Posted tagged ‘knowledge’

The Easiest Hardest Question Ever

January 7, 2009

I was reading Felix’s post, recently (I know, I’m behind on everything… I’m posting on that soon too), where he cites a Tanta piece on negative amortizing loans. And it prompted me to have a very specific memory.

Here’s my email to Felix…

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Subject: Here’s something funny-scary …

… that your post on option ARMS got me thinking about. No one, and I literally mean NO ONE, who works in securitized products knows very basic things about the loans, as you touched on. But the people securitizing the loans and selling the bonds don’t know very basic things that fall under the “you should be shot for not knowing something this basic” category… Here’s what I asked a whole bunch of these master’s of the universe and none of them knew the answer, they all guessed.

“When I, as an individual who has a mortgage on my home, have a fixed rate amortizing loan on a thirty-year amortization schedule, and I send in a curtailment (excess principal payment that doesn’t pay off the loan but reduces the principal balance faster than scheduled) what happens to all the subsequent payments?”

Here’s why this is tricky…

1. If you curtail the loan then your interest payment reduces. However, this means your payments are no longer “level” … They change from month to month. This is because amortization schedules set based on simple interest computation (rate*loan balance) but the principal is set to keep the payments level. When you curtail the loan, you destroy this balance.

2. If your interest payment reduces once, but the overall payment doesn’t change, then you have a loan that starts to amortize much faster than before. Why? Well, the bank can’t charge you interest for that month on a principal balance that is lower, right? So if your payment is “x” and you paid off 5% of your loan, because the interest portion of your payment is 5% lower, if the payment hasn’t changed that money that would have gone to interest on the paid off amount goes to principal repayment. This compounds the same problem for next month’s payment.

3. No one was aware of loans being recast. It doesn’t seem to be the case that loans are recast once someone sends in more than their payment, and it also doesn’t seem to be the case that loans are recast on any sort of schedule (annually, for example). Not a single person thought this happened.

Most common answer was “principal balance goes down” …. And once the details were asked? One usually got a hand wave and an answer of “Curtailments are so rare, this is unimportant.” Even the people modeling the actual cashflows didn’t understand what happens to loans when curtailments come in. They would model it as a partial prepayment of the pool, but not alter anything else (after all, curtailments are rare! why bother modeling them correctly?). Ha!

-DJT

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I did call some mortgage companies and it seems they do “turbo” the loan, essentially, by keeping payments level and applying more to principal … But this, obviously, makes it les than a 30-year loan. However, some mortgage companies will allow you to recast the mortgage totally for payments that are large enough.

Confessions of an Internet Denizen (An open letter to Google.)

April 17, 2008

Dear Google,

I think you’re super. You have some incredible applications that you provide for free and that I enjoy very much. You’re not evil. You even love clouds, just like me! We’ve built up enough of a relationship where we can be honest with each other, right? Well, here goes…. I’m not really searching for anything. Yep, it’s true. Let me explain.

When I go to you, Google, I’m not really looking for something. Nope, it’s a myth. At least, I’m not looking in the same sense I’m looking for that missing sock or where I ate dinner that one night–I’m looking for the answer to my question. Certainly it’s been a long enough time that you can stop telling me which pages are most relevant to me, and actually just answer my question. The true power of processing billions web pages should be that you can learn from their content, not just retrieve links in short order.

Think about this, Google, “Why do people go to Wikipedia?” Well, people go thereĀ  because they have a singularity of purpose. It’s simple. There is a fact they are “looking up”… very different. When I want to know, “How do I get Windows to stop spitting out a certain error message?” I don’t want to see every instance of someone else asking the same question. Google, I think you should strive to become, not a hub, but an authority.

Perhaps this explains why Yahoo! Answers is so successful. The “money line” even is right in the post I just linked to:

According to [a] Harris survey … 81 percent [of respondents said] that they would look to the Internet for answers if the service was free and 77 percent saying that they would look to the Internet if they knew they would receive instantaneous responses.

See Google? Web 2.0 has focused on turning the Web, one of the front-lines of the internet, into a more social experience. Technology took interactivity to new heights and allowed usable applications to be Web-based. Collaboration and a new experience colored the past five or so years. Web 3.0 is already on the horizon. Taking free-form web content and giving it some kind of structure to make processing easier is the next stage.

Ok, now, I know what you’re thinking, Google. You’re thinking, “Ha! And kill my ad business? If I tell people what they want to know then why would they ever click on a link someone pays to put there?” Well, Google, good point. However, you’re thinking about this all wrong. First, you can still put ads on a site that delivers more specific information (also see Yahoo! Answers). Second, think in two dimensions! If your market share takes a massive leap (by both grabbing a larger percentage of searches and by increasing the usefulness, and thus overall volume, of searches), which an innovative and technically difficult product like I’m describing will certainly facilitate, then you will clearly be able to monetize more traffic.

Google, the natural course of innovation has been showed to you by the ebb and flow of what has taken hold on the Web. Now, all the pieces are aligned. The next step is using the Web as a huge knowledge base. Everyone else is focused on revenue and advertising dollars as the drivers to innovation for search engines. Once the next product comes online, the next evolution in how people use the Web, the competition, still trying to figure out how to perfect the old concept will be left in the dust. Just a thought.

Sincerely,

Dear John Thain


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