Archive for January, 2011

The Adjustable Balance Mortgage

Monday, January 24th, 2011

Almost 2.9 million properties received foreclosure filings in the United States in 2010, despite federal programs like the Making Home Affordable Program, which allows some borrowers to modify or refinance their mortgages. According to Smeal’s Brent Ambrose, these programs are failing to stem the foreclosure crisis because they  focus strictly on borrower payment-to-income ratios, and, as a result, do not remove the incentive to default for long.

“The programs rolled out by U.S. regulatory authorities will not significantly reduce defaults unless house prices rapidly stabilize or go up,” Ambrose says. “The only way to truly reduce the default probability is to either reset the mortgage balance to a loan-to-value ratio that is lower than 100 percent, probably around 80 percent, or have frequent, predictable balance resets.”

Yes, balance resets. Ambrose and his colleague Richard Buttimer, a professor in the Belk College of Business at the University of North Carolina at Charlotte, have proposed a new type of mortgage contract that automatically resets the balance and the monthly payment based on the mortgaged home’s market value. They call the new mortgage contract the “adjustable balance mortgage” and contend that it reduces the economic incentive to default while costing about the same as a typical fixed-rate mortgage. Under real-world conditions, including the presence of unrecoverable default transaction costs to the lender, this new mortgage contract is better for both lenders and borrowers.

It works like this: At origination, the adjustable balance mortgage resembles a fixed-rate mortgage—it has a fixed contract rate and is fully amortizing. From that point on, at fixed, preset intervals, the value of the house would be determined based on changes to a local house price index. If the house value is found to be lower than the originally scheduled balance for that date, the loan balance is set equal to the house value, and the monthly payment is recalculated based on this new value. If the house retains its initial value or increases in value, then the loan balance and payments remain unchanged, just as in a standard fixed-rate mortgage.

For example, if a homeowner was found to owe more than the current market value of her home at one of the predetermined quarterly adjustment dates, then her balance would reset to the current market value and her monthly payment would be lowered as a result. At the next reset interval, if the market had recovered and the house was now worth more than what the homeowner owes, the mortgage balance reverts back to the originally scheduled balance, resulting in a higher monthly payment but one that does not exceed the payment specified at origination.

Read more about this new mortgage contract in Ambrose and Buttimer’s paper, “The Adjustable Balance Mortgage: Reducing the Value of the Put,” scheduled for publication in a forthcoming issue of Real Estate Economics.

Tags: Ambrose, Banking, Economic Crisis, Real Estate
Posted in News | 22 Comments

The Pension Crisis

Friday, January 21st, 2011

Ron Gebhardtsbauer, head of Smeal’s Actuarial Science Program (which was recently named a Center of Actuarial Excellence by the Society of Actuaries), was on Penn State’s public radio station, WPSU-FM, this morning discussing the underfunded pension problem facing Pennsylvania and many other state governments. According to an NPR report from last year, Pennsylvania’s unfunded pension liablities are expected to exceed $55 billion. And Gebhardtsbauer says a lot of other states are worse off.

Harrisburg recently made changes to the Pennsylvania pension system, cutting benefits and raising the retirement age. These changes only affect new workers, but Gebhardtsbauer thinks that they’re a good step in the right direction to ease the state’s current pension crisis.

You can listen to his complete interview online here.

Tags: Gebhardtsbauer, Media, Pennsylvania, Pensions
Posted in News | 7 Comments

This Looks Like a Job for Super Angels!

Thursday, January 20th, 2011

Fast Company  recently reported on “the latest group of alleged tech marauders,” super angels:

These crafty interlopers represent a hybrid between the two investing models that have long ruled the normally placid world of startup funding. Super angels raise funds like venture capitalists but invest early like angels and in sums between the two, on average from $250,000 to $500,000. By being smaller, faster, and less demanding of entrepreneurs than VCs, super angels are getting first dibs on the best new ideas.

According to Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, super angels are nothing new:

The granddaddy of all angel groups, the Band of Angels,was founded in 1994 and has for many years had pre-committed funds available for investing in hot deals.  This structure avoided the horrendous task of  getting  to a decision when the group members have conflicting requirements and  are on a 24/7 schedule. As Wally Buch, one of the early members of the group, explained to me, “It’s like herding cats.”

The Fast Company article also implied that super angels are a purely Silicon Valley phenomenon, but such groups have operated nationwide for many years.  In Pennsylvania, for example, BlueTree Allied Angels in Pittsburgh has been successfully investing in life science companies for several years. There are nearly 30 companies in its current portfolio. 

We are seeing a growth in super angel groups inserting themselves at the early stage of company foundation before VCs get involved for a reason not really addressed in the article.  The Internet has enabled young companies to grow with less need for cash.  They can operate virtually, using experts as required from anywhere in the world without the need for full-time hires, and use social media marketing to enter markets. Business models using such capital efficiencies are opening up more opportunities for super angels at the expense of the VC firms, which  have to put larger amounts of cash to work.

Tags: Entrepreneurship, Venture Capital, Warren
Posted in News | 2 Comments

Keeping Your New Year’s Resolution

Tuesday, January 11th, 2011

The start of the new year means new resolutions to lose weight, quit smoking, and pay down debt. These resolutions make for crowded gyms in January, but according to Time, about “60 percent of gym memberships go unused and attendance is usually back to normal by mid-February.”

So, why are resolutions so hard to keep? ResearchPennState posed that question to Smeal’s Meg Meloy recently. Here’s an excerpt:

“It’s a matter of goals in conflict,” says Meg Meloy, associate professor of marketing at Penn State. “Consider the New Year’s resolution of being healthy and losing weight. You set the goal of eating healthy food. Then you’re presented with all this food and the goal of eating tasty food is triggered. Which goal wins?”

Studies by Meloy and others show that when someone with conflicting goals is given a choice, the person usually pursues the goal most prominent in his or her thoughts at the moment. Instant gratification tends to win, unless the person creates a situation where the alternative goal is more prominent.

“Imagine we present a group of people with a healthy option and a tasty option. The tasty option satisfies the immediate goal of getting something delicious to eat. Most people will choose it,” Meloy says. “However, if, while they’re deciding, we get them to think about how the healthy option contributes to a long-term goal like weight loss, many people will choose the healthy instead.” she says. Some will go back to the tasty option if given the chance to reconsider, she admits, especially if they make a promise to themselves to eat healthy food later in the day.

Meloy goes on to offer some advice on keeping resolutions. The complete article is available here.

Tags: Marketing, Meloy
Posted in News | 5 Comments

New Starbucks Logo Could Help Asian Expansion

Monday, January 10th, 2011

Smeal’s Karen Winterich, who has studied how logo changes affect consumers, weighs in on Starbucks logo redesign:

On the heels of Gap’s logo change (and subsequent change back to the previous logo) this fall, Starbucks has released a new logo. Similar to past logo changes for Gap, Ikea, and even Apple, consumers are immediately expressing their dislike for the new logo.  It might be surprising to many that those who are the most loyal customers and thus are expected to best support the brand tend to be those who are most upset. But if one considers that consumers develop relationships with brands, then this change to an integral part of the brand may threaten the customer’s relationship with the brand. Change is hard for many of us after all, so perhaps it’s no wonder those loyal customers are upset when “their” brand’s logo changes.

But unlike Gap’s return to its prior logo after customer complaints on social media networks, there may be an upside to Starbucks’ logo change. Its updated logo became more rounded, dropping the angular text in the previous logo. Rounded designs tend to be more appealing to consumers in Eastern cultures or those with an interdependent self-construal.  If Starbucks continues to grow in these cultures, its revised logo, while perhaps upsetting to loyal U.S. customers, may appeal to their newest customers in these collectivistic markets, and that just may be where it matters most.

More on Winterich’s research on logo redesigns can be found online here.

Tags: China, Globalization, Marketing, Winterich
Posted in News | 5 Comments

Chinese Wind Energy

Tuesday, January 4th, 2011

The New York Times recently reported on China’s entry into the U.S. wind energy market. “While proponents say the Chinese manufacturers should be welcomed as an engine for creating more green jobs and speeding the adoption of renewable energy in this country, others see a threat to workers and profits in the still-embryonic American wind industry,” The Times reports.

Smeal’s Gerald Susman, chair of the college’s Sustainability Council, believes that China’s entry into the U.S. wind power market presents a mixed bag of new challenges and opportunities:

There may be some benefits and drawbacks from the Chinese entry into the U.S. wind market.  The Chinese heavily subsidize their domestic solar and wind industries via low-interest loans and make it difficult for foreign competitors to enter China.  That allows them considerable scale to lower costs.  They already have gained significant share in the U.S. solar market, and this may happen for wind too.  The U.S. government has subsidized wind mainly through the Production Tax Credit, but low or zero profits have reduced its attractiveness.  Wind demand in the United States is driven mainly by Renewable Energy Standards in the 30+ states that mandate renewable energy.  Chinese entry won’t increase demand much via lower prices because coal is cheap and natural gas is especially cheap now. 

The Times article points out that foreign firms already make up most of the wind market.  GE and Clipper have relatively small shares compared to Siemens, Vestas, Suzlon, and Mitsubishi.  These latter companies import most of their high-value-added, high intellectual property components because there is a limited skill-base in the United States to make these components.  U.S. manufacturing focuses on towers, nacelle covers, engine mounts, and blades, which are either low-value-added components or too big and too heavy to import. 

The best that we can hope for in the near term is increased jobs for people who manufacture the low-value-added components, assemble turbines from imported components, and construct towers and maintain them.  That’s not insignificant growth, however.

Tags: China, Energy, Globalization, Susman, Sustainability
Posted in News | 14 Comments