Saturday Cup of Joe: a lending and tech(ish) newsletter

Friends & Colleagues,

Saturday Cup of Joe #30. It has been an absolute pleasure to bring you the most interesting articles and thoughts from my week. Over 6 months of Saturday Cup of Joe has taught me a lot about writing and our industry. We have loved Detroit and enjoyed bringing you thoughts, pictures and observations along the way. Thank you for all the support and feedback along the way. I will continue this experiment until it no longer adds value. Have a great weekend.

This week we look at:

· Future of HUD (Of Interest)

· The world of the global elite (Got Me Thinking)

· Beauty of the diner experience (Sidenote)

· Hope, in the form of a letter (Today’s Thought)

Of Interest: HUD remains in the news both within the mortgage industry and nationally as President-elect Trump seeks to nominate a new Secretary of Housing and Urban Development. This week it was announced that our friend, Shawn Krause, Quicken’s EVP of Gov’t Relations was named to the HUD transition team. What impact that might have on rumors that Trump is trying to persuade Ben Carson to take the job is not yet known. Hopefully Shawn’s role will be to ensure someone who understands the critical role HUD, doesn’t yet, but could play in economic stability across the country. A housing expert is ideal. Someone who understand the role of housing in the overall economic development of communities and individual poverty would be even more powerful. (At a minimum, I’d like someone who understands the housing market.) In the end, we’ll take whomever the administration can get confirmed, I suppose.

What can get lost during these moments, and is often lost during many administration, is HUD’s potential. I mentioned it earlier but many (wrongly) see HUD as a social services organization because it is often treated as a social services organization. FiveThirtyEight blog wrote a compelling case for not sidelining HUD and instead capitalizing on the special role housing plays in combating poverty.

According to the article, a sociologist at Harvard named Matthew Desmond has conducted research tying inadequate housing to a devastating cycle of poverty. Though common sense to most of us who care about communities and families, residential instability is a fundamental predicator of life outcomes in children. What could be more important to future administrations that making sure we stabilize housing for as many children as possible ensuring the next few generations have the best chance to lead this country through upcoming challenges.

Beyond the theoretical potential of HUD, within HUD the Federal Housing Administration (FHA) underwrites and insures mortgages aimed at low to moderate income Americans, particularly first time home buyers. FHA is one of the few (if not the only) sub-agency that can fully fund its existence off the product/market it supports. HUD also fulfills, though again — not well, the mission to ensure fair housing opportunities and data collection about lending and housing patterns nationwide. Takeaway: As we move into the middle of the 21st century, it is time to either elevate HUD and capitalize on its unique position or eliminate HUD spinning off parts of the Department in other, less costly, ways.

Have You Heard?: There might be another bubble. Dot coms. Mortgages. Hedge Funds. An article this week compared financial regulation to a balloon. Regulators constrain one area and another expands. Admittedly, regulators have limited resources and cannot possibly cover the entire market. If one of the unintentional themes of this week’s newsletter is to raise more questions than answers, this article fits perfectly. Hedge funds have offered the most aggressive upside for investors in recent years but continue to expand faster than regulators can keep up. Overall, I’m not that worried that hedge funds will overextend or start hemorrhaging assets in a way that weakens the entire market. Mainly because only the largest institutions and wealthiest individuals can afford to participate; also because the speed at which funds would divest or expose risk would generally ensure some stability. Nevertheless, regulators are taking a hard look at hedge funds and it is worth keeping an eye on.

A Look Ahead: There’s a tower in San Francisco that is sinking into the ground. Open in 2009, the Millennium Tower has sunk 16 inches. Though the builders insist the building is sound, engineers have estimated the tower is sinking as much as 1 inch a year. The article is accompanied by video if you are interested in seeing the cracks for yourself.

Got Me Thinking: Generally, I’m a sucker for stories about obscene wealth or the financial strategies of the world’s elite. This one has it all. Give it another few years and we’ll have the screenplay and the major motion picture. Until then, we have this amazing New York Times article titled, “How to Hide $400 Million.”

Here’s an excerpt: “…the world of offshore finance, a place that the global elite has spent hundreds of millions of dollars to build and defend. In the offshore archipelago, their interests are hidden behind shell companies and trusts, their anonymity guaranteed under the law, from Delaware to the Bahamas to the South Pacific. James S. Henry, a former chief economist at McKinsey, calls the offshore financial world the “economic equivalent of an astrophysical black hole,” holding at least $21 trillion of the world’s financial wealth, more than the gross domestic product of the United States.”

What I can’t figure out is what happens next. Meaning, will governments and institutions — banks, law firms, etc. — work to eliminate the ease of accessing mysterious and opaque financial instruments? Or will we continue to look the other way as the ultra-wealthy to dictate the rules of the game? Do we even care? Sometimes these things raise more questions than answers. Here, I’m not all that worried about the web of people and mechanisms to hide otherwise legitimate money. This article is interesting because it straddles the line between implying that some of the money is legit and/or some is illegal (i.e. stolen from the citizens of an oppressed country). Do the bad actors besmirch the whole system? The wealth, the people who possess it, the international financial structures. It is a tough call. No single country has the authority or bandwidth to unravel a system this complex. If that’s true, what’s next? My interest is whether the disparities between the global elite and the rest of us, or better yet, the global elite and the reach of national authorities will ever change course (or simply continue to grow further apart).

One possible resource in this type of interesting discussion is NPR’s podcast Planet Money. Check it out.

Sidenote: A propos of nothing I found an article this week that caught my attention. The New York Times metro section did a thoughtful piece on the New York City diner. As a lover of diners (shout out to the Starlite Diner, York, PA), I figured the author and I would agree. Just last week, I heard the term “the third place” for the first time and I’ve been thinking about it ever since. The fact that this article also recognizes the importance of the third place means it is definitely in the air. The third place is not home and not work but a destination that holds some comfort and meaning just the same. As social creatures, it fills the sense of community we can no longer get naturally. We have to seek it out. The diner as the third place is perfect. Whether it’s healthier than a pub is debatable but probably true. The other observation I would offer is about nostalgia. It is difficult not to read this piece without lamenting the fact that diners can no longer afford to exist in Manhattan and Brooklyn. It signifies progress and the natural evolution of place. But still seems sad, somehow. At the same time, it is an opportunity for places that are not Manhattan and Brooklyn to take notice and maintain the “something” that diners provide and everyone (even Millennials!) seek. A thoughtful person recently said to me “I’m not nostalgic but I am reverent.” For some reason I feel reverent for what the third place offers us but still nostalgic for a good diner.

Quick Hit: Questions surrounding credit scoring models continue. I mentioned it last week and Ken Harney wrote about it this week. The bottom line is that challengers to FICO like VantageScore are well positioned having already done the difficult work of proving the math to investors, establishing trust within DC’s regulatory community, and selling the value proposition to the industry. Others, even some that may not exist yet, could easily challenge the industry with data. The difficulty is the weighting of underlying assumptions behind the data. It will always be a subjective measure no matter how scientific it becomes. Consumers and lenders alike can rest easy, though, because no matter which model is applied everyone in the model is at least treated equally. Perhaps what will develop won’t be the perfect model that the entire industry adapts but rather that lenders will start looking at multiple models understanding each treats certain attributes slightly differently or includes attributes the others do not. Until we get further stability, the future might be comparing models not electing an heir to FICO.

Presented without Comment: A list of all the promises Trump made during the campaign. 282 in all.

Today’s Thought: Hang onto your hat. E.B. White’s letter to Mr. Nadeau.

Dear Mr. Nadeau:

As long as there is one upright man, as long as there is one compassionate woman, the contagion may spread and the scene is not desolate. Hope is the thing that is left to us, in a bad time. I shall get up Sunday morning and wind the clock, as a contribution to order and steadfastness.

Sailors have an expression about the weather: they say, the weather is a great bluffer. I guess the same is true of our human society — things can look dark, then a break shows in the clouds, and all is changed, sometimes rather suddenly. It is quite obvious that the human race has made a queer mess of life on this planet. But as a people we probably harbor seeds of goodness that have lain for a long time waiting to sprout when the conditions are right. Man’s curiosity, his relentlessness, his inventiveness, his ingenuity have led him into deep trouble. We can only hope that these same traits will enable him to claw his way out.

Hang on to your hat. Hang on to your hope. And wind the clock, for tomorrow is another day.

Sincerely, E. B. White

Bonus Article: Dan Gilbert’s blog post this week on avoiding the status quo at all costs.

Quote:I am not afraid of storms, for I am learning how to sail my ship.” — Louisa May Alcott

Continued Success,

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