When innumeracy like this is displayed by a writer for The New York Times (please note, emphasis added for later discussion):
These modification programs encourage lenders to reduce mortgage payments, so that each borrower’s housing payments (including principal, interest, taxes and insurance) are no more than 31 percent of the borrower’s gross income. The payments are to be reduced for five years or to whenever the mortgage is paid off (whichever comes first).
The amount of the payment reduction depends on the borrower’s income — the less he or she earns, the more the payment is reduced. For example, a borrower whose annual family income is $100,000 can get housing payments reduced to $31,000 a year; a borrower whose annual income is $50,000 can have the payments cut to $15,500 a year.
If the mortgage modification rules were actually followed, one implication would be that a family that earns $50,000 more in the year before the modification stands to pay an additional $15,500 a year for five years on housing payments — a total of $77,500. Adding $50,000 to your income adds $77,500 to your expenses: the mortgage lender gets more than 100 percent of your extra income! Economists call this a marginal “tax rate” that exceeds 100 percent, because the person earning that income is obligated to give all of it to a third party (the lender, in this case), and then some.
Let’s look at this: the author calculates the total additional payments for five years, then divides it by the one year additional income to derive a marginal “tax rate” for the mortgage modification program.
Ummm, even using New Math that’s completely, utterly wrong.
If you want to calculate a “tax rate” of a cost extending over FIVE years, you need to use the additional income from the SAME FIVE years, in other words, divide by $250,000, NOT by $50,000.
This changes the “tax rate” from more than 100% to 31%. Not necessarily a happy thing, but far from the “exceeds 100 percent” whereby “the person earning that income is obligated to give all of it to a third party…”
This mistake is so basic I cannot believe it was made in the first place, and it undermines the entire premise of the post. This is very unfortunate, because the author does bring up a very important point, to wit:
…The Associated Press reported that many borrowers say the modification program is a bureaucratic nightmare. The A.P. report said, “They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork.” Instead of modifying three million mortgages and preventing their foreclosures, less than one-half million mortgages have been modified under the program, while about three million borrowers received foreclosure notices (see the latest report by the Office of the Special Inspector General of the Troubled Asset Relief Program).
Rather than overtly contradicting the Treasury by denying eligible borrowers, banks are encouraging borrowers to deny themselves by requiring those borrowers to endure deluge of paperwork.
It’s interesting how often banks, insurance companies, and other large corporations “lose documents” when it comes to following regulations and laws that might result in a payment to an individual, and it is unfortunate how this important point is lost because of the innumeracy displayed by the author, at least to those paying attention.
This is yet another example of how deregulation and other “pro-business” behaviors enable business to essentially steal from individuals, and how enforcement of the regulations in place, or even additional regulations aimed at protecting the individual, are NOT “anti-business” as some wish to portray it.
Cross-posted to Random Fate.