I now work for the Sol Price School of Public Policy as well as the Marshall School of Business at USC

The Price Family gave a $50 million gift for the USC School of Policy, Planning and Development to be remained the USC Sol Price School of Public Policy.  Mr Price was an alum of USC, as is his grandson.

Mr. Price was the force behind Price Club, which later merged with Costco.  He was known for paying his workers well, treating his customers well, and not overpaying his executives.  He was ahead of his time with respect to racial integration and urban renewal.  Sometimes I feel an internal tension, because I admire both success in business and care a lot about social justice.  If all successful people in business were like Mr. Price, I would feel no such tension.  His obituary in the San Diego Jewish World contained the following:

“Most of life is luck,” he said in an 1985 newspaper interview. “Obviously you have to have the will and intensity, and in my case discipline and idealism had a lot to do with it. But if you move back a step, even that is luck."

I can't think of a better way to look at life.  And whether you need mustard or Johnny Walker Black, there is no better place to go than Costco.  I am proud to now work at a school named for him.

Why I think Raphael Bostic is more likely right about FHA than Joe Gyourko/AEI/WSJ

A healthy debate has taken place between HUD Assistant Secretary Raphael Bostic and Wharton Professor Joe Gyourko on the financial future of FHA.  While FHA is thinly capitalized, Raphael argues that will likely survive, while Joe thinks a large taxpayer finance bailout is looming.  In the interest of full disclosure, I should note that Raphael is a colleague of mine at USC, but Joe invited me to be a visiting faculty member at Wharton for a semester.  I think highly of them and am grateful to them both.

I have two reasons to bet on Raphael's view:

(1)  At the time the dumbest mortgage business was being done, FHA was out of the picture.  While FHA's market share is typically in the neighborhood of 12-15 percent, during the period 2003-2007, its market share ranged from 3.77 to 9.66 percent.    FHA did not lower its underwriting standards to that of the shadow banking sector (a sector that was not subject to the Community Reinvestment Act, by the way) in order to keep market share--the government insurance program was far more disciplined than the private sector.

FHA's market share increased dramatically in 2009 and 2010, in large part because the private sector abandoned the low downpayment market.  In 2010 in particular, FHA gained market share despite raising its prices and tightening its underwriting.    FHA was also ramping up its market share after house prices collapsed.  While house prices have not been robustly rising since late 2008, they have not been falling precipitously either.  One could argue that the private sector has been backward looking, while the public sector has been more forward looking.

(2) The second reason I have is more speculative, and is something that I am currently in the middle of researching, but I want to put it out there as a hypothesis (and a hunch).  I suspect that there is such a thing as "burn-out" in default--if a household goes through a difficult time without defaulting, it becomes decreasingly likely to default.  Part of the reason for this is amortization, but that is a small reason.  More important, people who refuse to default even when their measured characteristics suggest that they should have revealed that they are "different," and in a manner that is unobservable.  

Now again, in the interest of full disclosure, I should note that I did not forecast the size of GSE losses, so maybe I shouldn't be taken that seriously.  But I think my first argument will stand up, and as I do more research, I will know more about the second.

Does slowing people down slow down the economy?

As my family and I were traveling back to LA from my parents' place in Arizona this weekend, we had to stop at three checkpoints.  Each stop delayed us--I would guess the average delay was 5-10 minutes.  One check point bragged that it had arrested around 100 people--about 70 for immigration violations and 30 for crimes--over the course of 2011.

According to this web site, one of the highways I travelled on carries 10,000 cars per day.  Let's say the average stop takes five minutes, the average car has 1.3 people in it, and the value of people's time averages $15 per hour.  This means that each arrest costs a little under $60,000; perhaps there is a deterrent effect as well.  Is this worth it?  I really don't know.

But I can't help but notice that over the last ten years, the US, as a matter of security policy, has really gummed up the ability of people to get easily from one place to another. Is it a coincidence that the economy has underperformed over this time?  Perhaps.  I can't think of a way to run a regression to test the relationship between ease of travel and economic performance--but that doesn't mean that someone else can't.

Remembering the date

In the long history of the world, only a few generations have been granted the role of defending freedom in its hour of maximum danger. I do not shrink from this responsibility—I welcome it. I do not believe that any of us would exchange places with any other people or any other generation. The energy, the faith, the devotion which we bring to this endeavor will light our country and all who serve it—and the glow from that fire can truly light the world.

More four year degrees won't solve the current problem

David Brooks and Thomas Friedman have recently taken to arguing that the solution to our income distribution woes is to encourage and enable more people to go to college.  I want to leave aside for a second the fact that our educational problems are much deeper than that--that our high school graduation rate is declining is to me the most alarming education statistic.

Rather, it is worth looking at what has happened to earnings by educational attainment over the past eight years.  The census has put out data for 2002-2010, and here is what it (Table A-6) shows:

Median earnings for men with a high school degree fell 12.1 percent between 2002-2010; earnings for women with a high school diploma fell 8.5 percent between 2002-2010; for men with college degrees, it was a fall of 8.0 percent; for women with college degrees it was flat.  So yes, education is increasing income inequality in that those with college degrees are losing less than those with high school diplomas.

I am the sort of person who would be fine with a GINI of .5 (a number the reflects lots of inequality) if it meant that the people who are materially worst off can live at a decent standard of living.  But currently, those who play by the rules (and I mean really play by the rules) are seeing their living standards erode.  Homilies about sending more people to college are at the moment pretty much beside the point.

Raphael Bostic takes on Joe Gyourko

The Assistant Secretary of PDR (and USC colleague) writes:

This week, HUD released its annual report to Congress on the financial status of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund.  The report demonstrates the long-term strength of the Fund while not shying away from the challenges it faces in the near-term due to ongoing stresses in the housing market.  While the independent actuary reports older books of business underwritten during the bubble years of 2000-2008 are expected to produce losses of more than $26 billion, it also finds that FHA has a very strong platform going forward, with insurance on loans booked since January 2009 posting an estimated net economic value of $18 billion. Indeed, the actuary reports that the Fund still retains positive capital, and that it should be able to rebuild capital to the statutory requirement of two percent of insurance-in-force very quickly once housing markets across the county exhibit sustained growth.

Notwithstanding findings of the independent actuary that the FHA MMI Fund retains positive capital four years into the worst housing crisis since the Great Depression, a report commissioned by the American Enterprise Institute (AEI) suggests that FHA both lacks an actuarially sound program and is in current need of a significant capital infusion. 

Read the whole thing. It has actually stunned me how well FHA says done relative to AEI's paragon of virtue, the private market.  Of course, it was the private labels security market that drove down FHA's market share during the worst of the lending market. FHA loans actually always required underwriting; underwriting in the private sector often disappeared.

Read CRL on Disparities in Mortgage Lending

The Center for Responsible Lending's research team of Carolina Reid (who has been working tirelessly at developing data on subprime mortgages for some time now), Roberto Quercia, We Li and Debbie Grunstein Bocian has produced Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. They argue

1) The nation is not even halfway through the foreclosure
crisis. Among mortgages made between
2004 and 2008, 6.4 percent have
ended in foreclosure, and an additional 8.3 percent are
at immediate, serious risk.

(2) Foreclosure patterns are strongly
linked with patterns of risky
lending.
The foreclosure rates are consistently
worse for borrowers who received high-risk loan products
that were aggressively marketed
before the housing crash, such as
loans with prepayment penalties,
hybrid adjustable-rate mortgages
(ARMs), and option
ARMs.
Foreclosure rates are highest in
neighborhoods where these
loanswere concentrated.

(3)The majority of people affected
by foreclosures have been
white families. However, borrowers of
color are more than twice as
likely to lose their home as
white households. These higher
rates reflect the fact that African
Americans and Latinos were
consistently more likely to receive
high-risk loan products, even
after accounting for income and
credit status.

It is really striking how African-Americans and Hispanics were steered into crappy loans, even controlling for income and credit history. Beyond all this, the web site accompanying the report has really nicely organized data on severely delinquent loans and loans in foreclosure by state, race, ethnicity and MSA.