REPORT: lending rules would have cut the defauls in half

Higher Education in the United States of America
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Higher Education
Higher Education in the United States of America: What's the difference in average earning power between a Masters vs. JD vs. MBA vs. PHD in the humanities?
4 Answers
Karl Muth
Karl Muth, teaches Economics, Law, Org. Behaviour, Public Policy, and Statistics.
7.4k Views
Well, I'm in the bizarre position of having studied for all four of the degrees you're talking about. But I will talk about them as investments, since that's really what I think your question relates to.

Of them, the JD is the worst investment. The difference in earning power between top-tier and lower-tier JDs is negligible compared to top MBAs and lower-tier MBAs, so a high percentage (90%?) of graduates earn in a narrow, not very impressive band for the first ten years of their careers. Most people start out in junior associate positions with little potential for big bonuses no matter how great your work is or how much extra money your work makes the firm or your boss (unlike, say, investment banking). From an economics perspective, think of this as basically being compensated for X amount of productivity while your boss (or his boss, more likely) steals nearly 100% of the excess proceeds beyond that level of productivity (and probably takes credit for your work, too). Though we (Northwestern) offer a two-year JD, this is not the norm and the opportunity cost of that extra year spent in school earning a JD early in one's career trajectory is particularly problematic.

The MPhil or MSc probably is the second-worst investment. The variation in earnings is vast, but if you study something interesting (data sciences, economics, econometrics, applied statistics) that can get you into a good firm doing good work, you can get earnings levels that are similar to a top MBA. The discipline and the school for the masters degree (rigorous program from an institution well-known in that discipline) matters a lot. Your ability is what an employer will look like. I know two people who have done excellent work at investment banks and made lots of money (enough to retire at forty in comfort); both have masters degrees in physics from Cambridge. They have never done anything physics-related; both went directly into investment banking. But it does matter that they attended a good program and were hard-working, impressive students.

The PhD probably comes next. Really, PhDs break into two areas: those interested in industry and those interested in academia. People who both teach and consult at a high level are relatively rare. I'm often the first PhD a client (in a business consulting setting) has ever interacted with who had any interest in research, publishing, or academia. Generally, they're mystified as to why I'd have any interest in academia, given that it is so underpaid and so forth (from their perspective). When I explain that I'm fascinated by the state of the art in the areas I study, that I enjoy teaching, and so on... I generally get blank stares. But I do love having the ability to teach students and to work on big private sector projects and deals - and it doesn't bother me at all that I'll sometimes make as much in a two-day consulting session as I'd make in a semester of teaching.

The MBA is the best investment. I say this as someone who attended a #1 MBA program (Chicago) during the height of the recession anxiety (2008-2010). I give this context to give you a sense that this was probably the worst time in our generation to earn an MBA in terms of interest from recruiters (low), level of bonuses in consulting and finance (low), and so on. Yet it's one of the best things I've done and gave me the skills I use the most frequently (and most lucratively). Here, as with the MPhil, one's concentration (for me, economics) and the institution's reputation in that area (Chicago's being nonpareil in economics and finance) are crucial to initial earning power. The MBA confers high earning power but not within a narrow band; it is not impossible to be in the top 20% of the distribution and these people generally are earning 3x to 4x as much per year as the median MBA.

If your only consideration in getting a degree is future earning power, I think the MBA is the clear choice.

Cheers,
Someone who undertook JD, MBA, MPhil, PhD studies in that order and has found a fun career and has no student loans... yay!
 
evince said:
http://blogs.wsj.com/developments/2...could-have-cut-defaults-in-half/?mod=msn_free




Nearly half of all mortgage defaults from the housing bust might have been prevented by forthcoming consumer-protection regulations, but another 25% of loans that didn’t default might not have been made, according to an analysis by economists at Goldman Sachs GS -3.58%.

The Goldman analysis tries to quantify the impact of the forthcoming “qualified mortgage” regulations, which were part of the 2010 Dodd-Frank financial-regulatory overhaul. The law changed lending rules so that mortgage lenders are legally responsible for ensuring a borrower can repay a loan. The Consumer Financial Protection Bureau was tasked with writing rules for a “qualified mortgage” that lenders could make that would automatically satisfy the new ability-to-repay mandate.

The “QM” rules don’t take effect until next month. Lenders aren’t barred from making loans that fall outside of the QM rules, though they could face greater legal liability on those loans. Tuesday’s WSJ looked at how some banks have decided that they will offer some “non-QM” loans once the rules take effect next year, primarily by making loans to affluent customers (or potential customers) that will stay on banks’ balance sheets.

The Goldman study assumes that any loan that wasn’t a QM wouldn’t have been made. Nontraditional loan products are excluded from the QM definition, meaning loans with interest-only terms, for example, which don’t require immediate principal payments, wouldn’t qualify.

For loans originated between 2005 and 2008, nearly 47% of loans that defaulted had at least one product feature that isn’t allowed under the QM rule; around 59% of loans made in 2007 that ultimately defaulted had at least one nontraditional product feature that doesn’t meet the QM standard. (And because many of those defaults led to foreclosures that sparked the broader housing meltdown, those defaults may have indirectly produced even more defaults of traditional mortgages.)

But the study shows that around 25% of mortgages made between 2005 and 2008 that didn’t default might also have been excluded from the market, including 30% of loans made in 2007.

Loans with those nontraditional product features were concentrated in the “sand states”—Arizona, California, Florida and Nevada—that had some of the bubbliest housing markets. More than nine in 10 interest only loans in 2006 were in those states, along with nearly seven in 10 so-called “option” adjustable-rate mortgages, which require low minimum payments before resetting to sharply higher levels.

Many of those products have largely disappeared from the lending environment since 2008 and aren’t expected to come back anytime soon. So what changes could consumers see as a result of the regulations?

In addition to restricting QM to fully amortizing mortgages, lenders must show that borrowers’ total debt payments don’t exceed 43% of their pretax income. (Loans that are eligible for purchase by Fannie Mae FNMA -7.35% and Freddie Mac FMCC -7.45% can have higher debt-to-income ratios for now.)

The debt-to-income cap could curtail lending for borrowers seeking “jumbo” mortgages that are too large for government backing and who have irregular incomes or harder-to-document incomes.

“Self-employment income is harder to underwrite than is wage income, and lenders may become incrementally less willing to make loans to such borrowers given new legal obligations,” said the Goldman report. Borrowers that make a significant share of their earnings from volatile sources of income, such as bonuses, tips, commissions, and investment income, could also face greater difficulty
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now why is it none of you brave debaters even touched these completely verified facts?
 
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