The Reality Behind the Foreclosures.

This is probably the best article I have read in a while about why we have so many foreclosures. It was written by a real estate broker who lives in Littleton:

http://www.denverpost.com/opinion/ci_15 ... urce=email

I was especially glad to see that he wrote this, as it's something I've been trying to explain for a long time:

Bank financing is essentially a nationwide monopoly. You go to a bank, pay exorbitant fees to the bank, and get a 30 year loan that is amortized. An amortized loan is designed to pay more interest up front, and more principal at the end.

This design takes away most of the principal payments for the first 8 years in a 30 year loan. As an example, a borrower pays off only $26,000 on a 30 year loan in the first 6 years of payments at 6 percent. A straight payment loan would pay off $60,000 in that same amount of time.

Now, imagine if you had paid for 6 years, and you only owed $240,000 on your 30 year loan. You would have $60,000 equity, and you would fight to save your home. You might have actually paid your loan down to its value, even in a seriously declining market.

Instead, you owe $274,000, and any small decline in the market means you are in trouble. This is the way loans are designed. They make the banks money, and pay off the loan so slowly that few owners ever pay off enough of their loan to be financially sound.

If this system were modified, 90 percent of the people in trouble would not be in trouble. They would have equity, or at least be equal in their loan amount to the devalued price of their home. It is a simple concept.

The whole article is excellent. I rarely say that.

WOW. No wonder the world is in financial trouble. And it shows a total lack of math skills as well.

RenaissanceLady wrote: http://www.denverpost.com/opinion/ci_15 ... urce=email

I was especially glad to see that he wrote this, as it's something I've been trying to explain for a long time:

A straight payment loan would pay off $60,000 in that same amount of time.

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RL, can you explain what a straight payment loan is.

A straight payment loan is where the amount of principle and interest are the same for every payment. IE: $1,000 borrowed at 20% interest for 1 year would have a payback of $1,200, and each payment would be $100.00 with $83.33 1/3going for principle on each payment and $16.66 2/3 going towards interest on each payment.

And if the loan was paid off after the first month - the lender would have made 16.67% interest not 20% for their loan. It seems other "restrictions" will be forth coming to ensure the agreed upon return of 20%.

That is exactly why Banks don't do straight loans.

daisypusher wrote: And if the loan was paid off after the first month - the lender would have made 16.67% interest not 20% for their loan. It seems other "restrictions" will be forth coming to ensure the agreed upon return of 20%.

I do not see the problem with that. The lender would have recaptured the time value of the $ and be able to loan it out again. Am I missing something?

Yes, neptunechimney, you're missing greed..................

I am not sure the example given is right. The lender would actually like it.

Here is the example given:

Payment interest balance
1 $16.67 $916.67
2 $16.67 $833.33
3 $16.67 $750.00
4 $16.67 $666.67
5 $16.67 $583.33
6 $16.67 $500.00
7 $16.67 $416.67
8 $16.67 $333.33
9 $16.67 $250.00
10 $16.67 $166.67
11 $16.67 $83.33
12 $16.67 $0.00
$200.00

Here is the same loan using amortization (interest rate of 20% owed per month)

Payment interest balance
1 $16.67 $916.67
2 $15.28 $831.94
3 $13.87 $745.81
4 $12.43 $658.24
5 $10.97 $569.21
6 $9.49 $478.70
7 $7.98 $386.68
8 $6.44 $293.12
9 $4.89 $198.01
10 $3.30 $101.31
11 $1.69 $2.99
12 $0.05 -$96.96
$103.04


Although the first schedule is 20% for the total amount/year - the borrower is not getting any credit for the money paid. He has paid 20% for the 1000 for a year - yet did not have use of the total $1000 for the year.

daisypusher, you are correct, the bank would receive more interest with a straight interest loan, my mistake.