With Down Payments as Little as 3%

Programs would offer home mortgages with as little as 3% down. Bloomberg News

Programs would offer home mortgages with as little as 3% down.

By Joe Light

Mortgage-finance companies Fannie Mae and Freddie Mac on Monday provided details of new low-down-payment mortgage programs that could reduce costs for first-time and lower-income home buyers, providing a boost to a segment largely absent from the housing market for the last few years.

The mortgage-finance companies and their regulator, the Federal Housing Finance Agency, said the companies would start to back mortgages with down payments of as little as 3%, and that the loans would be available to first-time home buyers, borrowers who haven’t owned a home for at least a few years and to those who have lower incomes.

“When we survey consumers, they say the biggest obstacle to home ownership is saving for the down payment. That’s particularly true for young people,” said Jed Kolko, chief economist for the residential real-estate website Trulia Inc.

The new loans could be most popular among high-credit-score borrowers who might have otherwise had to resort to pricey mortgages backed by the Federal Housing Administration.

The programs also could fuel critics who say the low down payments hark back to the loose lending standards of the housing boom.

Borrowers who get loans guaranteed under the new programs would have to meet criteria that offset the increased risk, such as high reserves or lower debt-to-income ratios, said officials at Fannie, Freddie and the FHFA.

“This will be particularly helpful to those who are strapped by wealth rather than credit challenges,” said Jim Parrott, a senior fellow at the Urban Institute and a former housing-policy adviser in the Obama administration.

Both companies said the programs could be available to borrowers with credit scores of as low as 620, which is the current Fannie and Freddie minimum for other loans.

In a statement, FHFA Director Mel Watt said that the guidelines “provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”

Fannie and Freddie don’t make loans. They buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.

Fannie and Freddie already guarantee loans with down payments of as little as 5%, and those loans, as with those under the new programs, require borrowers to buy private mortgage insurance. Many of the loans also will require consumers to get home-buyer counseling before making a purchase.

Mr. Watt first announced that Fannie and Freddie would guarantee 3% down payment loans in October, though he didn’t provide details of who would be eligible.

The new details reveal that the programs will be more limited than some might have hoped, but still could open the market to borrowers who couldn’t afford to make a 5% down payment or to pay the hefty premiums charged by the FHA.

Critics have expressed concern that mortgages with low down payments could expose borrowers, Fannie and Freddie to some of the risks that precipitated the financial crisis. If prices drop, homeowners with a small amount of equity in their residences quickly could owe more than their residences are worth.

“We should have learned from past experience that this is incredibly dangerous,” said Anthony Sanders, a finance professor at George Mason University. “Down payment matters, big time, and we’ve always known this.”

Some studies have shown that moving from a 5% down payment to a 3% down payment doesn’t result in many more defaults. About 0.4% of borrowers in 2011 who made down payments of 3% to 5% on loans backed by Fannie Mae have defaulted—no more than borrowers who made down payments of 5% to 10%, according to the Urban Institute.

Fannie and Freddie’s low down-payment programs will have slightly different requirements. Fannie’s program will be limited to borrowers who haven’t owned a home in the past three years. Freddie’s program generally will be available to borrowers who don’t make more than the median income in their area.

Fannie’s program will go into effect almost immediately, while Freddie’s won’t be available until March.

Lenders generally take a while to adapt to new guidelines, so an FHFA official said they don’t expect the new low-down-payment mortgages to be widely available until the end of the first quarter of next year.

Mr. Watt first announced the new program in October, along with other changes that some banks say will make it easier for them to make loans.

The programs were lauded among some lenders and analysts who have said that mortgage availability has been too limited in the last couple of years.

It isn’t yet clear how popular the new down payment programs will be. Borrowers already can get mortgages with down payments of as little as 3.5% through the FHA, though the costs of such loans have increased markedly during the last few years.

John Councilman, president of the Association of Mortgage Professionals,said the new programs’ uptake will depend on how cheap they end up being relative to the FHA.

He said that the Fannie and Freddie-backed loans could be most popular among borrowers with relatively high credit scores. “I’d assume that this would skim off the cream of the crop,” he said.

Fannie and Freddie officials said they expect the low-down-payment loans they guarantee to be less costly than FHA loans for borrowers with higher credit scores. An FHFA official said they expected the new loans to be a small part of the companies’ business.

“We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers,” said Fannie Mae executive Andrew Bon Salle in a statement.

___________________________________________________________________________________________

Business Day

U.S. Lowers One Hurdle to Obtaining a Mortgage

By PATRICIA COHEN

Hoping to lure more first-time home buyers into the housing market, the government on Monday detailed its plan to offer mortgages with a down payment of as little as 3 percent of the purchase price.

The proposal, first announced in October, aims to make mortgages more widely available to people who have a strong credit history but lack the ready cash for the standard 20 percent down payment.

Some critics warned about the risk of repeating the subprime mortgage fiasco and opening the door to higher defaults among home buyers lacking any substantive equity cushion in case of another downturn in the market. But federal housing officials and other experts challenged these concerns, saying the new programs include a range of safeguards, including underwriting restrictions, a requirement to buy private mortgage insurance and counseling to reduce the risk of defaults.

“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Melvin L. Watt, the director of the Federal Housing Finance Agency, said in a statement.

Melvin Watt, head of the Federal Housing Finance Agency, said on Monday that he wanted to lure more first-time home buyers. Credit Isaac Brekken for The New York Times

Mr. Watt’s agency regulates Fannie Mae and Freddie Mac, the two large government-backed entities that guarantee mortgages and will be offering the new mortgage programs. While both Fannie and Freddie will require the loans to be fixed rate and to cover the borrower’s primary residence, some features differ.

Fannie Mae’s new My Community Mortgage program begins this week and is open only to first-time buyers with a minimum credit score of 620. Borrowers with Fannie-backed mortgages will be eligible to refinance with a limited amount of money that can be taken out.

Freddie Mac’s new Home Possible Advantage mortgages, which begin in March, will be available to both first-time and other qualified borrowers. In most cases, credit scores will be just one of several factors in determining a home buyer’s eligibility, a spokesman said. Refinancing, though with no cash-out, also will be available.

The programs are the latest efforts to promote homeownership after the collapse of the housing bubble, in hopes of reviving a housing industry that is still plagued by excessive foreclosures and struggling to overcome millions of owners still trapped in underwater mortgages.

Today, first-time home buyers — who are generally younger — account for just 29 percent of home sales, far below the historical rate of 40 percent, according to the National Association of Realtors. In the third quarter of this year, the Census Bureau reported recently, the nation’s seasonally adjusted homeownership rate was 64.3 percent, the lowest level in two decades.

The government’s move was applauded by the mortgage insurance industry, which expects a business increase from the new programs, and advocates for low-income families.

“We wouldn’t be putting borrowers in these loans if we were worried about their performance through stressful times,” said Rohit Gupta, chief executive of Genworth’s United States Mortgage Insurance Business and co-chairman of the U.S. Mortgage Insurers, a trade association.

The Urban Institute, a nonprofit research organization that generally supports social programs, concluded: “Those who have criticized low-down-payment lending as excessively risky should know that if the past is a guide, only a narrow group of borrowers will receive these loans, and the overall impact on default rates is likely to be negligible.”

Housing officials declined to estimate just how many people might take advantage of these new loans, but even supporters question the magnitude of the new programs.

Guy D. Cecala, chief executive and publisher of the newsletter Inside Mortgage Finance, estimated the effect would be modest, noting that first-time buyers who qualified for similar low down payment loans accounted for only 3 percent of Fannie-backed mortgages in 2013.

“It’s another tool in helping the housing market, but not a huge one,” Mr. Cecala said.

Since the borrowers must still be credit worthy, he explained, “this is not pushing the envelope.”

Diane Swonk, chief economist at Mesirow Financial in Chicago, also expressed doubt that this latest initiative would lure many new buyers, saying that the lack of demand and tight mortgage standards have been bigger hurdles than the size of the down payment.

Mark A. Calabria, an economist at the libertarian Cato Institute, was not as sanguine about the financial stability of the targeted borrowers. Given closing costs, he said, “You’re essentially underwater when you walk away from the table.”

“That is not a situation we should be trying to get people in,” he said.

To Andres Carbacho-Burgos, a senior economist at Moody’s Analytics, however, the danger of mortgage defaults generally comes from lax monitoring, not lower down payment requirements.

While sharing the view that the effect would be limited, Mr. Carbacho-Burgos said the program was nonetheless worth pursuing. “Anything that can be done to restart the first-time home buyer market is a good thing,” he said.

A version of this article appears in print on December 9, 2014, on page B1 of the New York edition with the headline: U.S. Lowers One Hurdle to Obtaining a Mortgage