Oct 15

A number of my posts reference innumeracy. Innumeracy is to numbers what illiteracy is to reading and writing. There are two distinctions, however. First, when reading, one can keep a dictionary handy, and at least work their way through the passage or book. It can’t work quite that way with numbers. Second, when I read a poorly written piece, I am usually able to gather its meaning or intent. When someone simply offers me bad numbers, it often takes a bit of research to find the mistake.

Now, to my point, and observation. There are numerous emails (and blogs posts) out there who claim the $700 billion bailout package is $250,000 per individual, or $450,000 per family. This number is mind boggling and wrong. Let’s set the record straight. We have about 305 million people in our country. Using that number, we can easily see that a billion dollars is $3.28 per person. So $700B is $2295 per person. So for sake of hyperbole, we can call it $7000 per household or $4-5000 per adult, but while those numbers are a disgrace, it’s not the $450,000 per family that is spreading around unquestioned. If you such get an email, please reply back to the sender and set them straight.
Joe

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Apr 09

The debate continues about how the subprime mess occurred. Let me tell you how it would not have occurred:

  • Maximum Loan to value: 80% any higher requires PMI (Private Mortgage Insurance)
  • Debt ratio permitted: 28/36 – This means that one’s mortgage payment and property tax cannot exceed 28% of one’s gross monthly income and all one’s monthly debt burden cannot exceed 36%.
  • Income must be verified, i.e. ‘no doc’ loans not allowed.
  • ARMs must be qualified at the maximum adjusted payment 3 years hence. This would insure that a year or two of rising rates would not be an economic time bomb.
  • All documentation must follow the loan, no matter how it’s sold or repackaged

Would these rules eliminate foreclosures? Hardly. People still lose their jobs, and if unable to find work soon may be unable to make payments. People get sick and are unable to return to work, their disability pay not adequate enough to pay the mortgage. The rules above were broken, and the subprime mess resulted. Follow the rules above and it would take a 20% decline in prices for the lender‘s capital to be at risk. With the permitted debt ratio above, a family earning $60,000 can pay $1400/mo toward mortgage and property tax. A $1200 payment can support a $200,000 loan at 6%, 30yr fixed. 20% down, and this results in a $250,000 home. Now, the median price of a home is $206,200 per the latest CNNMoney report, down from $219,300 in the prior quarter. Seems reasonable to me.

Joe

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