College Years: Debt, Value, Education

In yesterday’s D&C business section there was an article that compared the current state of student debt to the mortgage crisis before that bubble burst. The long and short of that crisis was that consumers took on too much mortgage debt on inflated home prices. The subsequent decline in investment markets traumatized the economy, unemployment skyrocketed and many folks found themselves no longer being able to pay their mortgages on homes with deflated values. They couldn’t sell them so they walked away. Whether the root cause was being uneducated, misled, misinformed or just plain reckless is for you to decide. What followed were many foreclosures which prompted Government to step in and offer bailouts.

The same thing is taking shape with student loans. Student loan debt is about $1 trillion and rising. President Obama while on his reelection campaign has made it a political issue, again offering bailouts. While I certainly agree there are circumstances in both cases for assistance, for the most part we have to be responsible for ourselves and our families. If you have family members that are nearing their decision to pick a college, have open discussions regarding affordability and strategies to find the best college that will achieve their goals. You can help give them a fighting chance to pay off their loans once they get into the working world.

Speaking from experience, I have two daughters who did their undergraduate studies at SUNY colleges.  My older daughter is now pursuing graduate studies at a private college and my younger daughter is posturing for the same. Their foresight has allowed them to take only modest debt forward as they advance their education.  As they said to me, “it’s not where you go to college but where your diploma is from that will count for an employer.”  Music to my ears.

One of the many services we offer at Brighton Securities is a complimentary Education planning.  Please feel free to call me at (585) 340-2239 if you wish to take advantage of this service, or to learn more about other services we offer.

Salvatore Fasciano
Financial Advisor

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Freddie Mac and Inverse Floaters: a love story

In an interesting twist to the current Freddie Mac situation (which I blogged about here), President Obama has decided to elaborate on his New Housing Proposal that he briefly mentioned in his State of the Union Speech last Tuesday. Obama’s plan to expand the Home Affordable Refinance Program HARP would assist homeowners who are attempting to qualify for refinancing.  According to the HARP website, the program expects to refinance “as many as 2.85 million loans by the end of 2013.”

How does the Freddie Mac bet against homeowners affect this goal?

First, let’s look at Freddie’s questionable position:

Freddie Mac has bought ‘inverse floaters’ which essentially means they invested in packages of mortgages and sold off their right to collect on the principal of those mortgages with the mindset that they would just collect the interest rate payments.  This is a bet that people will continue to pay these interest payments and one way that they may get out of paying those interest payments is to replace them with a new loan with lower interest payments – that’s a little something called ‘refinancing’.  Well, if you or I invested in inverse floaters like those bought by Freddie Mac, we could debate the merits and risks of that investment.  But Freddie Mac is charged with helping people refinance – so why would Freddie Mac make such an investment?  It was likely a hedge – a way to trade off some possible risk in other investments.  But here’s the kick: there should never, ever be even a hint of a conflict of interest in an organization’s positions, even in a hedge.

The answer is simple: as long as Freddie Mac has an role in refinancing, they must remove their hedge against it. 

As I have been writing, I noticed a little piece of news float up: Freddie Mac seems to know this is a bad idea to some extent, although they don’t seem to know why.

Jonathan Marlowe
Financial Advisor Trainee

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

The Federal Home Loan Mortgage Corporation’s Bet Against Homeowners

After a bailout in 2008, tax payers like you and me own Freddie Mac, a government-sponsored enterprise that exists to work with mortgage lenders to help citizens get lower housing costs and a better opportunity for home financing.  However, a National Public Radio and ProPublica exclusive report on Monday, January 30^th, discovered that Freddie Mac, in an attempt to make additional money and potentially hedge itself, has invested in securities that benefit from higher mortgage payments. This is simply an act of betting against the very the purpose it stands for.

 What does this mean?

 With financing rates at a historic low, homeowners across the nation are looking to benefit through refinancing their home mortgages.  Freddie Mac should be fulfilling its mission of making (or keeping) more homeowners by being a resource for refinancing.  Instead, it is betting on mortgages with high-interest rates not being refinanced – an exact opposite of its mission statement.  So now, either Freddie Mac will attend to its own interests and act to prohibit homeowners from attaining lower borrowing costs, or Freddie Mac will act in accordance with its mission and lose money on its in-house investments!

 Should a government entity be betting against the very purpose for which it exists?

Jonathan Marlowe
Financial Advisor Trainee

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

The Bankers of Venice

The well known story of Shakespeare’s The Merchant of Venice has title character Antonio borrowing money from Shylock.  When Antonio cannot pay, Shylock is entitled to the terms of the loan: a pound of Antonio’s flesh.  Thus ensues a great drama.

Today we are still living with the effects of our own great mortgage drama.  It spawned the financial crisis and tipped our economy into recession.  Meanwhile Washington is busy creating new bureaucracies and financial markets struggle back.  But at ground level, we have some of Shakespeare’s story: homeowners who have borrowed and cannot pay, and bankers who want their pound of flesh. 

Back in Shakespeare’s original, Shylock has been careless with his terms.  He is indeed entitled to a pound of Antonio’s flesh in satisfaction of the debt. But in the court of the Duke of Venice, it is pointed out that while he may indeed carve a pound of flesh from Antonio, he may not take so much as a drop of blood in the process. Shylock is defeated and Antonio goes free.

Today’s bankers seek to foreclose on homeowners who cannot pay their mortgage.  Defaulted borrowers must be foreclosed.  After all, in the words of Calvin Coolidge, “They hired the money.” But if the bankers are to insist on payment, they must prove that they are entitled.  And now it appears that, like Shylock, they too have been careless with their terms.

Banks made billions making mortgage loans, lost billions when markets went south, received billions in taxpayer-financed bailouts, and now seek billions in foreclosure proceeds.  Let the bankers have their day in court.  They may take their due, but if they were sloppy or heedless with their terms, let them suffer Shylock’s fate.

 GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).