One hundred percent of those who lost homes in foreclosure suffered from excessive debt — 100%. The total amount of debt is important, but the terms of repayment are far more critical. The monthly payment (plus taxes, insurance and other costs) must be a manageable percentage of the borrower’s income, otherwise the borrower is likely to default. Historically, this value was 28% or less, then it was expanded to 30%, and now the GSEs underwrite to 31%. Debt-to-income ratios higher than this are proven to have accelerating default rates absent Ponzi borrowing.
Thirty-one percent doesn’t sound like an onerous percentage of income. But most people forget this is gross income, not net. A 31% debt-to-income ratio is 50% or more of a borrowers take-home pay. How long do you think you could afford to pay half your take-home pay for housing? It’s a stretch, but it can be done. But what about 50% of gross pay. That’s 70% or more of a borrower’s take-home pay. How can anyone sustain that very long?
Millions of Californians are paying close to half their income for housing – a level once considered foolish. Even as home prices have tumbled, the cost of homeownership has continued to rise.
In 2006, Ernie and Edith Garcia began building their dream home on a Fountain Valley lot his grandparents had purchased decades earlier.
Six years, one recession and one layoff later, the mortgage on their home has become an anvil around their necks.
“The American dream?” Ernie Garcia asks. “This has turned out to be the American nightmare.”
The writer makes it sound like these were circumstances beyond their control, but were they? When these people built their “dream home,” do you think they were concerned about the cost and their ability to pay for it, or did they get the largest Option ARM an irresponsible lender would give them? They had choices to make, and they made the wrong ones.
The Garcias have a lot of company. Unnoticed amid the housing boom and bust, millions of California families entered risky territory, paying once unthinkable shares of their income for housing.
Today, some 2.7 million California households – homeowners and renters – pay at least half their income for housing. That includes the Garcias and about 200,000 other Orange County households. The numbers have nearly doubled in the past decade, according to the Census Bureau. A much bigger group – 4.6 million California households – is paying 35 percent or more, above the traditional 30 percent norm, up by 1.7 million in a decade.
Of the 200,000 OC Households paying more than 50% of their income toward housing, how many of them are loanowners who will ultimately succumb to the financial pressures? Will lenders get prices to go back up and resupply the housing ATM in time to enable these loanowners to continue their Ponzi borrowing?
They have little money available for savings, retirement or the unexpected. Mortgage or the rent takes most of their cash. They are caught in a housing crunch.
As their ranks have grown, lenders have redefined upward how much is too much to pay for housing.
Lenders are slavers. By continually raising the percentage of income people put toward debt service, borrowers will never get out of debt, and lenders earn the rewards of their slave’s labor through never-ending interest payments. Most sheeple are too stupid to see what’s happening. What’s worse, this money going to lenders comes straight out of disposable income further crippling the economy. Oh wait, lenders have a solution to that problem — more consumer debt to make up for the lack of disposable income. Then they can profit from that too.
REDEFINING THE LIMIT
The 30 percent benchmark stood for decades after World War II.
But “30 percent doesn’t seem to click with reality in Orange County,” said Glenn Hayes, president of Neighborhood Housing Services of Orange County, which counsels prospective homeowners and people in trouble on their mortgages. “Historically, we used to try to do 28 or 30 percent, but you couldn’t buy in Orange County for that.”
Mortgage giant Fannie Mae sets standards for conventional lenders through its rules for purchasing loans. Earlier in the decade, it said borrowers should pay no more than 36 percent of their income for housing, though lenders could go higher. In December 2008, Fannie Mae changed the rules to let borrowers take on more debt.
Under the new rules, lenders qualifying borrowers by hand could go as high as 45 percent for strong borrowers, such as those with excellent credit or big cash reserves. Lenders with automated underwriting could start at 45 percent and go, in exceptional cases, to 50 percent, Fannie Mae spokesman Andrew Wilson said.
The evolving loan standards recognize a reality: Income has not kept pace with housing.
Wrong! The constantly rising loan standards is partially responsible for continually inflating home prices. If lenders did not allow borrowers to borrow beyond income levels borrowers can repay, house prices would not go up beyond affordable levels.
Think about it. Contrary to popular belief, affordability is not obtained by increasing a potential buyer’s borrowing power. It merely allows them to bid higher which pushes prices higher. The new higher prices become a barrier for the next wave of buyers who must borrow even more. Lenders cannot continually raise the debt-to-income ratios of borrowers because at some point (about 30% of gross income) borrowers simply cannot consistently make the payments. Once borrowers are pushed beyond, they default, a credit crunch ensues, and prices come crashing back down to levels of affordability. This isn’t theoretical. We all just witnessed this over the last decade.
From 2000 to 2010, median household income – the broadest measure of income – rose by 21 percent in California while rent and monthly owner costs rose by more than 50 percent, according to the Census Bureau’s 2010 American Community Survey.
Only a dramatic drop in interest rates have made this possible. At some point, incomes must catch up. Based on where we are in the credit cycle, it’s likely the federal reserve will keep interest rates near zero until wages finally begin rising — along with inflation.
While lenders adapt to this new reality, others warn of dire consequences right around the corner.
“When you’re paying 50 percent of your income for housing, you’re primed and ready to fall,” said Ginna Green of the Center for Responsible Lending in Oakland, a nonprofit advocacy group that fights predatory lending. “You are one illness, you are one car emergency, you are two overtime shifts away from a default.”
It’s not uncommon for people to live paycheck to paycheck, but the safety margins get pretty thin when so much is going toward housing.
… “The property is our legacy that we can’t ever sell,” he said. “This is the last of our family’s property. I’m not going to roll over on it.”Ernie and Edith Garcia, 50 and 49, … took … three years to build their dream house. Unexpected cost overruns boosted the price tag by $100,000 more than they had budgeted. Final tab: $647,000. They moved in September 2009.
Unexpected cost overruns? Notice how the writer is making this sound like circumstances outside their control again? Perhaps they could have cut back on the interior finishes or changed the design when the first bids came in. Instead, they built their “dream home” and ignored the consequences of their decisions. Are we supposed to feel sorry for them because they lacked the wisdom to exercise a modicum of financial restraint?
This section is better titled, “Stupid is as stupid does.”
Cheryl Knight was in love.
She loved a townhouse across the street from her Fullerton condo in a garden complex lined with small lakes. And the price in mid-2006 just before the market peaked, $480,000, was within her reach, barely.
“I fell in love with it,” the editor and writer said,
Do people really fall in love with townhomes? I suspect she fell in love with the extra money she thought she get once she owned her own ATM machine.
“which was why I went against my Realtor’s advice and bought it when she said it was overpriced.”
Knight, 43, also ignored the implicit advice of her lender, who rejected her first two loan applications.
The loan she finally got was a five-year, interest-only adjustable for $390,000. She borrowed the remaining $90,000 on a line of credit. The seller refused to wait for Knight to sell her condo. It would take Knight nearly a year to sell the condo.
Her monthly payments, including taxes, insurance and homeowner association fees, came to $2,510 – about 60 percent of her income at the time.
A few months after moving in, the company where she worked as an editor sent her to a conference in Omaha, Neb. She attended a session on financial planning and heard the speaker say that no one should spend more than 30 percent of his or her income on housing.
“And I was paying double that,” Knight said. “I almost started laughing. It was a shock.”
… She spent months trying to get a loan modification on her own. In early summer 2010, the bank rejected her request but said she could do a short sale, keeping a foreclosure off her credit record. Relieved, she went out of town in August.
Knight returned to find her home had been foreclosed. Within two weeks, she was out, living in a 1,000-square-foot apartment. She’s paying $1,450 a month in rent – more than half her now-reduced income.
Notice how the reporter made it sound like this woman was foreclosed on in a very short period of time. The fastest this could have happened was 112 days after receiving a notice of default, but we all know the banks have not been in any hurry. She had plenty of time to complete a short sale, but instead she chose to squat until the foreclosure. She knew the auction was scheduled — these dates are not a mystery. What did she expect? Did she think the bank would postpone the foreclosure because she was out of town and they must have magically known she was going to come back and quickly complete a short sale? Give me a break.
“In the process of losing my property and my life savings,” Knight said, “I’m trying to become more positive that someday I’ll be a homeowner again.“
After her experience, why would she want to?
… With Edith still unemployed, it amounts to about 45 percent of their income. But they are determined to stick it out.”A short sale doesn’t work – not with this house,” Ernie said. “We can’t fail. All of our savings have been drained into this house.”
Despite the setbacks, Ernie is still optimistic about his dream home.
“I’ve waited my entire life to be a homeowner,” he said. “It’s still an exciting place for me.”
Real exciting. I can’t wait to sign up for one… not.
Build it, and they will walk.
Today’s featured property was purchased as a vacant lot on 5/4/2006. The owners put $231,250 down when they purchased the lot. Later Washington Mutual gave them $2,980,000 to build this property. Ordinarily, the bank would make sure their was equity still in the deal, but this was WAMU in 2007, so the $2,980,000 loan likely represents 100% of the lot and construction costs.
This property was built by the CEO of RINO Corporation, and apparently used some shady accounting through the corporation to get the house. It’s not clear why the owner stopped making the payments, but he gave the house back to WAMU who is sitting on a $3,000,000 loan on a house worth who-knows-what. These are the kind of high-end loans littering shadow inventory. Lenders are bringing these to market slowly because they know absorption at these price points is near zero, and if they have to discount these properties to sell the, they will lose billions.
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Proprietary OC Housing News home purchase analysis
$2,900,000 …….. Asking Price
$2,980,000 ………. Purchase Price
11/9/2007 ………. Purchase Date
($80,000) ………. Gross Gain (Loss)
($238,400) ………… Commissions and Costs at 8%
($318,400) ………. Net Gain (Loss)
-2.7% ………. Gross Percent Change
-10.7% ………. Net Percent Change
-0.6% ………… Annual Appreciation
Cost of Home Ownership
$2,900,000 …….. Asking Price
$580,000 ………… 20% Down Conventional
4.05% …………. Mortgage Interest Rate
30 ……………… Number of Years
$2,320,000 …….. Mortgage
$565,059 ………. Income Requirement
$11,143 ………… Monthly Mortgage Payment
$2,513 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$725 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$216 ………… Homeowners Association Fees
$14,597 ………. Monthly Cash Outlays
($1,649) ………. Tax Savings
($3,313) ………. Equity Hidden in Payment
$822 ………….. Lost Income to Down Payment
$383 ………….. Maintenance and Replacement Reserves
$10,840 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$30,500 ………… Furnishing and Move In at 1% + $1,500
$30,500 ………… Closing Costs at 1% + $1,500
$23,200 ………… Interest Points
$580,000 ………… Down Payment
$664,200 ………. Total Cash Costs
$166,100 ………. Emergency Cash Reserves
$830,300 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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