Question About Mortgage Loans

*** Edited to add a conversation with the GZA (at the end) ***

Maybe this is a really stupid question, but if anyone knows what the deal is, I would very much like to hear what you have to say. The question I have is about jumbo vs conforming mortgage loans.

Right now the conforming limit is 417K (and current talk of boosting this as high as 730K). So, any loan above this amount would be considered a jumbo, and therefore would be subject to significantly higher interest rates. This makes perfect sense, because larger loans would definitely carry more risk. Thus, lenders have the right to be compensated for the increase.

However, the notion of a hard cut-off seems really dumb to me. Why wouldn't there be many shades of risk which are then subject to a gamut of interest rates tied to each shade? Then, we would more or less have a weighted average of the risk and as a result a weighted average of the proper interest rate.

It seems stupid to me that a 415K loan can be had for 1% less than a 550K loan. What would make sense to me would be something more like a progressive schedule, with tiny incremental adjustments. Say we used 5 or 10K slices. First 10K is very low risk, and thus is given the very best interest rates... maybe 5%. The next 10K adds a little more risk, and maybe gets 5.02%. By the time you get to the 55th 10K slice, that part is much riskier given that in terms of an instantaneous snapshot, you've already borrowed 540K, and so it is subject to a much higher rate, say 6.89%.

The end result would be that you'd have a weighted rate for your loan.

Now, I'm just talking out of my ass right now. And, I'm thinking more like an engineer. Often times it's better to take a weighted average and apply a weighted rule set rather than applying completely new rules at some arbitrary cutoff point. You simply lose continuity.

I mean, qualifying criteria for a Roth IRA utilize a weaning off schedule (AGI < 99k =" full" 114k =" weighted"> 114K = no contribution). Why can't mortgage loans follow a similar model?

Anyone with more knowledge want to share with me why this general idea is not viable? I certainly would expect a lot of kinks to be worked out, but the overall concept of a risk-weighted loan makes a lot more sense than what we have today.


*** Edit #1 ***

Some spots are paraphrased/edited for clarity.

GZA: I saw your blog entry. It's not just that the jumbo loans have more risk from being larger.
GZA: Conforming loans can be bought and resold by Freddie Mac, where as the jumbo loans can't.
BruteForceX: right, so the thing is... why can't they figure out a way so that loans can somehow be partially conforming, partially not, etc. in terms of securitizing
BruteForceX: can't they break up loans into smaller chunks/slices? Or is that just too complex?
GZA: So you want to complicate the calculation of loan interest rates even further :)
BruteForceX: if it makes things less arbitrary... definitely! haha
GZA: Don't you think that shit is ridiculous enough to understand for the average person?
BruteForceX: well... that's for the professionals to figure out. The bottom line is that you will hopefully see your rate as a weighted avg. Who cares how your loan is bought and sold behind the scenes?
BruteForceX: You, as an avg person, should be oblivious to the behind the scenes shit. All you know is that a 450K vs 415K loan is not a HUGE interest rate diff, because that's plain stupid to have a discontinuity in the rates
GZA: Yeah. I hear you.

---------------------------------------

Okay, so I still don't know why there isn't some mechanism/model that prevents this sudden change in interest rates at arbitrary cutoff points. Still makes way more sense to me that there should be a smoother curve.

Smoking and a Wet Seal

My large position in Wet Seal is starting to show potential. My initial position is now back to even, but a position I established in my 401k is clearly in the green now (purchases at 2.18 and 1.91). I guess prior to this disclosure, only a few knew of those purchases, because I generally do not comment on my retirement accounts.

The company has been undergoing cost-cutting measures, and I have little doubt that a lot of what's going on in the company right now is a result of the return of their former CEO, Edmond Thomas. Despite the scary (to say the least) drop to the 1.80's, the stock has rebounded sharply and now sits at 2.87 . That's a really large move to the upside in 3 short weeks following good quarterly earnings, stronger than expected SSS, and signs of management's ability to effect change.

My initial position still has 40% of the shares covered by the March 2.50's, which is fine. Sure, I'd be better off had I not sold them, but I was overexposed and still am.

Anyway, tomorrow, Altria (MO) will be announcing their earnings. More importantly, they will be detailing the spin-off of Phillip Morris International. Assuming what they say is good, this should hopefully provide a further catalyst to move shares higher. I also read today that the company is getting a lot more aggressive on the global front. The WSJ came out with a piece on the company and talked a bit about their new China dealings and also the new Marlboro Intense product. These should be seen as strong positives for the company, in my opinion.

I guess that's it for now.

More Art

Just when you were about to forget the kindergarten art that I put up recently... here are the latest two in the series: Life as a King and Life as a Möbius Strip. Maybe I will actually get to 52 pieces so that I can make a weekly calendar.







This work is licensed under a
Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License.

Funny Ad

Just saw this today, and I thought it was funny, so I'm posting it.

Quick Update and More Chess

I thought about this a bit and decided it was best for me to exit some of my positions and raise cash. But, I did add to an existing holding with some of the proceeds.

Sold International Game Technology (IGT) at around 40.
Sold Eastman Kodak (EK) today in the mid-19's.
Sold Fortune Brands (FO) a little under 69.

Added to Glatfelter (GLT) below 14.

Maybe I sold into a bottom in the making. But, I think I really did need to do some clean-up, and so now it is done.

Okay, back to some chess talk. Anyway, I ran the game I played against Jorge through the Crafty engine. And, the rook sacrifice was clearly not sound, as I suspected. After the wild move, Crafty estimated White as having more than a full rook advantage. But, then White blundered in a not so obvious way...

26. Re7. Crafty saw this as a blunder, and estimated that after this move the game was pretty much even.

Looking at what the engine had to say, the not-so-good move for White that allowed me eventual victory was playing 28. Qf3 instead of 28. Be2.

So, I would guess a large part of this was psychological... Yay, for playing human opponents.

Chess Victory

I'm going to first say that I'm not a good chess player, especially when considering those who take their chess seriously. Among the most casual of players, I do just fine. While I've never been officially rated, I have held my own against those in the 1400 range (C Class). And, I should say I haven't really played in a long time.

Anyway, I'm going to share this game with you all only because I played it (and won!) against a buddy of mine, Jorge... I've never really beat him before (I think there was a speed game or two where we played time odds and he lost on time), and we've played a lot. But, he went into chess retirement, and only recently started playing again.

So, about the game... I pretty much screwed up in this game, and it was really apparent at move 18. So, I went for my Hail Mary rook sacrifice, which somehow allowed me to win. The sacrifice probably wasn't sound, but I figured I had to take a shot... aka I pulled this victory straight out of my ass.

And, Jorge asked that I paste his comment here:

You can quote me on your blog: I came out of retirement to lose to [BruteForceX].

Without further ado, here is the game in PGN. You'll need a viewer if you're at all interested in the replay. Here's an online viewer that I found that works fine: Online PGN Viewer.

[Event "Challenge"]
[Site "http://www.redhotpawn.com"]
[Date "2008.01.22"]
[White "Jorge"]
[Black "BruteForceX"]
[Result "0-1"]
[GameId "4524013"]

1. f4 d5 2. b3 Ng8f6 3. Bc1b2 e6 4. Ng1f3 Nb8c6 5. e3 Bf8d6 6. Nb1c3 e5
7. Nc3b5 exf4 8. Bf1d3 Bc8g4 9. O-O a6 10. Nb5xd6 Qd8xd6 11. Qd1e1 O-O-O
12. Nf3g5 Qd6e7 13. Rf1xf4 Bg4h5 14. Qe1g3 Kc8b8 15. Ra1f1 d4 16. Ng5e4 Rh8g8
17. Bb2xd4 Nc6xd4 18. exd4 Kb8a8 19. c3 c6 20. Ne4xf6 gxf6 21. Qg3h4 Bh5e2
22. Rf4e4 Rg8xg2 23. Kg1xg2 Be2xf1 24. Kg2xf1 Qe7a3 25. Qh4xf6 Rd8g8
26. Re4e7 Qa3c1 27. Re7e1 Qc1xd2 28. Qf6f3 Qd2xh2 29. Qf3f2 Qh2h3
30. Kf1e2 Rg8g2 31. Qf2xg2 Qh3xg2 32. Ke2d1 Qg2xa2 33. Bd3c2 Qa2a5
34. c4 Qa5a1 0-1

Relieved

Well, I was ready to lighten up on some of my overall portfolio, but then I saw that the FTSE had recovered sharply from its sell-off and then there was the emergency 75bp rate cut. So, I basically didn't do anything today (except gambled a little bit on Yahoo! (YHOO) and did pretty well... more luck than anything else).

I might still be lightening up on some positions in the days/weeks to come, but I haven't decided yet. Will wait and see, I guess.

So one crazy thing about today is that most of my positions are actually up despite the overall negative market. Probably says a lot more about how my positions are mostly in beat-up states than anything else. But, I'll take it.

Anyway, I guess all my worrying from the night before was all for naught.

And, if anyone missed Cory Bear's comment on my previous post, I think it's good to keep things in perspective. It really would suck a lot more if you were on the verge of retirement prior to a major market correction. Then again, I'm of the opinion that you shouldn't be that overweight in equities if you're really close to retiring.

That's all for now... I'm off to get an awesome lunch with the money that I didn't lose today.

Tomorrow Is Going To Suck

I have no idea how bad tomorrow is going to be, and it's possible that I'm worrying too much about it. But, after seeing several major worldwide indexes fall 7+%, I'm feeling pretty sick about what tomorrow will bring.

Obviously, there's not much that can be done... but, man, it's going to be brutal.

Altria Group (MO), for example, closed friday in the mid-$75's. In Frankfurt, it was last trading at under $72. Apple (AAPL) was going for around 160 on Friday. In Europe, shares were changing hands at 150.

Will we finally see some capitulation? Is a bottom near? Ugh, I should stop thinking about it. What I am feeling right now reminds me a lot of grade school when you did something stupid (like putting earthworms on your teacher's desk), and you get called into the principal's office. You sit and wait outside knowing that you're going to get into a lot of trouble really soon.

*** Edit ***

Seeing as how the Futures are currently indicating a rather large gap down in the market, I guess it really will be extremely painful. Question is, do I want to lighten up on some of my longs... it would be really bad if I did so, and it turns out that tomorrow's sell-off creates a bottom. Ugh. What to do... what to do?

Mimikaki

Okay, so I've heard quite a bit about this Japanese ear-picking gadget called the mimikaki. I have been curious about it, and today I bought one. It's simply awesome. I don't really know how to explain it, but I don't think I'm going to invest any more money in Q-Tips. They are not for me.

Here is a picture of mine.



What's great is that I'm not alone. I found this awesome You Tube video of someone that feels the same way as I do. Check out his video... he is awesome.

Perplexed About Absolute Zero

Okay, this is well outside my bailiwick, but I've been thinking about it recently after catching part of an episode of Nova covering absolute zero. So, if I understand correctly absolute zero is the theoretical temperature where everything basically stops moving and there would truly be zero heat energy. And, that temperature is at 0 kelvin, which based on all the searching I could do is -273.15° Celsius.

Now, maybe I'm a bit confused about how the Celsius scale came about, but it seems to be based on the properties of water (0° freezing point and 100° boiling point). Here's why I'm really confused and maybe I am missing something obvious here. If we chose an arbitrary compound (water, in the case of Celsius) to define some temperature scale, how is it that we got so lucky that the theoretical temperature of absolute zero fits so neatly, only requiring 2 decimal places?

I would have guessed that the chances of this would be astronomically against us. Everything I've looked at for more information never shows an absolute zero value that expands past the hundredths place. And, if the real value isn't exactly -273.15° Celsius, then how is it that there have been all these scientific breakthroughs that help get us closer and closer to absolute zero (to the billionths of a kelvin!).

There are answers out there, and I am fairly sure that some of you reading this have them. So, what am I missing? Did we really just get ridiculously lucky in our choice of Celsius that Kelvin translates cleanly to it? What's the real deal?

*** Edit ***

Well, that was fast... J.T. figured it was based on the redefinition of Celsius, and upon further research he is correct. So, the Celsius of 1900 is not the same as the Celsius of 2008.

See the little bit in the orange box on: A Brief History of Temperature Measurement.

In 1967, the Thirteenth General Conference on Weights and Measures changed the name of the thermodynamic temperature unit degree Kelvin (symbol °K) to merely kelvin (symbol K). The conference redefined Celsius temperature as the thermodynamic temperature minus 273.15 kelvin.

Silly Microsoft

So, I just wasted maybe 10 minutes of my life fixing a lame problem in some experimental code of mine. I basically wrote up really quickly a simple function I needed. It looked more or less like:

int f( int a, int b )
{
int big;
int small;

... then some junk here ...
}

Anyway, I was getting a funky compilation error from MSVC 6 (ya, I'm old school).

error C2632: 'int' followed by 'char' is illegal

I then spent some time trying to find out what was going wrong... I assumed I had mangled up some code above this silly little function. After some searching I was still a bit confused, and then it struck me that maybe Microsoft somehow #defined my simple variable name to something.

Sure enough, inside RPCNDR.h, we have:

/*********************************************
* Other MIDL base types / predefined types:
*********************************************/

#define small char

Anyway, it wasn't a ton of time wasted or anything, but I just felt like bitching about this silliness. So, the lesson here is don't name your local variable small if RPCNDR.h is included in your project (most likely by including Windows.h).

New Camera and Losing Bets

Well, I received my new camera today... Canon SD850 IS. It only cost me 25,000 PokerStars FPPs. Sad thing is that while collecting those FPPs, I didn't win as much as I'm used to (the games have really gotten tougher there, imo), but hey, it sure beats losing.

Speaking of losing, I have pretty much lost my SanDisk (SNDK) bull spread bet. It would take a near miracle, I think, for the spread to be anywhere in the money for me. Oh well... I guess that's why it's a good idea to keep gambling bets relatively small.

That's all for now!

Word Cubes Champion

It's official. I am the winner of the Skills4Cash Word Cubes tournament at 18 participating Bay Area bars. I just received the call, and I am now awaiting an e-mail with forms and instructions. Top prize paid out $655, which isn't bad at all for a silly bar game.

I played a handful of times and put up a whopping 8520 score. I guess I'll use that money to help fund a new LCD television, which I really need/want.

35 Down, 45 To Go

I'm taking a quick break here from work... I've been putting in some pretty long hours recently.

Anyway, my quest continues...

Since my last update on this matter, I watched 4 more Best Picture films.

One Flew Over the Cuckoo's Nest -- I went into this one with only a vague idea of what the story was about. Obviously, I've never read the book. After watching this, I don't think I really want to either. It's just not a story that I can really get into. The movie was slightly disturbing, but not really in a way that was the least bit interesting. I don't think it was horrible or anything, but I really don't understand why this one would be Best Picture material.

Chariots of Fire -- This movie I liked quite a bit. I felt it was well-acted, and I sort of liked the idea of two separate protagonists each with their own stories. The movie sort of had an inspirational feel to it, not so different than that produced by the classic, Rocky. I think it also helped my enjoyment knowing that this was based on true events.

Chicago -- Here's another one that I enjoyed. Before I continue, I should say that generally speaking, I like musicals. The storyline was fun and not really serious despite the fairly serious topic of incarceration for a capital crime. The music was good, and I'd say that I was thoroughly entertained for a couple of hours.

The English Patient -- Awesome cinematography does not an awesome movie make. I really didn't get that into this movie at all. While the details of story were not super predictable, I felt that you could pretty much see where the story story was headed. I don't know what others think about this one, but I was honestly a bit bored. And, at no time did I really connect with any of the characters on an emotional level, which I think would be required for a movie like this one to succeed in my book.

I've now completed 1990 - Present. Only 45 more to go! Ha ha.

Presidential Candidate Matching

So, I found this Presidential Candidate Matching Quiz thing on Corey M's blog... anyway, I took it and here's what I get. Definitely not a really strong match with any of them, but clearly I'm more on the 'red' side.

69% Ron Paul
62% Mitt Romney
61% Tom Tancredo
58% Fred Thompson
57% Rudy Giuliani
53% Bill Richardson
50% John McCain
49% Mike Gravel
49% Mike Huckabee
48% Chris Dodd
44% Hillary Clinton
44% Dennis Kucinich
43% Barack Obama
43% John Edwards
43% Joe Biden

2008 Presidential Candidate Matching Quiz

Power Outage

Well, I'm at home today... at least for now. We got hit with a pretty big storm overnight and there is a widespread blackout, which knocked out power at work. This means I get to watch the market get absolutely obliterated and watch the portfolio dissolve slowly amidst this steep sell-off.

Returning to Normalcy

The last week has been a bit busy... my parents, both of my sisters, and Duke were in town visiting. Although none of us really did anything it seemed like there was always something going on. I dunno, it was probably just my imagination. Anyway, as of today, everyone is gone, and it's time to get back to the regular schedule.

I have been watching some more movies in an effort to complete my quest. Here are the ones I checked off my list recently:

The Departed -- I liked this movie. It had a good storyline and there were some good twists that kept me guessing. However, I wouldn't call it an awesome movie, and I know that it didn't fit my idea of a Best Picture winner. I'm not even sure if I'd really be interested in seeing the Hong Kong movie that it was based on.

Shakespeare in Love -- This was a cool movie. While watching it, I realized that I had caught the last half hour or so of the movie in the past. Obviously, I didn't know what was really going on then. I wish I'd seen the movie in its entirety earlier, because it's a movie that I really got into. I don't know what it was about it that really drew me into the story. I felt the story was cleverly pieced together, and it just appealed to me.

Rain Man -- It is about damn time I finally saw this one. I am surprised that I never watched it before, since I honestly don't know anyone that hasn't yet seen it. I didn't even know that Tom Cruise played in the movie. In any case, I enjoyed the movie, and I thought the performance by Dustin Hoffman was excellent. Now, I will no longer be the only one left out when people make references to this film.

That puts me at 31 viewed of 79 total.

So, here are the movies in my queue (meaning that I've secured them and they await my viewing).

Chicago
Terms of Endearment
Gandhi
Ordinary People
The Deer Hunter
One Flew Over the Cuckoo's Nest
The Apartment