Brilliance isn’t the only key to Warren Buffett’s investing success. See rule No. 5.
The U.S. economy shrank last quarter. The Federal Reserve is
widely expected to begin raising interest rates later this year. U.S.
stocks are expensive by many measures. Greece’s national finances remain
fragile. Oh, and election season already is under way in the U.S.
Investors who are tempted to sell risky assets and flee to safety don’t have to look far for justification.
If you are one of them, ponder this: Most of what matters in investing involves bedrock principles, not current events.
Here are five principles every investor should keep in mind:
1. Diversification is how you limit the risk of losses in an uncertain world.
If,
30 years ago, a visitor from the future had said that the Soviet Union
had collapsed, Japan’s stock market had stagnated for a quarter century,
China had become a superpower and North Dakota had helped turn the U.S.
into a fast-growing source of crude oil, few would have believed it.
The next 30 years will be just as surprising.
Diversification among different assets can be frustrating. It requires, at every point in time, owning some unpopular assets.
Why would I want to own European stocks if its economy is such a mess? Why should I buy bonds if interest rates are so low?
The appropriate answer is, “Because the future will play out in ways you or your adviser can’t possibly comprehend.”
Owning a little bit of everything is a bet on humility, which the history of investing shows is a valuable trait.
2. You are your own worst enemy.
The biggest risk investors face isn’t a recession, a bear market, the Federal Reserve or their least favorite political party.
It is their own emotions and biases, and the destructive behaviors they cause.
You
can be the best stock picker in the world, capable of finding
tomorrow’s winning businesses before anyone else. But if you panic and
sell during the next bear market, none of it will matter.
You can
be armed with an M.B.A. and have 40 years before retirement to let your
savings compound into a fortune. But if you have a gambling mentality
and you day-trade penny stocks, your outlook seems dismal.
You
can be a mathematical genius, building the most sophisticated
stock-market forecasting models. But if you don’t understand the limits
of your intelligence, you are on your way to disaster.
There
aren’t many iron rules of investing, but one of them is that no amount
of brain power can compensate for behavioral errors. Figure out what
mistakes you are prone to make and embrace strategies that limit the
risk.
3. There is a price to pay.
The stock market has historically offered stellar long-term returns, far better than cash or bonds.
But
there is a cost. The price of admission to earn high long-term returns
in stocks is a ceaseless torrent of unpredictable outcomes, senseless
volatility and unexpected downturns.
If you can stick with your
investments through the rough spots, you don’t actually pay this bill;
it is a mental surcharge. But it is very real. Not everyone is willing
to pay it, which is why there is opportunity for those who are.
There
is an understandable desire to forecast what the market will do in the
short run. But the reason stocks offer superior long-term returns is
precisely because we can’t forecast what they will do in the short run.
4. When in doubt, choose the investment with the lowest fee.
As a group, investors’ profits always will equal the overall market’s returns minus all fees and expenses.
Below-average fees, therefore, offer one of your best shots at earning above-average results.
A
talented fund manager can be worth a higher fee, mind you. But enduring
outperformance is one of the most elusive investing skills.
According
to Vanguard Group, which has championed low-cost investing products,
more than 80% of actively managed U.S. stock funds underperformed a
low-cost index fund in the 10 years through December. It is far more
common for a fund manager to charge excess fees than to deliver excess
performance.
There are no promises in investing. The best you can
do is put the odds in your favor. And the evidence is overwhelming: The
lower the costs, the more the odds tip in your favor.
5. Time is the most powerful force in investing.
Eighty-four year old Warren Buffett’s current net worth is around $73 billion, nearly all of which is in Berkshire Hathaway stock. Berkshire’s stock has risen 24-fold since 1990.
Do the math, and some $70 billion of Mr. Buffett’s $73 billion fortune was accumulated around or after his 60th birthday.
Mr.
Buffett is, of course, a phenomenal investor whose talents few will
replicate. But the real key to his wealth is that he has been a
phenomenal investor for two-thirds of a century.
Wealth grows exponentially—a little at first, then slightly more, and then in a hurry for those who stick around the longest.
That
lesson—that time, patience and endurance pay off—is something us
mortals can learn from, particularly younger workers just starting to
save for retirement.
June marks the 800th
anniversary of Magna Carta, the ‘Great Charter’ that established the
rule of law for the English-speaking world. Its revolutionary impact
still resounds today, writes Daniel Hannan
King John, pressured
by English barons, reluctantly signs Magna Carta, the ‘Great Charter,’
on the Thames riverbank, Runnymede, June 15, 1215, as rendered in James
Doyle’s ‘A Chronicle of England.’
Photo:
Mary Evans Picture Library/Everett Collection
http://si.wsj.net/public/resources/images/BN-IQ808_MAGNA_J_20150529103352.jpg
By Daniel Hannan
Eight hundred years ago next month, on a reedy stretch of
riverbank in southern England, the most important bargain in the history
of the human race was struck. I realize that’s a big claim, but in this
case, only superlatives will do. As Lord Denning, the most celebrated
modern British jurist put it, Magna Carta was “the greatest
constitutional document of all time, the foundation of the freedom of
the individual against the arbitrary authority of the despot.”
It
was at Runnymede, on June 15, 1215, that the idea of the law standing
above the government first took contractual form. King John accepted
that he would no longer get to make the rules up as he went along. From
that acceptance flowed, ultimately, all the rights and freedoms that we
now take for granted: uncensored newspapers, security of property,
equality before the law, habeas corpus, regular elections, sanctity of
contract, jury trials.
Magna Carta is Latin for “Great Charter.”
It was so named not because the men who drafted it foresaw its epochal
power but because it was long. Yet, almost immediately, the document
began to take on a political significance that justified the adjective
in every sense.
The bishops and barons who had brought King John
to the negotiating table understood that rights required an enforcement
mechanism. The potency of a charter is not in its parchment but in the
authority of its interpretation. The constitution of the U.S.S.R., to
pluck an example more or less at random, promised all sorts of
entitlements: free speech, free worship, free association. But as Soviet
citizens learned, paper rights are worthless in the absence of
mechanisms to hold rulers to account.
Magna Carta instituted a form of conciliar rule that was to develop
directly into the Parliament that meets at Westminster today. As the
great Victorian historian William Stubbs put it, “the whole
constitutional history of England is little more than a commentary on
Magna Carta.”
And
not just England. Indeed, not even England in particular. Magna Carta
has always been a bigger deal in the U.S. The meadow where the
abominable King John put his royal seal to the parchment lies in my
electoral district in the county of Surrey. It went unmarked until 1957,
when a memorial stone was finally raised there—by the American Bar
Association.
Only now, for the anniversary, is a British
monument being erected at the place where freedom was born. After some
frantic fundraising by me and a handful of local councilors, a large
bronze statue of Queen Elizabeth II will gaze out across the slow, green
waters of the Thames, marking 800 years of the Crown’s acceptance of
the rule of law.
Eight hundred years is a long wait. We British
have, by any measure, been slow to recognize what we have. Americans, by
contrast, have always been keenly aware of the document, referring to
it respectfully as the Magna Carta.
Why? Largely because
of who the first Americans were. Magna Carta was reissued several times
throughout the 14th and 15th centuries, as successive Parliaments
asserted their prerogatives, but it receded from public consciousness
under the Tudors, whose dynasty ended with the death of Elizabeth I in
1603.
In the early 17th century, members of Parliament revived
Magna Carta as a weapon in their quarrels with the autocratic Stuart
monarchs. Opposition to the Crown was led by the brilliant lawyer Edward
Coke (pronounced Cook), who drafted the first Virginia Charter in 1606.
Coke’s argument was that the king was sidelining Parliament, and so
unbalancing the “ancient constitution” of which Magna Carta was the
supreme expression.
United for the first
time, the four surviving original Magna Carta manuscripts are prepared
for display at the British Library, London, Feb. 1, 2015.
Photo:
UPPA/ZUMA PRESS
The early settlers arrived while these rows were at their height and
carried the mania for Magna Carta to their new homes. As early as 1637,
Maryland sought permission to incorporate Magna Carta into its basic
law, and the first edition of the Great Charter was published on
American soil in 1687 by William Penn, who explained that it was what
made Englishmen unique: “In France, and other nations, the mere will of
the Prince is Law, his word takes off any man’s head, imposeth taxes, or
seizes any man’s estate, when, how and as often as he lists; But in
England, each man hath a fixed Fundamental Right born with him, as to
freedom of his person and property in his estate, which he cannot be
deprived of, but either by his consent, or some crime, for which the law
has imposed such a penalty or forfeiture.”
There was a
divergence between English and American conceptions of Magna Carta. In
the Old World, it was thought of, above all, as a guarantor of
parliamentary supremacy; in the New World, it was already coming to be
seen as something that stood above both Crown and Parliament. This
difference was to have vast consequences in the 1770s.
The
American Revolution is now remembered on both sides of the Atlantic as a
national conflict—as, indeed, a “War of Independence.” But no one at
the time thought of it that way—not, at any rate, until the French
became involved in 1778. Loyalists and patriots alike saw it as a civil
war within a single polity, a war that divided opinion every bit as much
in Great Britain as in the colonies.
The American
Revolutionaries weren’t rejecting their identity as Englishmen; they
were asserting it. As they saw it, George III was violating the “ancient
constitution” just as King John and the Stuarts had done. It was
therefore not just their right but their duty to resist, in the words of
the delegates to the first Continental Congress in 1774, “as Englishmen
our ancestors in like cases have usually done.”
Nowhere, at this
stage, do we find the slightest hint that the patriots were fighting
for universal rights. On the contrary, they were very clear that they
were fighting for the privileges bestowed on them by Magna Carta. The
concept of “no taxation without representation” was not an abstract
principle. It could be found, rather, in Article 12 of the Great
Charter: “No scutage or aid is to be levied in our realm except by the
common counsel of our realm.” In 1775, Massachusetts duly adopted as its
state seal a patriot with a sword in one hand and a copy of Magna Carta
in the other.
I recount these facts to make an important, if
unfashionable, point. The rights we now take for granted—freedom of
speech, religion, assembly and so on—are not the natural condition of an
advanced society. They were developed overwhelmingly in the language in
which you are reading these words.
When we call them universal
rights, we are being polite. Suppose World War II or the Cold War had
ended differently: There would have been nothing universal about them
then. If they are universal rights today, it is because of a series of
military victories by the English-speaking peoples.
Various early
copies of Magna Carta survive, many of them in England’s cathedrals,
tended like the relics that were removed during the Reformation. One
hangs in the National Archives in Washington, D.C., next to the two
documents it directly inspired: the Declaration of Independence and the
Constitution. Another enriches the Australian Parliament in Canberra.
But
there are only four 1215 originals. One of them, normally housed at
Lincoln Cathedral, has recently been on an American tour, resting for
some weeks at the Library of Congress. It wasn’t that copy’s first visit
to the U.S. The same parchment was exhibited in New York at the 1939
World’s Fair, attracting an incredible 13 million visitors. World War II
broke out while it was still on display, and it was transferred to Fort
Knox for safekeeping until the end of the conflict.
Could there
have been a more apt symbol of what the English-speaking peoples were
fighting for in that conflagration? Think of the world as it stood in
1939. Constitutional liberty was more or less confined to the
Anglosphere. Everywhere else, authoritarianism was on the rise. Our
system, uniquely, elevated the individual over the state, the rules over
the rulers.
When the 18th-century statesman Pitt the Elder
described Magna Carta as England’s Bible, he was making a profound
point. It is, so to speak, the Torah of the English-speaking peoples:
the text that sets us apart while at the same time speaking truths to
the rest of mankind.
The very success of Magna Carta makes it
hard for us, 800 years on, to see how utterly revolutionary it must have
appeared at the time. Magna Carta did not create democracy: Ancient
Greeks had been casting differently colored pebbles into voting urns
while the remote fathers of the English were grubbing about alongside
pigs in the cold soil of northern Germany. Nor was it the first
expression of the law: There were Sumerian and Egyptian law codes even
before Moses descended from Sinai.
What Magna Carta initiated,
rather, was constitutional government—or, as the terse inscription on
the American Bar Association’s stone puts it, “freedom under law.”
It
takes a real act of imagination to see how transformative this concept
must have been. The law was no longer just an expression of the will of
the biggest guy in the tribe. Above the king brooded something more
powerful yet—something you couldn’t see or hear or touch or taste but
that bound the sovereign as surely as it bound the poorest wretch in the
kingdom. That something was what Magna Carta called “the law of the
land.”
This phrase is commonplace in our language. But think of
what it represents. The law is not determined by the people in
government, nor yet by clergymen presuming to interpret a holy book.
Rather, it is immanent in the land itself, the common inheritance of the
people living there.
The idea of the law coming up from the
people, rather than down from the government, is a peculiar feature of
the Anglosphere. Common law is an anomaly, a beautiful, miraculous
anomaly. In the rest of the world, laws are written down from first
principles and then applied to specific disputes, but the common law
grows like a coral, case by case, each judgment serving as the starting
point for the next dispute. In consequence, it is an ally of freedom
rather than an instrument of state control. It implicitly assumes
residual rights.
And indeed, Magna Carta conceives rights in
negative terms, as guarantees against state coercion. No one can put you
in prison or seize your property or mistreat you other than by due
process. This essentially negative conception of freedom is worth
clinging to in an age that likes to redefine rights as entitlements—the
right to affordable health care, the right to be forgotten and so on.
It
is worth stressing, too, that Magna Carta conceived freedom and
property as two expressions of the same principle. The whole document
can be read as a lengthy promise that the goods of a free citizen will
not be arbitrarily confiscated by someone higher up the social scale.
Even the clauses that seem most remote from modern experience generally
turn out, in reality, to be about security of ownership.
There
are, for example, detailed passages about wardship. King John had been
in the habit of marrying heiresses to royal favorites as a way to get
his hands on their estates. The abstruse-sounding articles about
inheritance rights are, in reality, simply one more expression of the
general principle that the state may not expropriate without due
process.
Those who stand awe-struck before the Great Charter
expecting to find high-flown phrases about liberty are often surprised
to see that a chunk of it is taken up with the placing of fish-traps on
the Thames. Yet these passages, too, are about property, specifically
the freedom of merchants to navigate inland waterways without having
arbitrary tolls imposed on them by fish farmers.
Liberty and
property: how naturally those words tripped, as a unitary concept, from
the tongues of America’s Founders. These were men who had been shaped in
the English tradition, and they saw parliamentary government not as an
expression of majority rule but as a guarantor of individual freedom.
How different was the Continental tradition, born 13 years later with
the French Revolution, which saw elected assemblies as the embodiment of
what Rousseau called the “general will” of the people.
In that
difference, we may perhaps discern explanation of why the Anglosphere
resisted the chronic bouts of authoritarianism to which most other
Western countries were prone. We who speak this language have always
seen the defense of freedom as the duty of our representatives and so,
by implication, of those who elect them. Liberty and democracy, in our
tradition, are not balanced against each other; they are yoked together.
In February, the four surviving original copies of Magna Carta were
united, for just a few hours, at the British Library—something that had
not happened in 800 years. As I stood reverentially before them, someone
recognized me and posted a photograph on Twitter with the caption: “If
Dan Hannan gets his hands on all four copies of Magna Carta, will he be
like Sauron with the Rings?”
Yet the majesty of the document
resides in the fact that it is, so to speak, a shield against Saurons.
Most other countries have fallen for, or at least fallen to, dictators.
Many, during the 20th century, had popular communist parties or fascist
parties or both. The Anglosphere, unusually, retained a consensus behind
liberal capitalism.
This is not because of any special property
in our geography or our genes but because of our constitutional
arrangements. Those constitutional arrangements can take root anywhere.
They explain why Bermuda is not Haiti, why Hong Kong is not China, why
Israel is not Syria.
They work because, starting with Magna
Carta, they have made the defense of freedom everyone’s responsibility.
Americans, like Britons, have inherited their freedoms from past
generations and should not look to any external agent for their
perpetuation. The defense of liberty is your job and mine. It is up to
us to keep intact the freedoms we inherited from our parents and to pass
them on securely to our children.
Mr. Hannan is a British
member of the European Parliament for the Conservative Party, a
columnist for the Washington Examiner and the author of “Inventing
Freedom: How the English-speaking Peoples Made the Modern World.”
White House officials can be oddly candid in talking to their liberal
friends at the New Yorker magazine. That’s where an unnamed official in
2011 boasted of “leading from behind,” and where last year President Obama
dismissed Islamic State as a terrorist “jayvee team.” Now the U.S. Vice
President has revealed the Administration line on human rights in
China.
In the April 6 issue, Joe Biden recounts meeting Xi Jinping
months before his 2012 ascent to be China’s supreme leader. Mr. Xi
asked him why the U.S. put “so much emphasis on human rights.” The right
answer is simple: No government has the right to deny its citizens
basic freedoms, and those that do tend also to threaten peace overseas,
so U.S. support for human rights is a matter of values and interests.
Instead,
Mr. Biden downplayed U.S. human-rights rhetoric as little more than
political posturing. “No president of the United States could represent
the United States were he not committed to human rights,” he told Mr.
Xi. “President Barack Obama would not be able to stay in power if he did
not speak of it. So look at it as a political imperative.” Then Mr.
Biden assured China’s leader: “It doesn’t make us better or worse. It’s
who we are. You make your decisions. We’ll make ours.” [not the WSJ's emphasis.]
Mr. Xi took the advice. Since taking office he has detained more
than 1,000 political prisoners, from anticorruption activist Xu Zhiyong
to lawyer Pu Zhiqiang and journalist Gao Yu. He has cracked down on Uighurs in Xinjiang, banning more Muslim practices and jailing scholar-activist Ilham Tohti for life. Anti-Christian repression and Internet controls are tightening. Nobel Peace laureate Liu Xiaobo remains in prison, his wife Liu Xia
under illegal house arrest for the fifth year. Lawyer Gao Zhisheng left
prison in August but is blocked from receiving medical care overseas.
Hong Kong, China’s most liberal city, is losing its press freedom and
political autonomy.
Amid all of this Mr. Xi and his government have faced little challenge from Washington. That is consistent with Hillary Clinton’s
2009 statement that human rights can’t be allowed to “interfere” with
diplomacy on issues such as the economy and the environment. Mr. Obama
tried walking that back months later, telling the United Nations that
democracy and human rights aren’t “afterthoughts.” But his
Administration’s record—and now Mr. Biden’s testimony—prove otherwise.
JAMA Surg. Published online March 11, 2015. doi:10.1001/jamasurg.2014.2911.
On Thursday mornings, our operating room management committee meets
to handle items large and small. Most of our discussions focus on
block-time allocation, purchasing decisions, and alike. However, too
often we talk about behavioral issues, particularly the now
well-characterized disruptive physician.
We have all seen it or been there before. A physician acts out in the
operating room with shouting or biting sarcasm, intimidating colleagues
and staff and impeding them from functioning at a high level. The most
debilitating perpetrators of this behavior are repeat customers who
engender such fear and uncertainty in all who contact them that the
morale of the nursing staff and anesthesiologists is undermined, work
becomes an unbearable chore, and performance suffers.
When one engages a difficult physician on his or her behavior, the
physician responds in characteristic fashion. He or she defends his or
her actions as patient advocacy, pointing out the shortcomings of the
scrub nurse or instruments and showing limited, if any, remorse. He or
she argues that such civil disobedience is the only way to enact change.
In truth, disruptive physicians’ actions are often admired by a sizable
minority of their colleagues as the only way to articulate real
frustrations of working in today’s highly complex hospital. In extreme
situations, these physicians become folk heroes to younger physicians
who envy their fortitude in confronting the power of the bureaucracy.
A few days after a recent outburst by a particularly unpleasant and
repeat offender, I was enjoying my daily interval on the stationary
bicycle at my gym. My thoughts were wandering to a broad range of
topics. I spent some time considering what really drives this
nonproductive behavior and how otherwise valuable physicians could be
channeled successfully into a more collegial state. As in the past, I
was long on theory but short on conviction that it would make a
difference.
After my workout as I prepared to shower, I received an urgent email.
A patient I was consulting for upper extremity embolization had
developed confusion and possible cerebral emboli despite full
anticoagulation. I responded that I was on my way to see her and
suggested a few diagnostic tests and consultations.
As I typed my message, a custodial employee of the gym reminded me
that no cellular telephones were allowed in the locker room. I pointed
out that I was not using my cellular telephone but rather an email
function and I was not offending anyone by talking. He again pointed out
that cellular telephones were not allowed under any circumstances. As I
argued back, “I am a physician and this is an emergency.” My voice got
louder and I became confrontational. I told him to call the manager.
Another member next to me said quietly that the reason for the cellular
telephone ban was the photographic potential of the devices and that I
could have simply moved to the reception area and used the telephone any
way I wished.
I felt like the fool I was. I trudged off to the showers feeling, as
in the Texas homily, lower than a snake’s belly. After toweling off, I
approached the employee and apologized for my behavior and for making
his job more difficult. I told him he had handled the situation far
better than me and I admired his restraint.
The lessons were stark and undeniable. Like my disruptive colleagues,
I had justified my boorish behavior with patient care. I had assumed my
need to break the rules far outweighed the reasonable and rational
policy of the establishment; after all, I was important and people
depended on me. Worse yet, I felt empowered to take out my frustration,
enhanced by my worry about the patient, on someone unlikely to retaliate
against me for fear of job loss.
I have come to realize that irrespective of disposition, when the
setting is right, we are all potentially disruptive. The only questions
are how frequent and how severe. Even more importantly, from a
prognostic perspective, can we share the common drivers of these
behaviors and develop insights that will lead to avoidance?
The most common approaches used today are only moderately effective.
As in many other institutions, when physicians are deemed by their peers
to have violated a carefully defined code of conduct, they are advised
to apologize to any offended personnel. In many instances, these
apologies are sincere and are, in fact, appreciated by all.
Unfortunately, on occasion, the interaction is viewed as a forced
function and the behavior is soon repeated albeit in a different nursing
unit or operating room.
When such failures occur, persistently disruptive physicians are
referred to our physician well-being committee. Through a highly
confidential process, efforts are made to explore the potential causes
for the behavior and acquaint the referred physician with the
consequences of their actions on hospital function. Often, behavioral
contracts are drawn up to precisely outline the individual’s issues and
subsequent medical staff penalties if further violations occur.
That said, as well intentioned and psychologically sound as these
programs are, there remains a hard core of repeat offenders. Despite the
heightened stress and ill will engendered by disruptive physicians’
behavior, they simply cannot interact in other than confrontational
fashion when frustrated by real or imagined shortcomings in the
environment.
Based on nearly 20 years of physician management experience, it is my
belief that in these few physicians, such behaviors are hard wired and
fairly resistant to traditional counseling. An unfortunate end game is
termination from a medical staff if the hostile working environment
created by their outbursts is viewed as a liability threat by the
institution. Such actions are always painful and bring no satisfaction
to anyone involved. These high-stakes dramas, often involving critical
institutional players on both sides, are played out behind closed doors.
Few people are privy to the details of either the infraction or the
attempts at remediation. Misunderstandings in the staff are common.
I suggest that an underused remedy is more intense peer pressure
through continued education of those colleagues who might silently
support these outbursts without fully realizing the consequences. This
would begin by treating these incidents in the same way that we do other
significant adverse events that occur in our hospitals. In confidential
but interdisciplinary sessions, the genesis, nature, and consequences
of the interaction could be explored openly. If indeed the inciting
event was judged to be an important patient care issue, the problem
could be identified and addressed yet clearly separated from the
counterproductive interaction that followed. In addition to the
deterrence provided by the more public airing of the incidents, the
tenuous linkage between abusive behavior and patient protection could be
severed. It is this linkage that provides any superficial legitimacy to
the outbursts.
Through this process, peer pressure would be increased and provide a
greater impetus for self-control and more productive interactions.
Importantly, with such a direct and full examination of both the
character and costs of poor conduct, whatever support exists for such
behaviors within the medical staff would be diminished.
Bruce Gewertz, MD, Cedars-Sinai Health System
Published Online: March 11, 2015. doi:10.1001/jamasurg.2014.2911. Conflict of Interest Disclosures: None reported.
The
Obama
administration’s troubling flirtation with another mortgage
meltdown took an unsettling turn on Tuesday with Federal Housing Finance
Agency Director
Mel Watt
’s testimony before the House Financial Services Committee.
Mr.
Watt told the committee that, having received “feedback from
stakeholders,” he expects to release by the end of March new guidance on
the “guarantee fee” charged by
Fannie Mae
and
Freddie Mac
to cover the credit risk on loans the federal mortgage agencies guarantee.
Here
we go again. In the Obama administration, new guidance on housing
policy invariably means lowering standards to get mortgages into the
hands of people who may not be able to afford them.
Earlier this
month, President Obama announced that the Federal Housing
Administration (FHA) will begin lowering annual mortgage-insurance
premiums “to make mortgages more affordable and accessible.” While that
sounds good in the abstract, the decision is a bad one with serious
consequences for the housing market.
Government programs to make
mortgages more widely available to low- and moderate-income families
have consistently offered overleveraged, high-risk loans that set up too
many homeowners to fail. In the long run-up to the 2008 financial
crisis, for example, federal mortgage agencies and their regulators
cajoled and wheedled private lenders to loosen credit standards. They
have been doing so again. When the next housing crash arrives, private
lenders will be blamed—and homeowners and taxpayers will once again pay
dearly.
Lowering annual mortgage-insurance premiums is part of a
new affordable-lending effort by the Obama administration. More
specifically, it is the latest salvo in a price war between two
government mortgage giants to meet government mandates.
Fannie
Mae fired the first shot in December when it relaunched the 30-year, 97%
loan-to-value, or LTV, mortgage (a type of loan that was suspended in
2013). Fannie revived these 3% down-payment mortgages at the behest of
its federal regulator, the Federal Housing Finance Agency (FHFA)—which
has run Fannie Mae and Freddie Mac since 2008, when both
government-sponsored enterprises (GSEs) went belly up and were put into
conservatorship. The FHA’s mortgage-premium price rollback was a
counteroffensive.
Déjà vu: Fannie launched its first price war
against the FHA in 1994 by introducing the 30-year, 3% down-payment
mortgage. It did so at the behest of its then-regulator, the Department
of Housing and Urban Development. This and other actions led HUD in 2004
to credit Fannie Mae’s “substantial part in the ‘revolution’ ” in
“affordable lending” to “historically underserved households.”
Fannie’s
goal in 1994 and today is to take market share from the FHA, the main
competitor for loans it and Freddie Mac need to meet mandates set by
Congress since 1992 to increase loans to low- and moderate-income
homeowners. The weapons in this war are familiar—lower pricing and
progressively looser credit as competing federal agencies fight over
existing high-risk lending and seek to expand such lending.
Mortgage
price wars between government agencies are particularly dangerous,
since access to low-cost capital and minimal capital requirements gives
them the ability to continue for many years—all at great risk to the
taxpayers. Government agencies also charge low-risk consumers more than
necessary to cover the risk of default, using the overage to lower fees
on loans to high-risk consumers.
Starting in 2009 the FHFA
released annual studies documenting the widespread nature of these
cross-subsidies. The reports showed that low down payment, 30-year loans
to individuals with low FICO scores were consistently subsidized by
less-risky loans.
Unfortunately, special interests such as the
National Association of Realtors—always eager to sell more houses and
reap the commissions—and the left-leaning Urban Institute were
cheerleaders for loose credit. In 1997, for example, HUD commissioned
the Urban Institute to study Fannie and Freddie’s single-family
underwriting standards. The Urban Institute’s 1999 report found that
“the GSEs’ guidelines, designed to identify creditworthy applicants, are
more likely to disqualify borrowers with low incomes, limited wealth,
and poor credit histories; applicants with these characteristics are
disproportionately minorities.” By 2000 Fannie and Freddie did away with
down payments and raised debt-to-income ratios. HUD encouraged them to
more aggressively enter the subprime market, and the GSEs decided to
re-enter the “liar loan” (low doc or no doc) market, partly in a desire
to meet higher HUD low- and moderate-income lending mandates.
On
Jan. 6, the Urban Institute announced in a blog post: “FHA: Time to stop
overcharging today’s borrowers for yesterday’s mistakes.” The institute
endorsed an immediate cut of 0.40% in mortgage-insurance premiums
charged by the FHA. But once the agency cuts premiums, Fannie and
Freddie will inevitably reduce the guarantee fees charged to cover the
credit risk on the loans they guarantee.
Now the other shoe appears poised to drop, given Mr. Watt’s promise on Tuesday to issue new guidance on guarantee fees.
This
is happening despite Congress’s 2011 mandate that Fannie’s regulator
adjust the prices of mortgages and guarantee fees to make sure they
reflect the actual risk of loss—that is, to eliminate dangerous and
distortive pricing by the two GSEs. Ed DeMarco, acting director of the
FHFA since March 2009, worked hard to do so but left office in January
2014. Mr. Watt, his successor, suspended
Mr. DeMarc
o’s efforts to comply with Congress’s mandate. Now that Fannie
will once again offer heavily subsidized 3%-down mortgages, massive new
cross-subsidies will return, and the congressional mandate will be
ignored.
The law stipulates that the FHA maintain a
loss-absorbing capital buffer equal to 2% of the value of its
outstanding mortgages. The agency obtains this capital from profits
earned on mortgages and future premiums. It hasn’t met its capital
obligation since 2009 and will not reach compliance until the fall of
2016, according to the FHA’s latest actuarial report. But if the economy
runs into another rough patch, this projection will go out the window.
Congress
should put an end to this price war before it does real damage to the
economy. It should terminate the ill-conceived GSE affordable-housing
mandates and impose strong capital standards on the FHA that can’t be
ignored as they have been for five years and counting.
Mr. Pinto,
former chief credit officer of Fannie Mae, is co-director and
chief risk officer of the International Center on Housing Risk at the
American Enterprise Institute.
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