More (yeah, I know) on The Housing "Crisis"
There's an interesting article that I ran across this evening dealing with California Real Estate at Inside Bay Area. In it a borrower laments about "discrimination" when it comes to home ownership under the "new, tighter guidelines" for mortgage lending.
Let's break this story down a bit - because it deserves investigation.
This lady wants to buy a $500,000 house.
Under traditional guidelines, you can reasonably buy a home that is no more than three times as expensive as your annual income. So, to buy that $500,000 house, you need an income of $166,000 a year (gross, before taxes.)
And that is stretching your repayment abilities to the breaking point - expert advice has long been that you should not exceed 2.5 times your annual gross income.
What does Ms. Pena do for a living?
She works for a janitorial service.
Anyone care to bet whether or not she has a $166,000 a year income, say much less $200,000?
Do we really need to look any further than this for the root of the mortgage and housing problem?
Ms. Pena, prior to just a week or so ago, was getting approved for her mortgage! Ms. Pena was actually about to get the keys when her loan was withdrawn just days before the deal closed.
I am still in awe of the absolute depth of stupidity in this part of the lending marketplace.
This doesn't rival the 1990 Tech Bubble - it radically surpasses it!
We're not talking about people here who are a "bit" under the qualifying income for a safe loan on that amount of money - we're talking about people who have no prayer in hell of being able to make these payments once a "Teaser" or "negative amortization" loan runs out of steam.
What's worse is that there is no way for these people to refinance, because no matter what was to happen to property prices in the future, the same principle would be due (plus the negative amort) AND their income isn't going to rise THAT much to be able to meet the payment load!
So what were these people going to do? During a radically up market I guess you could buy a $500,000 house using one of these "Option ARM" loans, live in it for a year, sell it for $600,000 (remember, prices were going up 20% a year or more in some markets), pocket $50,000 (remember, there are COSTS involved in buying and selling, plus you have insurance, utilities, etc) and then do it again on another house. If you did this enough times and didn't spend the $50,000 (ha!) I suppose EVENTUALLY you could put down enough to drop the payments where you could afford them - but what you'd be buying at that point might be a shack!
This is the sort of insanity that we have had occur in the real estate market. And while there are some people running around screaming about how we need government intervention to "save" these poor people, let me point the finger where it REALLY belongs - directly at the Realtors and Mortgage Brokers.
There is no possible defense to putting someone in a house that costs more than three times their income, unless they can pay down the principle to that ratio using fully-seasoned cash at closing - that is, not some other form of loan, but cold, hard money!
NONE!
I've done more investigation on this around the country, and this is not limited to California. Indeed, it is happening everywhere.
Indeed, look at "Bankrate.com"; there are the two basic ratios that have been the foundation of mortgage lending forever - 28% "Front End" ratio (that is, your P&I payment, fully amortized, on your mortgage is no more than 28% of your gross income) and your "Back End" ratio (total debt to gross income of no more than 36%)
Lest you think that radically violating these standards is somehow "confined", let me point out a few links readily available on the web that say otherwise:
Every one of the links above is for an ALT-A product list - not Subprime - they all have qualifying FICO scores of well over the 620 level that is considered "Subprime."
These standards of sound underwriting of loans have been radically violated industry-wide for the last five years and this is where the root of the problem lies. This nonsense has resulted in radically pumped up property values as people have been able to "qualify" to own homes that they have no prayer of being able to actually afford.
What's even scarier is that I have anecdotal evidence that even the GSE loans (that is, "Conforming" loans sold off to Freddie and Fannie) have had "Back End" ratios as high as fifty percent in some cases.
If this is true then it is time for Congress to step in and put a stop to it; while they cannot (reasonably) police the private mortgage market, they sure as hell can (and must) step in when GSE firms, which have their obligations guaranteed (at least in theory) by government backing, are abusing industry standards.
No loan with a 50% DTI ratio is reasonable. In fact, it can be reasonably argued that any such loan is by defintion predatory. With the "Option ARM" and other "resettable" mortgages being a part of this mix it is entirely possible to get "after reset" DTI ratios as high as 75 - or even in excess of 100% - ratios that insure the borrower will not be able to make the payments! Yet these loans are being offered today - not just historically before "credit tightening" has occurred. I cannot imagine what was considered "acceptable" before the "tighter" revisions were made earlier in the month!
Anyone who thinks that we're going to get a "soft landing" in the housing market, or that the current damage is going to be confined to "Subprime" borrowers needs to have their heads examined.
This is going to hit the entire mortgage marketplace from Prime on down, and with the prevalence of these products, consisting of up to half of all loans written in 2006, we had better be prepared for an absolute financial tsunami!
I am not normally an alarmist when it comes to financial matters, but the deeper I dig into this the worse it smells - and no, folks, the bankers have not fixed the problems since the meltdown first became apparent.
Let's break this story down a bit - because it deserves investigation.
This lady wants to buy a $500,000 house.
Under traditional guidelines, you can reasonably buy a home that is no more than three times as expensive as your annual income. So, to buy that $500,000 house, you need an income of $166,000 a year (gross, before taxes.)
And that is stretching your repayment abilities to the breaking point - expert advice has long been that you should not exceed 2.5 times your annual gross income.
What does Ms. Pena do for a living?
She works for a janitorial service.
Anyone care to bet whether or not she has a $166,000 a year income, say much less $200,000?
Do we really need to look any further than this for the root of the mortgage and housing problem?
Ms. Pena, prior to just a week or so ago, was getting approved for her mortgage! Ms. Pena was actually about to get the keys when her loan was withdrawn just days before the deal closed.
I am still in awe of the absolute depth of stupidity in this part of the lending marketplace.
This doesn't rival the 1990 Tech Bubble - it radically surpasses it!
We're not talking about people here who are a "bit" under the qualifying income for a safe loan on that amount of money - we're talking about people who have no prayer in hell of being able to make these payments once a "Teaser" or "negative amortization" loan runs out of steam.
What's worse is that there is no way for these people to refinance, because no matter what was to happen to property prices in the future, the same principle would be due (plus the negative amort) AND their income isn't going to rise THAT much to be able to meet the payment load!
So what were these people going to do? During a radically up market I guess you could buy a $500,000 house using one of these "Option ARM" loans, live in it for a year, sell it for $600,000 (remember, prices were going up 20% a year or more in some markets), pocket $50,000 (remember, there are COSTS involved in buying and selling, plus you have insurance, utilities, etc) and then do it again on another house. If you did this enough times and didn't spend the $50,000 (ha!) I suppose EVENTUALLY you could put down enough to drop the payments where you could afford them - but what you'd be buying at that point might be a shack!
This is the sort of insanity that we have had occur in the real estate market. And while there are some people running around screaming about how we need government intervention to "save" these poor people, let me point the finger where it REALLY belongs - directly at the Realtors and Mortgage Brokers.
There is no possible defense to putting someone in a house that costs more than three times their income, unless they can pay down the principle to that ratio using fully-seasoned cash at closing - that is, not some other form of loan, but cold, hard money!
NONE!
I've done more investigation on this around the country, and this is not limited to California. Indeed, it is happening everywhere.
Indeed, look at "Bankrate.com"; there are the two basic ratios that have been the foundation of mortgage lending forever - 28% "Front End" ratio (that is, your P&I payment, fully amortized, on your mortgage is no more than 28% of your gross income) and your "Back End" ratio (total debt to gross income of no more than 36%)
Lest you think that radically violating these standards is somehow "confined", let me point out a few links readily available on the web that say otherwise:
- Morgan Stanley (yes, the big investment bank) - look at the "Max DTI %" line (ratios of 50-55% are considered acceptable!) - this document has a date of 2/2007 on it!
- Reunion Mortgage (revision date of 3/15 - two days ago - yet still has 50% DTI numbers!)
- Lexington Lending (revision date of 12/1/2006) - 42% DTI permitted.
- Oregon Mortgage (no revision date; claims that DTI ratios over 55% may be approvable!)
Every one of the links above is for an ALT-A product list - not Subprime - they all have qualifying FICO scores of well over the 620 level that is considered "Subprime."
These standards of sound underwriting of loans have been radically violated industry-wide for the last five years and this is where the root of the problem lies. This nonsense has resulted in radically pumped up property values as people have been able to "qualify" to own homes that they have no prayer of being able to actually afford.
What's even scarier is that I have anecdotal evidence that even the GSE loans (that is, "Conforming" loans sold off to Freddie and Fannie) have had "Back End" ratios as high as fifty percent in some cases.
If this is true then it is time for Congress to step in and put a stop to it; while they cannot (reasonably) police the private mortgage market, they sure as hell can (and must) step in when GSE firms, which have their obligations guaranteed (at least in theory) by government backing, are abusing industry standards.
No loan with a 50% DTI ratio is reasonable. In fact, it can be reasonably argued that any such loan is by defintion predatory. With the "Option ARM" and other "resettable" mortgages being a part of this mix it is entirely possible to get "after reset" DTI ratios as high as 75 - or even in excess of 100% - ratios that insure the borrower will not be able to make the payments! Yet these loans are being offered today - not just historically before "credit tightening" has occurred. I cannot imagine what was considered "acceptable" before the "tighter" revisions were made earlier in the month!
Anyone who thinks that we're going to get a "soft landing" in the housing market, or that the current damage is going to be confined to "Subprime" borrowers needs to have their heads examined.
This is going to hit the entire mortgage marketplace from Prime on down, and with the prevalence of these products, consisting of up to half of all loans written in 2006, we had better be prepared for an absolute financial tsunami!
I am not normally an alarmist when it comes to financial matters, but the deeper I dig into this the worse it smells - and no, folks, the bankers have not fixed the problems since the meltdown first became apparent.
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