- A fascinating conversation with Gerald Posner, author of God’s Bankers: a History of Money and Power at the Vaticas, with crazy and horrible details of the Vatican’s bank’s dealings with the Nazis (hat tip Aryt Alasti). Also a review of the book in the New York Times.
- Nerding out on an interesting blog post by Laura McClay, who describes her involvement researching flood insurance (hat tip Jordan Ellenberg). One of my favorite point about insurance comes up in this piece, namely if you price insurance too accurately, it fails in its most basic function, and gets too expensive for those at highest risk.
- There’s a new social network created specifically to get people more involved in politics. It’s called Brigade, and it gets users to answer a bunch of questions about their beliefs. The business model hasn’t been unveiled yet, but this is information that political campaigns would find very valuable. Also see Alex Howard’s take. Could be scary, could be useful.
This is a guest post by Todd Schneider. You can read the full post with additional analysis on Todd’s personal site.
[M]ortgages were acknowledged to be the most mathematically complex securities in the marketplace. The complexity arose entirely out of the option the homeowner has to prepay his loan; it was poetic that the single financial complexity contributed to the marketplace by the common man was the Gordian knot giving the best brains on Wall Street a run for their money. Ranieri’s instincts that had led him to build an enormous research department had been right: Mortgages were about math.
The money was made, therefore, with ever more refined tools of analysis.
—Michael Lewis, Liar’s Poker (1989)
Fannie Mae and Freddie Mac began reporting loan-level credit performance data in 2013 at the direction of their regulator, the Federal Housing Finance Agency. The stated purpose of releasing the data was to “increase transparency, which helps investors build more accurate credit performance models in support of potential risk-sharing initiatives.”
The GSEs went through a nearly $200 billion government bailout during the financial crisis, motivated in large part by losses on loans that they guaranteed, so I figured there must be something interesting in the loan-level data. I decided to dig in with some geographic analysis, an attempt to identify the loan-level characteristics most predictive of default rates, and more. The code for processing and analyzing the data is all available on GitHub.
The “medium data” revolution
In the not-so-distant past, an analysis of loan-level mortgage data would have cost a lot of money. Between licensing data and paying for expensive computers to analyze it, you could have easily incurred costs north of a million dollars per year. Today, in addition to Fannie and Freddie making their data freely available, we’re in the midst of what I might call the “medium data” revolution: personal computers are so powerful that my MacBook Air is capable of analyzing the entire 215 GB of data, representing some 38 million loans, 1.6 billion observations, and over $7.1 trillion of origination volume. Furthermore, I did everything with free, open-source software.
What can we learn from the loan-level data?
Loans originated from 2005-2008 performed dramatically worse than loans that came before them! That should be an extraordinarily unsurprising statement to anyone who was even slightly aware of the U.S. mortgage crisis that began in 2007:
About 4% of loans originated from 1999 to 2003 became seriously delinquent at some point in their lives. The 2004 vintage showed some performance deterioration, and then the vintages from 2005 through 2008 show significantly worse performance: more than 15% of all loans originated in those years became distressed.
From 2009 through present, the performance has been much better, with fewer than 2% of loans defaulting. Of course part of that is that it takes time for a loan to default, so the most recent vintages will tend to have lower cumulative default rates while their loans are still young. But there has also been a dramatic shift in lending standards so that the loans made since 2009 have been much higher credit quality: the average FICO score used to be 720, but since 2009 it has been more like 765. Furthermore, if we look 2 standard deviations from the mean, we see that the low end of the FICO spectrum used to reach down to about 600, but since 2009 there have been very few loans with FICO less than 680:
Tighter agency standards, coupled with a complete shutdown in the non-agency mortgage market, including both subprime and Alt-A lending, mean that there is very little credit available to borrowers with low credit scores (a far more difficult question is whether this is a good or bad thing!).
Default rates increased everywhere during the bubble years, but some states fared far worse than others. I took every loan originated between 2005 and 2007, broadly considered to be the height of reckless mortgage lending, bucketed loans by state, and calculated the cumulative default rate of loans in each state:
4 states in particular jump out as the worst performers: California, Florida, Arizona, and Nevada. Just about every state experienced significantly higher than normal default rates during the mortgage crisis, but these 4 states, often labeled the “sand states”, experienced the worst of it.
If you’re interested in more technical discussion, including an attempt to identify which loan-level variables are most correlated to default rates (the number one being the home price adjusted loan to value ratio), read the full post on toddwschneider.com, and be sure to check out the project on GitHub if you’d like to do your own data analysis.
As everyone knows, nobody reads their user agreements when they sign up for apps or services. Even if they did, it wouldn’t matter, because most of them stipulate that they can change at any moment. That moment has come.
You might not be concerned, but I’d like to point out that there’s a reason you’re not. Namely, you haven’t actually seen what this enormous loss of privacy translates into yet.
You see, there’s also a built in lag where we’ve given up our data, and are happily using the corresponding services, but we haven’t yet seen evidence that our data was actually worth something. The lag represents the time it takes for the market in personal data to mature. It also represents the patience that Silicon Valley venture capitalists have or do not have between the time of user acquisition and profit. The less patience they have, the sooner they want to exploit the user data.
The latest news (hat tip Gary Marcus) gives us reason to think that V.C. patience is running dry, and the corresponding market in personal data is maturing. Turns out that EBay and PayPal recently changed their user agreements so that, if you’re a user of either of those services, you will receive marketing calls using any phone number you’ve provided them or that they have “have otherwise obtained.” There is no possibility to opt out, except perhaps to abandon the services. Oh, and they might also call you for surveys or debt collections. Oh, and they claim their intention is to “benefit our relationship.”
Presumably this means they might have bought your phone number from a data warehouse giant like Acxiom, if you didn’t feel like sharing it. Presumably this also means that they will use your shopping history to target the phone calls to be maximally “tailored” for you.
I’m mentally tacking this new fact on the same board as I already have the Verizon/AOL merger, which is all about AOL targeting people with ads based on Verizon’s GPS data, and the recent broohaha over RadioShack’s attempt to sell its user data at auction in order to pay off creditors. That didn’t go through, but it’s still a sign that the personal data market is ripening, and in particular that such datasets are becoming assets as important as land or warehouses.
Given how much venture capitalists like to brag about their return, I think we have reason to worry about the coming wave of “innovative” uses of our personal data. Telemarketing is the tip of the iceberg.
Guys! Exciting changes are afoot.
I’m extremely happy to say that I finished my first draft of my book, and although it’s not the end of that story, it’s still rather exhilarating. As of now the publication date is May 2016. My editor is reading it this week. Fingers crossed, everyone.
In the meantime, I’ve also recently heard that a grant proposal that I was on came through. This will have me working on interesting data questions from the Department of Justice out of the GovLab, which is run by Beth Noveck. It’ll be part time for now, at least until my book is done and until the Occupy Summer School is over, which is taking place more or less across the street from GovLab in downtown Brooklyn.
One thing that’s particularly great about being almost done with the book is that I’m looking forward to getting back to short-form writing. I’ve been so involved in the book, but as you can imagine it’s a very different mindset than a blogpost. When you write a book you have to carry around in your head an enormous amount of context, but when you write a blogpost you just need to have one idea and to say it well. It also helps if you’re annoyed (right, Eugene?).
Anyhoo, I’m pretty good at being annoyed, and I love and miss being mathbabe, so I’m more or less psyched to be coming back more consistently to this format soon. Although the life of a book writer is pretty awesome too, and I will definitely miss it. My favorite part has been the magical ability to connect with people who are experts on subjects I’m trying to learn about. Turns out people are extremely generous with their time and expertise, and I am grateful for that!
Please go read the article in the Dutch newspaper de Volkskrant entitled China rates its own citizens – including online behavior (hat tip Ernie Davis).
In the article, it describes China’s plan to use big data techniques to score all of its citizens – with the help of China internet giants Alibaba, Baidu, and Tencent – in a kind of expanded credit score that includes behavior and reputation. So what you buy, who you’re friends with, and whether you seem sufficiently “socialist” are factors that affect your overall score.
Here’s a quote from a person working on the model, from Chinese Academy of Social Science, that is incredibly creepy:
When people’s behavior isn’t bound by their morality, a system must be used to restrict their actions
And here’s another quote from Rogier Creemers, an academic at Oxford who specializes in China:
Government and big internet companies in China can exploit ‘Big Data’ together in a way that is unimaginable in the West
I guess I’m wondering whether that’s really true. Given my research over the past couple of years, I see this kind of “social credit scoring” being widely implemented here in the United States.
I have been told by my editor to take a look at the books already out there on big data to make sure my book hasn’t already been written. For example, today I’m set to read Robert Scheer’s They Know Everything About You: how data-collecting corporations and snooping government agencies are destroying democracy.
This book, like others I’ve already read and written about (Bruce Schneier’s Data and Goliath, Frank Pasquale’s Black Box Society, and Julia Angwin’s Dragnet Nation) are all primarily concerned with individual freedom and privacy, whereas my book is primarily concerned with social justice issues, and each chapter gives an example of how big data is being used a tool against the poor, against minorities, against the mentally ill, or against public school teachers.
Not that my book is entirely different from the above books, but the relationship is something like what I spelled out last week when I discussed the four political camps in the big data world. So far the books I’ve found are focused on the corporate angle or the privacy angle. There may also be books focused on the open data angle, but I’m guessing they have even less in common with my book, which focuses on the ways big data increase inequality and further alienate already alienated populations.
If any of you know of a book I should be looking at, please tell me!
I’m on record complaining about how journalists dumb down stories in blind pursuit of “naming the victim” or otherwise putting a picture on the story.
But then again, sometimes that’s exactly what you need to do, especially when the story is super complicated. Case in point: the Snowden revelations story.
In the past 2 weeks I’ve seen the Academy Award winning feature length film CitizenFour, I’ve read Bruce Schneier’s recent book, Data and Goliath: The Hidden Battles To Collect Your Data And Control Your World, and finally I watched John Oliver’s recent Snowden episode.
They were all great in their own way. I liked Schneier’s book, it was a quick read, and I’d recommend it to people who want to know more than Oliver’s interview shows us. He’s very very smart, incredibly well informed, and almost completely reasonable (unlike this review).
To be honest, though, when I recommend something to other people, I pick John Oliver’s approach; he cleverly puts the dick pic on the story (you have to reset it to the beginning):
Here’s the thing that I absolutely love about Oliver’s interview. He’s not absolutely smitten by Snowden, but he recognizes Snowden’s goal, and makes it absolutely clear what it means to people using the handy use case of how nude pictures get captured in the NSA dragnets. It is really brilliant.
Compared to Schneier’s book, Oliver is obviously not as informational. Schneier is a world-wide expert on security, and gives us real details on which governmental programs know what and how. But honestly, unless you’re interested in becoming a security expert, that isn’t so important. I’m a tech nerd and even for me the details were sometimes overwhelming.
Here’s what I want to concentrate on. In the last part of the book, Schneier suggests all sorts of ways that people can protect their own privacy, using all sorts of encryption tools and so on. He frames it as a form of protest, but it seems like a LOT of work to me.
Compare that to my favorite part of the Oliver interview, when Oliver asks Snowden (starting at minute 30:28 in the above interview) if we should “just stop taking dick pics.” Snowden’s answer is no: changing what we normally do because of surveillance is a loss of liberty, even if it’s dumb.
I agree, which is why I’m not going to stop blabbing my mouth off everywhere (I don’t actually send naked pictures of myself to people, I think that’s a generational thing).
One last thing I can’t resist saying, and which Schneier discusses at length: almost every piece of data collected about us by our government is more or less for sale anyway. Just think about that. It is more meaningful for people worried about large scale discrimination, like me, than it is for people worried about case-by-case pinpointed governmental acts of power and suppression.
Or, put it this way: when we are up in arms about the government having our dick pics, we forget that so do our phones, and so does Facebook, or Snapchat, not to mention all the backups on the cloud somewhere.