The Karma and the Economics

Engineers view III

Lets get back to the basics (Provided the karma basics appeal you. Even if it doesn't, please spare a thought for this post.)

Karma: Reincarnation!! naa, rebirth!!! naa, By karma, i mean what you sow so shall you reap. There is an old saying, " Babool ke beej bo-o gay to aam nahi babool he paongay". Lets draw this analogy of karma with economics or rather i should say lending banks. Long time ago, there was a growth economy. Every thing was hunky-dory lush green clients, apple red yields. Ahoy!! awesome time to make money. Then came the demon greed. Bankers with ample of liquid money started to lend money to clients. There was no harm in doing so cause, that's what their business model is. Money flows in to bank through deposits, savings, other accounts, they in turn lends money at higher interest rates to borrowers. That's the simple business.

In greed banks and their associates started lending money to everyone without checking if they deserve the money. And since they didn't deserve to borrow money they charged higher interest rates. A man/women (no gender bias :-)) earning Rs.100/- was given a loan Rs.200/- that too at an interest rate of 15-20%. It was some thing like pumping in forcefully 100 litres of water in a, water tight, 50 litre tank. What would happen then, is any ones guess.

Similarly, bad karma of banks, of lending money (to non deserving) in expectations of higher yield on loans, resulted in explosion of client. Since, a low earner couldn't afford to pay such a high interest rate he/she defaulted (exploded) and forget about the interest payment he couldn't even afford to payback principal. Hence he/she went kaput and so did the asset(explained later), to possess which, he borrowed the money. Since there was mass default, banks stopped lending money even to the credit-worthy one, as it lost confident in everyone. As the credit dipped, there were no buyers to buy this assets. Hence, the assets lost its real value to such an extent that borrowed money was higher then the current asset value. Again resulting in foreclosure of loans. Or defaults on loan. Or closure of loans and handover of assets. At the end banks incurred heavy losses as their greed took over their ideal business model of lend to the credit-worthy one.

In short, Bad karma's of bank ricochet in bad debts. It sowed bad money (bad creditors) and in turn got a tree of bad debt. Taking us back to the karma,"Babool ke beej bo-o gay to aam nahi babool he paongay". Moral of the story,"No matter how complicated is economics, rocket-science, or any other sci-fi technology but their basics is - THE KARMA PRINCIPLE".

Conundrum behind Reverse Mortgage

There is a lot of debate and discussion over reverse mortgages now. Various committees have been formed to develop a basic framework or guidelines for the government to consider the proposal. What is RM and how does it work? Who is it meant for? In a normal mortgage, a homebuyer borrows money to finance his/her home. In a Reverse Mortgage (RM), the home property owner surrenders the title of the property to a lender and raises money. Isn't it the same as loan against property (LAP)? Not quite. In LAP, the borrower gets 60-70% of the money upfront. In RM, the lender doesn't pay the entire amount, but pays out a regular sum each month for the agreed time. The owner along with his/her spouse gets to stay in the property for the rest of their lives. Thus, the owner can ensure a regular cash flow in times of need and enjoy the benefit of using the property. Usually after the death of the owner, the spouse can continue using the property. In case both die during the period of the RM scheme, the lender will sell the property, take its share and distribute the rest among the heirs.The reverse mortgage is named thus because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.
Usually, RMs are available to those above a specific age, say 60 years. The aim is to convert an immovable asset, like property into an income-generating one while continuing to use it. The amount of income is predetermined as is the contract period. If the property-owner outlives the agreement period, the monthly payments will stop. How is the income for property-owner determined? There are three crucial factors property value, the period of the payout and the rate. The property is evaluated by professionals employed by the lender, and revalued after a period of time and the fixed income amounts are changed accordingly.
In countries where the geriatric population is rising (such as Japan and Western Europe), RMs are popular. However, while it looks simple, lenders expose themselves to certain risks thanks to a variety of factors such as mortality, interest rates and real estate price changes. For the property owner signing away the roof over his head creates fears of loss of asset, eviction and inability to bequeath property. Besides, the legal,
taxation and other regulatory aspects are still not clear. This is why even in the US, the actual volume of RM is very small.

For the idea to be applicable in India, we need reliable data that should include mortality, home ownership levels among the elderly, trends in appreciation in home value and long-term movement of interest rates. Unfortunately, all this is hard to get. In India there is no universal social security kind of benefits. Only about 9% of the active working population is covered by formal schemes. This means that the potential target market for
RM would be quite large. On the other hand, the RM market can be applied only to cases where the title deed is clear and the marketability of the property is assured. Also, in India, a large number of elders are living with their family members. That again the limits the scope for RM.



Advantages of RM
It helps you maintain your financial independence and standard of living
Allows you to remain in your home and retain ownership till you or your spouse is alive.

Disadvantages of RM
The options can be confusing.
They may be costlier than LAP

Wise pays for profligacy of sinners

Engineers View I

Economics itself is a esoteric science, and for an engineer to understand the same, is a herculean task. Lets understand how an economy, typically works. Government prints money, in various denomination. A commodity price is fixed in the terms of that currency value. For example: A loaf of bread would cost Rs.10/. Now how doest the bread becomes costlier despite the Rs.10. remaining the same. It can be due to various reasons, the cost of wheat or flour used for bread could have increased which is the obvious assumption. On the other hand, consider a case, where Government prints 10 notes of Rs.10/-. Now 10-A person possess 1 note each of Rs.10 denomination. Considering the bread maker also makes only 10 loaf of bread which is bought be these 10 people for Rs.10/- each. Everything is balanced. Everything is hunky-dory. Now there are 10-B people who think they are smarter lot. What they do is since they don't possess any money they plan to borrow or get a deal from either the government or the 10-A person. In this deal they commit to lender (govt. or 10-A person) that they will give Re.1/- for every Rs.10/- given to them and end of a stipulated term commit to pay the Rs.10/-. The group that qualifies as lender thinks this a lucrative offer. They start lending, not understanding the quality of borrowers. Now, how does it impact the economy when borrowers turn sinners. Borrowers pay the Re.1 for three to four months anticipating that bread prices will move in such a fashion that even after paying Re.1 on Rs.10/- they can make handsome profits. But, they forget that bread produced is limited and 10-A or govt. would also need bread to eat. Even they are striving in the market for their share of bread. previously only 10 were striving for bread, but when 10-B came to make money on bread. Now there are 20 striving for bread. Obviously, there would be a shortage of bread. And bread maker, being no angel, takes this opportunity and further increases the price. The world comes down. Now the margins at which borrowers were borrowing and making money on bread has squeezed due to tight supply and more demand. They start to default. Lenders who were organized, sophisticated, honest 10-A people had no money to save for catastrophic times like these. slowly, since there is lack of money supply, demand for bread goes down, people prefer to starve then to borrow money. Govt is in distress. They print more money. But forgets that doing so, it is losing its value of currency.

Do you think this is what happened in Sub prime loans??

Do you think this is what happened to dollar??

Do you think this what happened to pensioners or depositors in US??

Do you think interest rates moves because of this??

Do you think there is a thin line between Needs and Wants ??

Please think where you belong in this chain of events.