Discussing pay-gaps in the Sunday Independent

One of the most infuriating things a person could hear is that they are not being paid on par with another person who has the same qualifications and who does the same job. This is why we have to be so careful about declaring the accuracy of pay-gaps when examining statistics.

Karl Deeter laid out the statistical issues in this are in the Sunday Independent this week and showed that for a myriad of reasons women can appear to be paid less than men but that in part it’s due to how we collect the statistics rather than due to any undercutting of earnings by women based on their gender.

The extract it starts with is below, the full article is in the link at the end of the extract.

Logically, if it was cheaper to hire women than men you would never hire men as the savings would be too great, unless a business values misogyny over capital. I say that not as an objective analyst, but as a business owner who values capital. Paying a person less for …

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Bank of England raises counter-cyclical capital buffer to 0.5%

Bank of England announced to lenders that it is raising the country’s counter-cyclical capital buffer from 0 to 0.5% to mitigate pressures from increasing consumer credit. The counter-cyclical capital buffer is a requirement on all banks, lenders and investment firms to keep a certain level of capital when credit growth is excessive. To a certain extent, this buffer is able to insulate banks from the cyclical growth and downturns of the economy. Bank of England’s decision reflects its interests in slowing down credit and lending in the British economy.

 

By raising the counter-cyclical capital buffer to 0.5%, British banks must increase their held capital by over £11.4 billion over the next 18 months. The Bank of England also has the intentions of further increasing the buffer by 0.5% to 1% by the end of 2017 to combat increases in consumer credit and lending. The counter-cyclical buffer has only been used once in the UK, but was quickly revoked due to stagnate economy conditions during the immediate aftermath of Brexit.

 

Bank of England’s Financial Policy Committee warned that there …

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How Do American Mortgages Work? Part 10: How does Western European Mortgages Compare

Relating this series to the Western European mortgage market, as fixed-rate mortgages are most common among America while variable-rate mortgages are the most common in Western Europe. This is because Fannie Mae and Freddie Mac insure their mortgages. This means it does not affect the lenders if the interest rate rises on a fixed-rate mortgage. It is so, because the mortgage market in the United States relies more on the secondary mortgage market than on formal government guarantees. Comparing home ownership rates between the United States and Western Europe, they are fairly similar but higher default rate in the United States. Mortgage loans are mostly non-recourse debt where the borrower is not personally liable in the United States.

With Ireland’s typical interest rate being higher compared to other Western European countries, theorist claim it was from the popularity of Tracker mortgages. Tracker mortgages being locked in at 1% higher than the European Central Bank (ECB) Rate, when the ECB rate hit 0% lenders were contractually obligated to have the borrowers’ interest rate at 1%. Since the lenders need to make …

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How Do American Mortgages Work? Part 9: The Financial Crisis

What caused the Housing Bubble in the United States during the early 200s? Experts’ continuous debate on what the root of the cause is but Fannie Mae and Freddie Mac have less to do with it than you think. Fannie and Freddie backed about half of all the home-loan originations in 2002 but a new market for mortgage-backed securities were arising. Loan originators backed by Wall Street were straying away from selling the loans to Fannie and Freddie but creating their own mortgage backed securities with high-risk subprime mortgages. These would include something called a hybrid adjustable-rate mortgages with balloon payments which are nearly impossible to sustain without refinancing. It left Fannie and Freddie only backing up around 30% of the loans in 2005 and 2006.

The big players of Wall Street like Lehman Brothers and Bear Stearns would package the subprime loans into securities. The credit-rating agency would then rate them falsely-high so they can sell to investors who were unaware of the actual health of the security. Everyone saw how the housing prices were rising and didn’t see …

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How Do American Mortgages Work? Part 8: Investors

The end of the line for the secondary mortgage market process is the investors themselves. Investors can be anyone but typically are foreign governments, pension funds, insurance companies, banks, GSEs and hedge funds. What kind of return are they looking for depends on what credit ranking of MBS, CMOs, or CDOs they acquire. Typically, more safe investors such as governments, pension funds, insurance companies, or banks are looking for a high credit investment. These investments have low predicted default rate. Investors looking for higher returns will more than likely look towards a low credit rating investment because the interest rate will have a higher return yield, hedge funds are usually investors of this type.

While America’s secondary market is massive, after a mortgage is closed it can end up in many different channels by the end of the month, whether it be a CMO or a CDO deal. Borrowers have little knowledge of the extent of what happens with their mortgage after closing and how much it has been split up, traded, and merged with other mortgages. With the start …

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How Do American Mortgages Work? Part 7: Securities Dealers

After a mortgage backed security (MBS) is formed, it needs to be sold to the investor. To do that, the MBS needs to go through a securities dealer. This dealer is more than likely located on Wall Street along with MBS trading desks. To better cater to the investor, a securities dealer has to go through creative and innovative channels to make the MBS look attractive to an investor. There is many different structures a MBS can go through such as Collateralized Mortgage Obligation or a Collateralized Debt Obligation.

Collateralized Mortgage Obligation (CMO) are the typical bundle of mortgages that is sold as an investment that was first issued in 1983. They are categorized from maturity and level of risk, and as the repayments of the loan comes in as a cash flow they are distributed to the investors in the set guidelines of the investment. These investments, since of the differences of the mortgages included within type or risk, interest rates, and principal balances, they can be quite sensitive to the change in the housing economic conditions and interest …

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How Do American Mortgages Work? Part 6: The Federal Agencies

Since the housing market is so massive in the United States the government had to be regulating the market in some way. With some agencies created in the midst of the Great Depression and some after the housing bubble burst. These three primary agencies are there to help the consumer and the lender whether it’s regulating the market or insuring less risk onto the lenders, they are there to provide an efficient mortgage market in America.

After the housing bubble burst, the United States government wanted to make sure nothing of this severity ever happened again. President Obama and the Congress signed in the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 that created the Consumer Financial Protection Bureau (CFPB). The goal of the organisation is to watch out for American consumers in the market for consumer financial products and services. Since this agency was only focused on the consumer rather than on monetary policy or bank safety, it puts all the agencies focus on protecting the consumer from unfair processes and illegal activity from products and …

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How Do American Mortgages Work? Part 5: Fannie Mae and Freddie Mac

The main goal of Fannie Mae and Freddie Mac is to give the national mortgage market some liquidity. They purchase the loans from the mortgage firms (only under strict standards with size, credit score, and underwriting). For the next step, they package up the loans into Mortgage-backed securities, which they guarantee the payments on the securities to the investors even if a mortgage defaults.

These standards led to a more reliable ad sustainable mortgage products with longer terms and fixed-rate mortgages. On top of that investors knew that even if a mortgage defaults in their invested security, Fannie and Freddie will supplement the payments to them. Which made mortgage securities seem like a safe and sustainable investment.

Fannie Mae was created in 1938 in part of the New Deal Legislation to help with the housing crisis during the Great Depression. The goal was to buy all the FHA-insured loans to help recover the lenders’ money supply. It was originally apart of the Federal Housing Administration (FHA).

Freddie Mac was established in 1970 to keep the supply of money moving for …

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How Do American Mortgages Work? Part 4: Aggregator

The next step into the Secondary Mortgage Market process in the aggregator. The aggregator buys the mortgages from banks and other originators. It then packages them up as mortgage-backed securities and sells it to securities dealers.

These mortgage-backed securities are investment opportunities that are bundled up mortgages. The aggregators send them off to a rating agency to be rated on their risk of money loss. They securitise the mortgages to either form a private label mortgage-backed security (think of Wall Street) or form agency mortgage-backed security (think of Fannie Mae and Freddie Mac). They then sell it to large institutional investors, insurance companies, hedge funds, and wealthy clients.

This is a complicated process because they have to make sure they receive a profit so before a security is sold a process called hedging a mortgage pipeline is involved. They make profit by the gap between the sales tag on the mortgages they obtain and the price the mortgage-backed securities sell for.

http://budgeting.thenest.com/definition-mortgage-aggregator-34152.html

http://www.investopedia.com/articles/pf/07/secondary_mortgage.asp

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Could Monetary Policy be affecting the Mortgage Default Rate?

With reference to How does monetary policy pass-through affect mortgage default? Evidence from the Irish mortgage market by David Byrne, Robert Kelly, and Conor O’Toole. 04/RT/2017

With the loosening structure of the monetary policy by central banks after the global financial crisis, which allowed the mortgage interest rates to be lower which could have led to a lower default rate on mortgages. This post will focus on two different types of mortgages the Standard Variable Rate mortgage (most commonly known as SVR) and the Tracker mortgage.

A SVR is a mortgage where the lender has the ability to decide when and if the interest rate on the loan will change while a Tracker mortgage is where the interest rate is set to a certain percentage above the European Central Bank interest rate. As the number of Tracker mortgages were increasing while the European Central Bank interest rate was decreasing, the banks started to lose money on them as the interest rate on the mortgage payments were not high enough to cover the cost of the loan. …

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