Saturday, March 6, 2010

Microsoft excel and sub prime mortage mess

calculating payments on a mortgage is very difficult to do by hand. In the old day, say pre 1970, before PCs or even calculators (when I went to college in the mid 70s, a simple 4 function calculator cost $100 - a lot of money back then) the way you looked up the payment for a mortgage was in thick heavy exspensive books.
Say someone wanted a mortgage for 30 years, 200K, 7.5% - you would look up the monthyl payment in the book.
, in the old days (say pre 1970) you couldn't calculate a mortage - you had to look it up in thick, expensive books, say the monthly payment on a 150K loan at 8.4 %
And if the book didn't have 35 years , you couldn't get a 35 year loan, cause the bank literally couldn't do the math

now we have excel.
It is well known to the math geeks that excel fails at elementary statistical aritmetic
which raises an interesting question: if excel can't do math right, and excel was used to calculate payments on complex sub prime mortgages, does that mean the mortgages are wrong and possibly illegal ?

1 comment:

Eric Morey said...

Amortized payments are easy to calculate without excel. I have never seen an error in the excel payment calculations. Also, excel is only used to estimate payments, though this isn't as common as you might think. In fact the bank software that used in accounting and billing for loans is programed independently of excel and must conform to statutory definitions. Any differences between the loan contract payments calculated using the accounting software and the excel estimate would be obvious.