Mar 17

In January, the Financial Crisis Inquiry Commission issued their final report, titled The Financial Crisis Inquiry Report.

While I’d not want to ruin a good cliffhanger of an ending, the web site itself puts it conclusion on the front page:

The Commission concluded that this crisis was avoidable—the result of human actions, inactions, and misjudgments. Warnings were ignored. “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.”

These words are encouraging, but I suspect the lessons learned here will soon be forgotten. Do you remember the Savings and Loan Crisis? I do. I was young, but bright enough to notice CDs from Lincoln Savings and Loan were not FDIC insured, not the ones they were pushing. Weren’t we supposed to learn our lesson then? The real question is whether our collective memory can last even a full generation. Will the next generation fall prey to the claim of this time being different?

This document is available as a (free) PDF download, and runs 662 pages. It’s organized in a way that makes it manageable and even interesting to read. I’m not betting, but let’s hope it’s really lesson learned this time.


written by Joe \\ tags: ,

Nov 17

A number of books have been written about the recent real estate crash over the last months. I’ve found Thomas Sowell’s The Housing Boom and Bust to be among the best.


Dr Sowell attributes much of the crisis to the well meaning politicians who misinterpret the meaning behind the data. They assume that any differences in mortgage approval rates between races must be due to racism and calls for correction. Instead of digging through the data to truly understand the origin of these differences, they seek to legislate equality with disastrous results. The Community Reinvestment Act (CRA) at its surface may have seemed to have the best of intentions, to provide affordable housing and improve home ownership rates among minorities. Unfortunately, good intentions didn’t lead to good results.

Let’s first take a step back and look at how the statistics are misunderstood. My undergrad is a BSEE (Bachelor of Science, Electrical Engineering), the number of women in my class and in the engineering school overall was about 15%. Does this need to be ‘fixed’ and if so, how? The immediate fix would be to change the acceptance criteria so all women that apply get admitted, or at least as many as it takes to get to 50/50. You can see how this is nonsense. For the long term, one can present fields of study in an interesting way and let the students decide. Can you change the interest of an entire gender? My data is 25 years old, and I suspect that the percent of women engineers has risen but not to the point of equality. This is a bit of a tangent, the truth behind the statistics, one I’ll bring up again in future posts.

An article in SmartMoney last November titled The Color of Money, spoke about the difference observed in wealth vs income among races, white households having a median net worth of $118,300 in 2004 vs black household’s $11,800. Even after normalizing for income, the wealth accumulation was higher for whites at the same income level as their black or Hispanic counterpart. The article didn’t go into the home ownership implications as it was pretty brief, instead focusing on retirement issues, but this observation sets the stage for some of the conclusions Dr Sowell’s book reaches.

The difference in mortgage approval rates can be viewed two ways, one study showing a denial rate for whites was 11% vs blacks 17%, ‘nearly 60% higher denial rate.’ When we look at the same data and state that the white approval rate was 91% vs blacks 83%, ‘less than a 10% disparity,’ the picture seems a bit different. What the CRA did was to encourage the banks to change the rules of lending, discarding much of what we learned in Mortgage 101. It wasn’t simply that house prices rose too high, as even in in 2005, the median house took just 22% of median income to afford, a number consistent with having housing cost 25% or less of one’s income. It was the introduction of subprime loans including those of the ‘no money down’ variety becoming the norm in many areas. This combined with the various adjustable rate products were the proposed solutions to a problem that didn’t exist. It doesn’t take a math genius to calculate the monthly payments required for an option ARM (paying interest only at a low teaser rate) and a fully amortizing higher rate loan a few years later. These products were the equivalent of financial time bombs.

This book is brief, only 148 pages, but an excellent read. The author, Thomas Sowell, is not a journalist with an agenda to promote, currently a Senior Fellow at the Hoover Institution, Stanford University, he has a respectable resume as a professor and author.


written by Joe \\ tags: , , , ,

Aug 06

I’ve used the term Innumeracy here to describe the equivalent to numbers what illiteracy is to reading. However, I now seek a stronger word or phrase to describe the egregious claims I’ve run across. I’m leaning toward “numerical blasphemy,” but am open to suggestions.

A Money Merge Account agent sent me a link to a You Tube video titled Truth in Lending. The author wanted to illustrate the concept of “front-loaded” interest on a 30 year mortgage. I’ve never seen a post that started with that idea end in anything that made sense, this video was no different. The video itself was well done, nice animation and voice over, but the numbers soon fall apart. I’ll offer two screen shots that show this.


As this slide came up, it seemed innocent enough,unfortunately it ends incorrectly. When working with a financial calculator you need to be very specific. N is not the number of years but number of payments, in the video’s example, 360. PMT, the payment, can be positive or negative depending on the calculator. Excel looks for it to be negative, a classic TI BA-35 calculator, positive. PV is not the equity built, but the present value of the mortgage, starting at the borrowed amount, and of course, ending with a FV (future value) of zero. He then says Compute, but there are two variable missing, %i (the interest rate) as well as FV. So, while I have no idea what his intention was, he now suggest taking I (the interest rate, I suppose) and dividing by Y (years, but why?) to produce a number which is admittedly large but meaningless.


Here, you can see that he author suggests that somehow the interest rate over 15 years is over 24%. But, back to a calculator or spreadsheet, we can see that PV = $200K (original loan) i = .5% (monthly rate or 6%/12) N=360 months (30 years) FV = 0 (after 30 years it’s paid to zero. If we enter these numbers we can comput the missing variable, the payment, which is $1199.10. Then it’s simple to set N to 180 (year 15) and compute the new future value, $142,097.69, as he shows above. On the other hand, we can enter PV =$200K, i = .5%, PMT = $1199.10, N=180 and FV = $142,097.69, and ask to calculate the rate, which of course comes back as .005 or 6% per year. By the way, it’s easy to look at the interest column above and divide say, the 2021 interest into the prior year ending balance and see you get under 6%. A couple hundred video views and no one saw how silly this all was?

As far as front loading is concerned, there’s nothing diabolical in how mortgages are calculated, you owe interest on the principal outstanding at any given time. Since you owe far more in the early years, more of your payment is interest. On this example $200K mortgage, in the first month the interest is $1000, but the principal paid is only $199.10. Pay more if you wish, that’s your decision. But don’t fall for an abomination of bad math. What does this have to do with the Money Merge Account? Only that every time I see numbers abused this badly I’m reminded of my friends at UFirst and the MMA.


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Apr 30

My regular readers will recognize this is a post regarding the Money Merge Account, an expensive mortgage accelerator I consider to be a scam. New readers should note, this was part of a series confined to a weekly Thursday post, and today this series ends as my intent is to provide a variety of articles well beyond this one issue. Now for the last MMA post…….

Well, I found this in my draft folder, seemed a waste to delete it:

I offer one agent’s rants, and my response:
“Yes, you might be able to do this kind of interest cancellation without the use of the software only IF:
1. you have the financial discipline and mathematical skill
2. you have the right kind of ALOC
3. you are willing and able to account for every penny at all times
4. you can tally all the variables and refigure your financial position each and every day
5. you can do this day in and day out for 5 to 10 years
6. you can do this without personal support if something goes wrong or you get confused
7. you are willing to forfeit tens of thousands of dollars in monetary gains in addition to doing all the work all by yourself.”

My response:
1. One need to write the checks regardless, the discipline is no different with or without this program. There is no mathematical skill required. If you can balance your checkbook, you’re all set.
2. The right kind? The “HELOC shuffle” provides little benefit and more risk than any agent understands.
3. Every penny? Hardly. This is just a scare tactic. You see, MMA with all its claims falls short by many dollars per month, adding up to quite a bit over the years. Skip MMA entirely, and now you’re watching those pennies.
4. Paying off your mortgage early is no more complex than paying extra toward your principal each month. The secret is…. there’s no math involved, just those payments. A spreadsheet or calculator will let you calculate the days until it’s paid in full, but MMA doesn’t add any value any more than a tape measure helps your child grow taller by frequent measurements.
5. I have better things to do with my time, so do you. It will take you a few seconds to make the extra payments at month end. You decide, do you really want to have to report every penny every night to your computer, and achieve worse results than you can on your own?
6. Per UFF disclaimer, they will not offer you any mortgage or financial advice, you want support, UFF isn’t going to be much help.
7. MMA costs you both time and money, doing it yourself will save you both.
Now, I think I’m done, the draft folder is empty. I will update the PDF to include the last set of articles in this series.

written by Joe \\ tags: , , , , , , , , , , , , , , , , , , , ,

Apr 23

Last week, I hinted that it was time to move on, and this will be my last regular post regarding the Money Merge Account scam sold by UFirst agents. A few reasons. After 30 weeks of non-stop analysis, there’s simply not too much left to say. I believe I’ve covered most aspects of the (bad) math used, the tactics agents use to promote the program, and the alternate ways to pay down your mortgage if that’s what you’re goal is. Those who seek an alternate not so objective view, the opposite of the agents pushing it, are welcome to read through my postings or download the PDF summary, which I will bring up to date. I’ll continue to discuss my thought on mortgages in general and take questions on the topic. I realized over the last few weeks that my time was better spent bringing articles to my blog for a more general readership, and to focus less on just one scam. For more discussion on MMA, there are a number of ongoing comment threads, including at The Simple Dollar, The Fraud Files, Bargaineering, and ActiveRain. So long as there are desperate people seeking solution to some kind of problem, there will be those who are happy to separate them from their money. The battle continues, I hope I helped save some readers from throwing their money away.

If something major happens which is worth sharing, or if someone offers an interesting guest post, I’m open to posting another installment in the future. Caveat emptor.


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