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Wednesday, May 28, 2014

Banking Criminality & Understanding their #1 Tool: Home Loans

We're normally not big fans of Iran but sometimes you got to give the devil their due and tip the cap as it were..

They sure know how to deal (correctly) with those who commit financial crimes

From CNBC:

"Mahafarid Amir Khosravi, a billionaire businessman at the heart of a $2.6 billion state bank scam, the largest fraud case since the country's 1979 Islamic Revolution, was executed Saturday, state television reported...

The fraud involved using forged documents to get credit at one of Iran's top financial institutions, Bank Saderat, to purchase assets including state-owned companies like major steel producer Khuzestan Steel Co. "
Can you just imagine the shock waves sent through Wall Street if people like Jamie Dimom, head of JP Morgan Chase and Lloyd Blankfein, head of GoldmanSachs were given the same level of justice?

To say there would never again be financial crimes that hurt millions of people would be extremely naive of us, but it is sorta like the punchline to the joke of 'what are 100 bankers at the bottom of the sea?'

A good start..

The laws in this country involving financial criminality are pretty F'd up..
Stick up a gas station or 7-11 and steal $100 and you are going to prison where you will be with some very nasty, unsavory characters for the next 3-5 years and if you're male, making sure you never drop the soap..

Siphon millions or billions from the company you work for, or create a ponzi scheme or other 'white collar' crime bilking people out of their money and at worst, its a minimum security prison-- the one with the tennis courts..

Why the discrepancy?

Well its not the everyday common person writing the laws are they?
So of course when white-collar people write laws, its usually to protect themselves and their own with endless subtle legal loopholes..

Petty crime..  that's pretty clear cut.

Much of the financial crime that goes on everyday isn't even newsworthy..

Its banks giving mortgages to buy homes..

What do we mean?
We've done this example many times before so might as well do so again...

A person or couple decide to purchase a home and after their down payment, $200,000 is left over which is obviously the mortgage..

Now people like focusing on interest rate and monthly payment so in this example, we'll say its a fixed interest at 4.15% for 30 years which when using an amortized calculator, means monthly payments of $972.21

Here's the part most people do not pay attention to..

That mortgage in this example..  If it is paid in full in 30 years with no early repayment..  Do you know how much that couple will be paying back in interest alone?
We'll multiple choice it...

A)   $45,657.21
B) $101,188.89
C) $149,994.39
D) $156,377.23
The answer is C..

Nearly $150k in interest paid on a $200k loan (75% interest created from the loan) meaning when the final payment is made in 360 months, that person or couple spent nearly $350k with 43% as interest

We know life isn't that simple.. The person or couple could have sold the home for a profit in 5 years and repaid the loan, etc..

But unless they're moving back with their parents, rent or into a van down by the river, they will be getting a new mortgage on their new home and the cycle of financial criminality continues

And people do this every day..
A lot of it has to do with social stigma that somehow a guy or gal is emotionally stunted and unable to accept responsibility, etc because he/she lives with parents into their 20's or even early 30's..

But the math is really astounding when you look at it practically..

Two individuals..  both 18 years old..  One decides he wants a place of his own because he can't stand his parents and needs space, etc.    The other is content where he is...

To keep this example very simple and easy for non-math people to get, we'll say from the time the one guy turned 18 up until his 30th birthday, he never spent more than $600 monthly on a rental due to always having roommates..
So $600 x 12 months equals $7,200

Between 18 and 30 is 13 years so $7,200 x 13 which equals...

$93,600 was wasted on rent in that time span..

Now the person who lived at home..  He worked just like the other guy but had no rent because his parents weren't the cheap petty type so he could save and save...

Now let's take this example one step further..
Both guys decide at 30 to buy their first homes...  Both modest dwellings that each cost $175k..  The guy who spent his 20s renting apartments puts down $25k as a down payment..   The guy who lived in home put down a down payment of $75k ($50k more than the renter)

How much more or less will they be spending compared to one another based on a 30 yr fixed mortgage at 4.15%?

20's renter:  $150k at 4.15% equals monthly payments of $729.15.    By the time the loan is paid in full, nearly $113k in interest will have been paid on a $150k loan..

20's non-renter:  $100k at 4.15% equals monthly payments of  $486.10.   That is $243.05 less monthly than the 20's renter...

By the time the loan is paid in full, just about $75k in interest will be paid off that $100k
So really both guys got absolutely rooked by the system but the one who stayed at home with parents less so, and he wasn't profited off of in his 20s like the renter was...

The system is set up so people non-stop work to have anything even remotely nice or to call their own...

Massive education debts acquired before being legally allowed to drink a beer that can't be dissolved in bankruptcy..

A tax system where if you pay 33% income tax, every workday between Jan 1 and April 30th, you get up in the cold and the snow and the rain;  every minute spent listening to a blowhard boss, etc just to pay the IRS..
And a banking usury gimmick called mortgage where as we said before, 75% interest is created off the loan to where by the time the final payment is submitted, you paid around 45% beyond principle for that 'dream home'

But that's how the system and the banking apparatus survives... The creation of continual debt and the perpetual indebtedness of the populace

One little fishy at a time