Roy Ho’s Blog

Senate Banking Cmt: Mortgage Bill on Thursday

Senate Banking Committee Chairman Chris Dodd (D-Conn.) yesterday said that his panel on Thursday will consider a draft housing bill that would allow the Federal Housing Administration to insure up to $300 billion in refinanced mortgages, and create a new regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Under the legislation, lenders would, among other things, volunteer to substantially reduce the amount of the original mortgage note. In exchange, the FHA would insure a new loan at a 30-year fixed rate that the borrower could afford. The House last week passed a housing package with some similar measures.

This is not the version of Treasury Secretary Henry Paulson. 

This plan is more consumer-centric than that of Henry Paulson, although improvements can still be made.  For instance, the mortgage write-down has to be initiated by the lender in this version.  For that reason, the lenders have the strongest incentive to unload the riskiest mortgages first.  However, the riskiest mortgages may not be the neediest. 

This riskiness may be perceived as loan by asset.  The lender may also see that as mortgage payment by burrower’s income.  However, the most desperate burrowers usually would see the need as payment by income.

Burrower’s consent is not needed.  The house has to be owner occupied.  The gov’t will also own part of the house’s equity (proceed upon sale).

Bush has threatened veto this legislation.

 

The text can be found in the Banking panel of the Senate website.

May 13, 2008 Posted by royho | Current Events, Investment, Money, Regulation, banking, business, economics, law, legislation, market, politics, wordpress-political-blogs | | 1 Comment

The common interests of Microsoft, Pharmaceuticals and Rumsfeld

Forbes published a few articles related to patent laws that are English friendly in the last 10 weeks.  The patent universe is likely to change very soon.  And Rumsfeld probably would not like this idea. 

 

The legislature has been considering patent laws reforms for the past few years.  The pressure of this reform comes from major corporations, which hold a lot of patents, have been getting sued by patent trolls, or patent speculators, for royalty fees.  Additional royalty fees of course cuts into the profit margin.  However, intellectual property suits are costly to fight simply they are so difficult to understand (and thus higher legal fees).  

 

For some industries, intellectual property (IP) lawsuits affect the legal fees and royalty fees.  However, for some industries, these lawsuits affect their capitalization the suit hits the news.  These are the IP-centric industries, such as IT and medical industries.  

 

When RIM, the maker of blackberry, got sued for patent infringement, its stock price dropped to its knees.  After all, RIM has nothing but blackberry.  And even if RIM’s patent is not void, a heavy royalty fees will seriously affect its profit.  

 

A key element of the reform is revolved around unique concept of American patent system: first to invent versus first to file.  The congress will remove the first to invent rule and make US to be in sync with the rest of world: first to file.  In the first to file rule, one needs not be an inventor, but just to be the first to walk into the patent office to own all rights of the invention.  

 

The first one to be disadvantaged is obviously the legal industry.  However, not many people will feel sorry for that.  And we will skip.

 

A loss to one may be a gain to another.  Here are some of those:

 

The second to be affected (not necessarily disadvantaged) are the medical and IT industries.  A lot of drug patents are expiring, just like the copy rights of a lot of Disney characters.  For these US giant pharmaceuticals to stay afloat, they need new patents.  They either have to invent or find other people’s invention to file before the inventor does.  So, the firms that are better industrial espionage will do better.  

 

Some items are affecting directly the rights of the inventor: 1) Damages will be restricted as well, a classic republican cause; 2) Challenges will be for the entire life span of the patent rather than a probation period; 3) Disclosure of invention will be required prior to granting the patent. 

 

Who gets the benefit out of this?  Infringers.  Infringers will be able to have a cap on the compensation to the patent owners, able to challenge the patent until the patent runs out (yes, they can), able to learn the invention before it is patented and therefore free from paying royalties fees, and no injections from the inventor to stop the infringements. 

 

Alright, how does it relate to Rumsfeld? 

 

As a defense hawk, Rumesfeld is interested at slowing the China’s economic growth.  Making it cheaper for patent violation is a big favour for the medium enterprises in China.  Inventors lobby groups probably would want to get more funding from pharmaceuticals and hire Rumsfeld to be the lobbyist for a cause that its core constituents probably does not have the funding nor the votes for.

May 2, 2008 Posted by royho | China, Current Events, Investment, Money, Regulation, business, economics, law, legislation, politics, wordpress-political-blogs, 中國 | | No Comments

What Can Non-Profits Do For Climate Change?

Bush announced his goals on climate change.  Sierra Club already says Bush’s plan will require a miracle to save our planet.  Even McCain’s ideas are more agressive than Bush’s.  Very little is said about climate change in yesterday’s Pennsylvania presidential debate between Clinton and Obama.  Why is Bush anouncing something so useless and so late?   Is it part of his last minute legacy plan?  How does it relate to my non-profit organization when it is not an advocate of climate change?

This is his stall tactics. 

Getting a bill passed requires a process in the congress and senate.  It goes through committee, agenda arrangement, scope definition, text proof reading among members and aides, negotiation among members, parties and administration.  By providing something (anything), it takes off some of this momentum to his goals. 

Bush realizes that something will get passed in the next administration.  But providing something so vague, he can drag the bargain wide open for the next round of lobbying and thus provide a possibility of pushing a resolution less aggressive than it otherwise would be. 

In other words, he is not aiming for any kind of success.  He is aiming for a pay back to his constituence.  He is not even aiming for a legacy.

However, one point is worth noting: if Bush recognizes the need to address this issue, it will be difficult for anyone in the future to deny climate change.  The remaining question will be what and how: what should be done and how to get it done.

A lot of attention will be focused on what the emission will be.  However, the how question will affect more people in a wider range than media will be able to focus on.  Advocacy groups/nonprofit organizations representing interests not directly affected by the emission will have to pay attention on the how question.  Unfortunately, since media do not focus on the how part, advocacy groups and nonprofit usually lose their sight of it. Here are two examples to achieve the same goal with different implementations and their corresponding effects outside of pollution.

Example: emission legislation requires enforcement.  This will increase the government budget, i.e taxes.  Who gets the worst of it? Small business since cost of compliance always takes up a higher proportion of cost than a big business.  Emission can also be achieved by placing a higher gas tax and increasing personal income tax exemption at the same time without affecting the federal government’s revenue as well as its budgeting.  And the effect will be significantly different in aspects outside of the pollution. 

The former will increase government participation in the overall economy.  The latter will not.  The latter will at the same time help elevate the tax burden on the lowest income bracket tax payers, same the $10k/year income group.  Now, the poverty group suddenly have an interest in how the goals are achieved. 

When attention is so focused on emission, attention on other pressing issues are forgotten.  That is why climate change can be percevied, as an elitest cause, as a competing interest against other interest groups, say proverty groups.  It needs not be.  In fact, groups of different causes can exploit opportunities of any issue to further its own goal without sacrificing the issue of the moment. 

And exactly because advocacy groups and nonprofit organizations may not be able to follow these legislation details as well as being not able to provide these suggestions to complement the legislation to achieve its goals (piggy bag), politicians now can service the interests of the lobbyists’ paying customers without much scrutiny.   Therefore, if the issue of the moment is to discourage a certain behaviour (pollution), then your organization can always advocate to tax that behaviour and cut taxes (or spend that same tax revenue) for your constituence (seniors, students, low income, domestic abuse victim).

Fiscal policy is boring.  However, that is the most effectively way to modify the aggregate behaviour to achieve a goal.  Aggregately, people adjust their behaviour to the most use of their budget.  Even people who do not subscribe to that specific ideology now gets taxed and contributed to the cause.  An issue completely unrelated to your organization’s goal can help you when the implementation can be compromised to your favour.  In fact, you can suddenly become an ally of any issue of the moment, if you can demonstrate you can mobilize votes to support a legislation.

April 17, 2008 Posted by royho | Current Events, Democrats, Election 2008, Regulation, Republican, advocacy, clinton, election, environment, fundraising, mccain, nonprofits, obama, opinion, politics, wordpress-political-blogs | | No Comments

Paulson’s Big Bang: For Who And What Do You Care?

Paulson made this long expected announcement about residential mortgage regulation.  What is relevant? To Who?  Irrelevant or indifferent to McCain, this plan is not adding points to McCain.  It does not do anything to elevate the pains a lot of people are suffering right now.  What is going on?Below is the news from Reuters: http://www.reuters.com/article/bankingFinancial/idUSN3142489220080331

This kind of regulation is not something Democrats are good at.  However, putting something like this up front can reduce a lot of fire in this election from the Democrats.  So, it does not add points to McCain, it can take a few hits from Democrats.  However, after reading the pdf file from Paulson, one may protecting McCain is only a collateral benefit.  This piece of work is more about pay back time, paying back to a core constituence.

This overhaul is to take the initiative of repair from the Democrats to the Republicans, in particular, someone who knows the financial industry well.  Paulson is not a retail banker.  He comes fromt he capital markets.  His placed a great emphasis on capital markets, like merging SEC and futures trade commission.   

The change regarding exchange traded funds is a good call.  But then, how is it related to the purpose of residential mortgage overhaul?  Fixing the approval process is needed. And couldn’t this be done in legislation maintenance?  Why packaged in such a big fix?  It serves the industry more than the purpose of residential mortgage regulation, similarly for expanding the Investment Company Act to permit a new global investment company.  

It is probably a good idea to have oversight of broker-dealers and investment advisers offering similar services to retail investors.  What about the practice of licenses being licensed to the companies rather than the individuals who actually do the work?  That has been the cause of a lot of discrimination lawsuits.  Since the licenses are licensed to the companies, this looks more like territorial fighting than “oversight”.  Of course, some kind of retail investor protection will be part of the deal.  

Of the whole 7 pages of summary, only 0.5 page of it is focused on residential mortgage origination.  Another 0.5 page about state banks, payment systems and thrift charter, the real retail customers related issues.  Once insurance is added on top, there is 1.5 page of material!  

It is true there are other issues involved, such as the new powers to the Fed that has indirect positive consequences to the retail customers as well.  However, the meat is in the regulation reduction.  And for all fairness, it is about redundancy.  But don’t do it in the name of preventing similar mistakes like this mortgage crisis!

Who cares? Of course anyone who has a heavy position in FIs.  However, the benefit is more on the bigger guys.  The bigger institutions are the ones who have cross jurisdiction issues.  The retail level gets affected the most looks like the mortgage brokerages.  More details regarding the mortgage origination is needed to see if Home Depot and the like would get affected.

April 1, 2008 Posted by royho | Current Events, Money, Regulation, banking, business, economics, finance, market, opinion, stock, trading, wordpress-political-blogs | | 4 Comments

What Is Next In Residential Mortgage Regulation? It’s Election Year!

Nothing looks good.  Today’s data are weak.  US dollar falls against yen, reports CNN.  In real time, US is bouncing up against Yen and Euro.  GDP grew very little.  Durable orders are down.   

http://edition.cnn.com/2008/BUSINESS/03/27/asia.dollar.ap/index.html

Essentially, everything depends on this mortgage crisis.  And politicians are offering all kinds of things.  What for? To occupy your TV box so that you forget about the other ones. 

Depending on your time horizon, all the political fuss about the mortgage crisis may or may not have an impact on you.  This is the newest round of talk, from Wall Street Journal:

http://online.wsj.com/article/SB120658212569867477.html?mod=hpp_us_whats_news

The most visible talks related to mortgage crisis come from the presidential candidates.  They make get you excited.  However, you need to start align this temporal emotional development to TIME.  It’s election year!  All bets off!

The new president will take office next January.  It takes a month of 2 to transition the administration.  So, any work for such an important topic will be some time in Feb, almost a year for anything to be put on the table.  So, don’t let Clinton’s auction talk, Obama’s credit card solution or McCain’s inaction be a factor on your today’s decision.  If your horizon spans > 18 months, then I would say you need to pay attention to their talks.  For instance, you are about to buy an existing internet foreclosure auction site, due diligence is about to complete and on to develop a term sheet.

What is really relevant is about what Treasury Secretary Paulson says.  Below is not exactly news any more since it is almost 2 weeks old.  However, it is relevant:

http://www.nytimes.com/2008/03/13/business/13cnd-paulson.html?em&ex=1205553600&en=5ceef68e75d21e48&ei=5087%0A

It may look inconsistent to this:

http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-24037412.htm

They are not inconsistent of each other.  Paulson does not want a quick fix.  He wants a “solution”.  That translates to regulatory risk (not compliance risk.  A lot of people mistake regulatory risk as compliance risk.).  And if one looks at the Feb 7 press release of the Undersecretary Robert Steel, Paulson will definite create new regulations in a very short term.  

 Related industries will not only be FIs or mortgage insurance companies, but from suppliers to appraisal firms to ABC Papers packaging shops.  Paulson seems to be undeterred by the election politics.  Or Bush is not? Paulson is the real deal.

March 27, 2008 Posted by royho | Current Events, Money, Regulation, US politics, banking, business, economics, election, finance, politics, wordpress-political-blogs | | 2 Comments