Understanding Compound Interest Using Nature’s Examples

compounding miceHumanity’s first experience with compounding – the accumulation of vast numbers through the systematic addition of small sums over a period of time – came from nature, not mathematics.

Thousands of years ago in the Fertile Crescent of the Middle East, ancient humans abandoned their nomadic ways, formed the world’s first communities, and began to till the ground, raising wheat, barley, and other grains. Growing seasons concluded with reaping and storing grain, which was used during months when agriculture was not possible and other food sources were scarce.

But because the large amounts of grain were stored in roofed buildings (silos), they provided an irresistible food source to Mus musculus – the common house mouse – which would feast protected from their natural enemies by the shelter of the silos. As a result, mice became extremely prolific, eventually leading to the spread of mice around the world as they followed migrating agriculturalists. In fact, a single pair of mice can produce 70 offspring during their two-year life, with an average litter of seven pups, five times a year.

The addition of 70 mice over a two-year span would be bothersome, but not catastrophic. A single mouse eats about one gram of food per day; 70 mice would eat about 70 grams, or less than a single bushel of wheat each year. However, when considering the effect of “compounding”, the mice pose a serious threat.

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Opposing Views For Government In Housing

This article was initially presented on NationalMortgageProfessional.com on November 26, 2013.

StandoffAmericans have been engaged in a great ideological war over the role of government since the founding of the nation, and the latest skirmish regards the future role of the government in housing. Since the election of Bill Clinton in 1992, the warring parties have become increasingly entrenched and unwilling to compromise in the name of ideological purity. As a consequence, the future regulatory and economic environments affecting the housing and mortgage industries, related industries, and citizens is uncertain.

The Republican goal is to eliminate any government role in the mortgage market (other than through the direct guarantees provided by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture’s (USDA) rural housing programs), while the intention of the Democrats is that federal support of the mortgage market be continued to encourage broad homeownership for all citizens. It is around these conflicting aims that the issues revolve.

Two partisan views

As a result of the mortgage security meltdown in 2008, significant taxpayer costs, and the subsequent recession that many contend continues today, members of both political parties agree that drastic reform of the mortgage finance industry is needed. However, each party has proposed a different approach based upon its political philosophy.

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Does the Bell Toil for Independent Mortgage Brokers?

This article first appeared on NationalMortageProfessional.com on November 18, 2013.

Bells.To paraphrase John Donne’s famous line, “Don’t ask whether you will be affected by the ongoing changes in the mortgage market—you will be.” The recovering but still nascent U.S. economy, the assault upon former industry practices and the uncertainty of the government’s future role in residential housing will severely challenge the capability of large wholesale correspondent lenders to adapt to the new market conditions.

According to the Mortgage Bankers Association’s (MBA) 2012 year-end forecast, overall mortgage volume is expected to drop from $1.7 trillion to $1.08 trillion in 2014. In addition, the ratio of refinance to purchase mortgages will essentially flip-flop, as refis decrease from 71 percent to less than 35 percent of total new mortgages in 2014. Since the bulk of refinancing occurs in the Big Four (Wells Fargo, Citibank, JPMorgan Chase, and Bank of America), they will be hurt to a greater degree by the product shift than their smaller competitors. In fact, the lower volume and the fundamental structural change provide extraordinary opportunities for independent local and regional mortgage competitors to prosper.

Pressures on the Big Four

According to a 2012 study by Harvard Business School professors Robin Greenwood and David Sharfstein, the growth of residential mortgages from 34 percent of the gross domestic product (GDP) in 1980 to 79 percent of GDP in 2007 was spurred by the tremendous profits in the financial industry from fees, as well as the growth of a “shadow banking” system with loose or non-existent regulations.

The subsequent failure of the sub-prime mortgage market and resulting loss of confidence in the larger financial entities to self-regulate have had several results:

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Income Inequality in America

income inequalityWarren Buffett, number 2 on the Forbes 400 List of The Richest People In America, said, “There’s class warfare, all right – but it’s my class, the rich class, that’s making war, and we’re winning.” Certainly, the disparity between the wealthy minority and the rest of Americans has widened considerably over the past 40 years. In 1973, the top 1% of earners collected 7.7% of all U.S. income; by 2013, their share had grown by two and a half times to 19.3%. Even more astounding, the top 10% of earners collected almost half of the nation’s total income (48.2%), the greatest disparity between the rich and the rest of the American population since the Roaring Twenties.

That decade, following the close of World War I, ended in the worldwide Great Depression. It also saw curbs on immigration with the passage of the Immigration Act of 1924, the rise of radical political movements including communism and fascism, and the reemergence and national spread of the Ku Klux Klan.

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