While it appears the combination of ample liquidity injections by the Fed and soft loans guaranteed by the Small Business Administration has managed to ease concerns of a looming and massive cash crunch across the economy, there is at least one group of financial firms that has yet to see any respite: mortgage servicers. These are the companies that collect mortgage payments and pass them on to the investors who hold mortgage‐backed securities (MBS). For that service, they collect a fee.
But now that officials have declared a moratorium on mortgage payments for all distressed borrowers, mortgage servicers are in trouble. By contract with the main guarantors of MBS—Fannie Mae, Freddie Mac, and Ginnie Mae (all government‐run)— they are supposed to continue paying investors even if borrowers become delinquent. Fannie & Co. ultimately make up for those payments, but there is a lag between nonpayment and reimbursement, which servicers must manage.
In ordinary circumstances, mortgage servicers usually have a capital cushion sufficient to handle the gap between borrower delinquency and reimbursement by the guarantor. But the government‐mandated nature of the COVID-19 lockdown and the broad coverage of the moratorium mean that millions of borrowers are expected to go delinquent at once, for a period of as‐yet‐unknown length. Owing to this large and unforeseen event, mortgage servicers have warned that they will soon find themselves defaulting on their contracts unless the guarantors come to their rescue.
While I have little doubt that servicers will eventually benefit from some form of taxpayer‐backed liquidity facility, the unfolding cash crunch is yet another instance of the ‘waterbed effect’ of regulation, whereby risky activity that regulatory interventions seek to discourage in one part of the market tends to re‐appear in other parts that are exempt from such regulation. What’s more, the new hubs of the risky activity sometimes have other vulnerabilities that can set the stage for a worse crisis than the one regulators sought to avoid. I fear that may be happening now with mortgage servicing.
In 2013, banking regulators enacted strict capital requirements for mortgage servicing assets (MSAs) that have since discouraged banks from holding them. A rule issued last year eases MSA requirements for domestically focused banks under $250 billion, but the changes only kicked in last week and they cover at most 48.4 percent of U.S. banks by assets. (I say “at most” because some banks under $250 billion have more substantial foreign activities that disqualify them from the new rule.) Besides, many of these smaller banks are no longer involved in mortgage servicing and have no immediate plans to return to that line of business.
The original MSA capital rule hastened a shift of mortgage market activity (both origination and servicing) from banks to nonbanks after the 2008 financial crisis. Post‐crisis litigation and Dodd‐Frank regulations chased many banks away, while exemptions from general underwriting rules for mortgages purchased by Fannie and Freddie made it easier for nonbanks (which do not keep any of the mortgages they originate) to cater to their businesses. Regulation appears to be the most important, but not the sole, driver of the rise of nonbanks, which also tend to have superior technology that enables them to market, originate, and service mortgages more cheaply than most banks.
Nonbank mortgage servicers face no federal prudential requirements. And although they must meet conditions set by guarantors they wish to work with, these are typically less onerous than the ones regulators place on banks. Bankers complain that this differential treatment gives nonbanks a competitive edge. Nonbanks counter that this treatment is reasonable, since unlike the largest U.S. banks, they do not pose a systemic risk owing to their smaller balance sheets and the short period of time for which they hold mortgages. Moreover, nonbanks largely get their funding from banks, which themselves have access to emergency lending through the Fed’s discount window, and cheap funding thanks to FDIC insurance and the Federal Home Loan Bank system. In a somewhat circuitous way, therefore, nonbanks have (and pay for) access to the federal safety net.
But nonbanks also have distinct characteristics that make them less robust in times of stress. Whereas mortgage servicing has always been a small part of banks’ balance sheets—even when they dominated the market—many nonbanks specialize in this business. This lack of diversification makes them more vulnerable to a servicing cash crunch. And while nonbanks may claim their reliance on short‐term bank funding as a virtue, such funding is also less stable than the insured deposit funding banks enjoy. Should banks turn off the tap, nonbanks will quickly find themselves in trouble. Nor could banks be accused of imprudent behavior if they did so, since mortgage servicing has suddenly become a very risky undertaking.
Many may be tempted to conclude that nonbank servicers’ current travails show that they should be subject to tighter capital and liquidity requirements. But while there may well be good arguments in favor of such a policy, today’s highly unusual circumstances form a doubtful foundation on which to base new rules, which could end up making mortgage credit unnecessarily expensive for many borrowers.
But the experience should prompt banking regulators to reevaluate their MSA capital rule. Mortgage servicing assets are a small share of the balance sheets of most banks, large and small. Indeed, they have dropped from over 10 percent of aggregate core bank capital before the 2008 crisis, to around 3 percent today. Allowing banks to take up a bigger share of mortgage servicing can therefore make the system safer, without increasing the cost of credit or exposing taxpayers to losses. The best way to keep a bulging waterbed from bursting is not to step on the bulge, but to take some weight off.
Some immigration opponents want lawmakers to cancel the H1B visa lottery, which admits 85,000 skilled immigrants per year. Their position may reflect a belief that high‐skilled immigration is especially dangerous during the COVID-19 pandemic. If so, they have the analysis backwards.
Not only do highly skilled immigrants help U.S. companies develop new technologies and innovations; many serve on the front lines of the medical response to COVID-19.
Medical professionals make up roughly 5 percent of H1B visa applicants out of the top 100 occupations. These doctors, nurses, and technicians already face overly strict regulations that limit their ability to provide care. In addition to the thousands of immigrants working in medicine, adjacent industries – including biotechnology, pharmacology, and more – rely heavily on skilled immigrant labor.
Policymakers should make it easier, not harder, for skilled immigrants to perform these critical duties. Suspending the H1B lottery is even more misguided now than it would be in normal times.
Cato’s Center for Educational Freedom has been thinking hard about the coronavirus and its impact on our education system. Here’s a quick roundup of our work furnishing suggestions and resources for the suddenly homeschooling and grappling with the education policy implications of the coronavirus lockdown.
Help for the Newly Homeschooling
Homeschooling expert Kerry McDonald recorded a three‐part Cato Daily Podcast series on homeschooling and the coronavirus. All three episodes are embedded in this blog post, which also summarizes each episode’s theme. McDonald differentiates coronavirus‐forced virtual schooling from richer, full homeschooling, discusses the potential benefits of an education system with suddenly relaxed regulations, and explores the benefits for homeschooling of expanding school choice initiatives.
Here a panel of homeschooling and education policy experts answer questions from people newly confronted with schooling at home. They tackle everything from having unstructured time, to delivering education to your kids even if you think your education is not good enough.
There are many steps parents can take to make educating their kids at home a rewarding experience:
1. Avoid replicating school at home
2. Prioritize play and unstructured time
3. Use online learning resources
4. Encourage virtual playdates
5. Embrace family time
6. Make room for reflection
Fears of some children falling behind as everyone moves education online are totally understandable. The consequences for those who fall behind would be less dire if we had an education system that did not essentially require us to batch process kids based largely on their age.
The New York Daily News published an article titled “American individualism has failed epically: The hard lesson of the coronavirus crisis.” The piece essentially blamed American “individualism” for putting profiteering ahead of caring. But the evidence, with a special spotlight on education, destroys their case.
Since many student loan borrowers will have trouble repaying their loans given the coronavirus, the government should implement a simple repayment pause. It should not implement broad forgiveness. It also makes sense for the federal government to waive state testing requirements at the K‑12 level.
California essentially jumped to a 100% K‑12 homeschooling population as a consequence of the coronavirus. Most school districts are providing educational services virtually. However, families also have the ability to opt for virtual charter schools that have been providing tuition‐free online learning to children for decades.
The American education system is fairly well equipped to respond to the coronavirus because it is decentralized and we have given room to alternative education models. Districts could respond to COVID-19 according to unique local circumstances, and having options such as charter, private, and homeschooling have helped to develop multiple ways of delivering education, including virtual.
Monday night, Communications Daily (paywall) ran a story with the following lede:
As Karl Herchenroeder noted deeper in the piece, the fact of the existence of an FBI investigation involving the Telegram app surfaced as a result of a Freedom of Information Act (FOIA) request I filed last year with the FBI. In October 2019, the FBI responded to my FOIA with the following:
I appealed, but last month the Department of Justice’s Office of Information Policy (OIP) affirmed the FBI’s refusal to provide a single document mentioning Telegram. While I’m evaluating whether to sue DoJ over the denial, the fact that the Department has acknowledged that it has at least one (and likely far more) investigation of Telegram’s service underway is itself significant.
That former (Comey) and current (Wray) FBI directors have been waging public relations battles against public key encryption is well established. Comey of course actually went to court against Apple over the issue as it related to the San Bernardino Salafist terrorist incident. But what no senior federal official has been willing to admit is this: compromising the encryption utilized by tens of millions of Americans–including the family members of FBI, DEA, and other law enforcement officers at all levels–would make all of us more vulnerable to not just ordinary hacking, but potentially to kidnapping or even murder.
Comey, Wray and other security and surveillance hawks–most who have zero experience as computer programmers or cryptographers–continue to engage in magical thinking–convinced that somehow tech companies can develop encryption “backdoors” that only the government could access. As the data breaches at the Department of Energy and OPM (among others) have demonstrated, there’s no such thing as a safe crypto or IT security “back door”–if they exist, hostile actors will find and exploit them. The fact remains that the FBI has many tools to get at bad actors that misuse encrypted messaging apps like Telegram. Legislatively or court‐mandated crypto “back doors” that place us all at risk should not be one of them.
Back in November the Centers for Disease Control and Prevention announced a “breakthrough” in its investigation into the cause of what is now called EVALI (e‑cigarette vaping associated lung injury): fluid samples from patients revealed the overwhelming majority of cases were due to Vitamin E acetate, used as the solvent in THC‐containing vaping liquids. I argued that this discovery provided yet another reason to legalize cannabis.
Because cannabis is federally banned, most THC vapers use bootleg cartridges obtained on the black market. Shortly after the discovery that inhaling Vitamin E acetate was behind the outbreak of EVALI, states where recreational marijuana is legal moved to ban use of the solvent in the manufacture of THC vaping solutions sold in legal cannabis shops. Of course, in legal markets cannabis dealers already have the incentive to make sure the vaping liquids they sell to customers is not made with Vitamin E acetate.
Shortly after the CDC announcement, Jeffrey Miron and J.J. Rich provided data showing cases of EVALI were less common in states where recreational cannabis is legal. Yesterday, researchers from Indiana University provided more supporting evidence. Reporting in JAMA, the researchers conducted a cross‐sectional analysis at the state level plus the District of Columbia using CDC data on the number of EVALI cases for each state in 2019, in conjunction with “estimates of the prevalence of e‑cigarette use in each state in 2017 from the Behavioral Risk Factor Surveillance System, and estimates of state populations in 2017 from the Surveillance, Epidemiology, and End Results database.” They concluded:
The data suggest that EVALI cases were concentrated in states where consumers do not have legal access to recreational marijuana dispensaries. This association was not driven by state‐level differences in e‑cigarette use, and EVALI case rates were not associated with state‐level prevalence of e‑cigarette use. One possible inference from our results is that the presence of legal markets for marijuana has helped mitigate or may be protective against EVALI.
An editorial accompanying the paper, written by three University of Utah School of Medicine critical care specialists, drew comparisons to the alcohol prohibition era, where bootleg alcohol was often fortified with methanol to increase potency, often causing blindness and death, and where stocks of ethanol legally allowed for commercial use were denatured with benzene and other poisons—on order of the federal government—to discourage their personal recreational use. Federally‐ordered denatured alcohol was responsible for thousands of deaths during the Prohibition Era.
U.S. policymakers are rightly focused on reducing fatalities and lung damage brought on by the COVID-19 pandemic. Hopefully before much longer, this public health crisis will pass. Unfortunately, federal cannabis prohibition will still be with us, causing its own set of lung injuries and related fatalities.
As the United States struggles to contain the coronavirus outbreak, it has revived the perennial guns versus butter debate. Or, in this case, guns versus medical equipment. Might some of the money spent on the U.S. military have been better spent on more useful things closer to home? Might a few million additional N‑95 masks have protected more Americans than a few additional M1 Abrams tanks? Might the money spent on even a single F‑35 fighter plane have saved more lives — in April and May of 2020, at least — if it had been used to buy a few thousand more ventilators?
Such questions were barely on the table less than two months ago. On February 10, 2020, the Trump administration submitted its budget proposal for Fiscal Year 2021. It called for $740.5 billion for national security, of which $705.4 billion was for the Department of Defense. The accompanying press release outlining the rationale for this spending didn’t mention infectious diseases or coronavirus or anything pertaining to protecting public health. That isn’t so surprising: the Pentagon is rarely called upon to deal with domestic threats – and most Americans don’t want it to. But at the time of Secretary of Defense Mark Esper’s announcement of the FY21 budget request very few could have imagined that, by late March, thousands of military personnel would be scattered around the United States constructing and staffing make‐shift hospitals.
Many aspects of the U.S. government’s response to COVID-19 merit scrutiny. There will be a thorough review of policies and procedures that might have slowed the spread of the virus. But, for now, the focus is and should be on stopping the further spread of the disease and caring for those who have contracted it. Such measures require several key pieces of protective equipment, from N‑95 masks to gloves and gowns. Testing kits and thermometers are needed to separate the healthy from the sick. And hospital beds and ventilators are needed for those who fall ill. Shortages have prompted governors and mayors to appeal for help from the federal government, but also from foreign governments. Michigan, which as of 3 pm on April 6, 2020, had reported 17,221 confirmed cases, and 727 deaths from the disease, last week requested over 20 million N‑95 masks and 25,000 ventilators. Massachusetts secured 1.2 million N‑95 masks from China, delivered by the New England Patriots’ team plane.
Surveying that budget request from two months ago, the Trump administration had asked for $11.4 billion to purchase 79 F‑35 Joint Strike Fighters, $3.5 billion for 2 Arleigh Burke destroyers for the Navy, and $1.5 billion to modernize 89 M‑1 Abrams tanks.
By way of comparison, then, and using high‐end estimates for the medical devices, for the cost of a single F‑35 ($144 million), we could have purchased at least 2,800 ventilators.
Last month, Maryland Governor Larry Hogan called on hospitals to quickly expand the number of beds in the state. Six hospitals reported that it would cost nearly $40 million to add 340 by May 1st. At that rate, the one Navy destroyer in the Trump administration’s budget ($1.75 billion) costs as much as 14,870 hospital beds.
And it would cost less to purchase 17 million N‑95 protective masks (at the pre‐gouging price) than what U.S. taxpayers are being asked to spend to modernize a single Abrams tank (the one the Army doesn’t want).
This obviously isn’t apples to oranges. National defense is a vital government function, while health care is both a public and private undertaking. What Americans spend to keep themselves healthy varies dramatically. Many of those dollars come out of our pockets, or from the third‐party payers we rely on to cover our health care costs – whether that is a private health insurer or the federal government.
But the government has a role to play in protecting public safety, and when the leading threat to public safety is right here at home, and not susceptible to military solutions, it is appropriate to redirect some of the money that was intended for the Pentagon to these other, more urgent, needs.
Looking for intellectual stimulation while you’re stuck at home? Why not take a short course in the history of liberty?
The Encyclopedia of Libertarianism, published in 2008 in hard copy, is now available free online at Libertarianism.org. The Encyclopedia includes more than 300 succinct, original articles on libertarian ideas, institutions, and thinkers. Contributors include James Buchanan, Richard Epstein, Tyler Cowen, Randy Barnett, Ellen Frankel Paul, Deirdre McCloskey, and more than 100 other scholars.
In an interesting discussion of social change and especially the best ways to spread classical liberal ideas at Liberty Fund’s Online Library of Liberty, historian David M. Hart had high praise for the Encyclopedia:
The Encyclopedia of Libertarianism provides an excellent survey of the key movements, individuals, and events in the evolution of the classical liberal movement….
One should begin with Steve Davies’ “General Introduction,” pp. xxv‐xxxvii, which is an excellent survey of the ideas, movements, and key events in the development of liberty, then read some of the articles on specific historical periods, movements, schools of thought, and individuals.
He goes on to suggest specific articles in the Encyclopedia that are “essential reading” for understanding “successful radical change in ideas and political and economic structures, in both a pro‐liberty and anti‐liberty direction.” Here’s his guide to learning about the history of liberty in the Encyclopedia of Libertarianism:
- The Ancient World
- “Liberty in the Ancient World”
- Medieval Period
- “Scholastics — School of Salamanca”
- Reformation & Renaissance
- “Classical Republicanism”
- “Dutch Republic”
- The 17th Century
- “English Civil Wars”
- “The Levellers”
- “John Milton” & “Puritanism”
- “Glorious Revolution”
- “John Locke” & “Algernon Sidney”
- The 18th Century
- 18thC Commonwealthmen — “Cato’s Letters”
- The Scottish Enlightenment
- “Adam Smith”, “Adam Ferguson” & “David Hume”
- The French Enlightenment
- “Physiocracy” — “Turgot”
- “Montesquieu” & “Voltaire”
- “American Revolution”
- “Declaration of Independence” — “Thomas Jefferson” & “Thomas Paine”
- “Constitution, U.S.” — “James Madison”
- “Bill of Rights, U.S.”
- “French Revolution”
- “Declaration of the Rights of Man and of the Citizen”
- The 19th Century
- “Classical Liberalism” — the English School
- “Philosophic Radicals”
- “Utilitarianism” — “Jeremy Bentham”
- “Classical Economics” — “John Stuart Mill”
- “Classical Liberalism” — the French School
- “Jean‐Baptiste Say” & “Benjamin Constant”
- “Charles Comte” & “Charles Dunoyer”
- “Frédéric Bastiat” & “Gustave de Molinari”
- Free Trade Movement
- “Anti‐Corn Law League” — “John Bright” & “Richard Cobden”
- “Feminism and Women’s Rights”
- “Mary Wollstonecraft”
- Abolition of Slavery — “Abolitionism”
- “William Wilberforce”
- “William Lloyd Garrison” & “John Brown”
- “Frederick Douglass” & “Lysander Spooner”
- [The Radical Individualists]
- “Thomas Hodgskin”, “Herbert Spencer”, & “Auberon Herbert”
- The “Austrian School of Economics” I
- 1st generation — “Carl Menger”, “Eugen von Böhm‐Bawerk”
- interwar years — “Ludwig von Mises”, “Friedrich Hayek”
- Post‐World War 2 Renaissance
- “Mont Pelerin Society” — “Friedrich Hayek”, “Milton Friedman”, “Karl Popper”, “James Buchanan”
- Institute for Economic Affairs (IEA) & “Antony Fisher”
- Foundation for Economic Education (FEE) & “Leonard Read”
- Institute for Humane Studies & “F.A. Harper”
- The Austrian School of Economics II
- post‐WW2 2nd generation — “Ludwig von Mises”, “Friedrich Hayek”, “Murray N. Rothbard”, “Israel Kirzner”
- “Chicago School of Economics” & “Milton Friedman”
- “Objectivism” & “Ayn Rand”
- “Public Choice Economics” & “James Buchanan”
I could add more essays to his list, but I’ll restrain myself to just one: Along with the essays on the Constitution and James Madison, read “Federalists Versus Anti‐Federalists” by Jeffrey Rogers Hummel.
By the way, you can still get the beautiful hardcover edition if you prefer real books, for yourself or as a gift.