Aug282013
The 43% DTI cap strongly favors those with no consumer debt
It’s no secret that I don’t think consumer debt is a good idea (See: Think you want consumer debt? Think again…) With the ongoing war on savers waged by the federal reserve, it’s been a difficult time to maintain a discipline of saving instead of consuming. However, buried in the new qualified mortgage rules is a loophole that may give those with little or no consumer debt a major competitive advantage when bidding on houses.
The new qualified mortgage rules cap overall debt at 43% of gross income. This was in response to the enormous debt burdens exposed when lenders abdicated all lending prudence and gave Ponzis unlimited deb. The back end ratios of the average borrower, not the extreme, the average borrower, was over 75%. Remember, this is of gross income, so unless these people don’t pay taxes or don’t eat, they were obviously Ponzis relying on fresh infusions of debt to sustain their lives.
The 43% debt-to-income cap is a good idea. Nobody should be paying more than that to lenders, and realistically, nobody can unless they go Ponzi. However, there is a loophole. There is no cap on the front-end DTI a borrower can put toward their mortgage payment. I’m not saying it’s a good idea, but borrowers with little or no consumer debt can service a payment of up to 43% of gross income, and the loan would still qualify under the new qualified mortgage rules. 
This additional leverage gives those with little or no consumer debt a major advantage when bidding on houses relative to their indebted competitors.
Right now, the GSEs cap front-end ratios at 31%, and since they are most of the market, finding a loan with a front-end ratio in excess of 31% is difficult. The FHA will do it, but their costs and fees are so high, there isn’t much leverage advantage to doing so. However, at some point, private lenders will start making these loans, packaging them into MBS pools and selling them off. Since these loans will meet the QRM requirements, they won’t have any risk retention requirements. Investors will likely feel comfortable with buying them because they know the borrowers were prudent enough to avoid consumer debt and are probably more creditworthy than their more indebted peers.
No endorsement
Make no mistake, I am not endorsing this. Most people should probably not put more than 25% of their gross income toward a housing payment, but here in overpriced California, people have become accustomed to putting the maximum allowable 31% toward housing, and if given the chance, many will put even more toward getting their dream home. I believe lenders will likely give them that chance, whether it’s good for the borrower or not.
New bubble?
All my affordability calculations are based on a 31% front-end ratio as a cap to borrowing power. If circumventing this limit becomes widespread, we have potential to inflate prices above what would be expected due to the increased leverage of these borrowers.
Will this be unstable? It depends on what you believe about the borrower’s ability to repay. If people can really handle 43% DTI ratios, and if they can live without consumer debt (no credit cards, no car payments, and no student loans), then these higher front-end DTIs will be stable, and the housing market may seek a higher equilibrium price. In the process, those who live with excessive amounts of consumer debt will be left on the outside looking in.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”NP13145636″ showpricehistory=”true”]
34 BLACK HAWK Irvine, CA 92603
$5,200,000 …….. Asking Price
$4,015,000 ………. Purchase Price
12/29/2004 ………. Purchase Date
$1,185,000 ………. Gross Gain (Loss)
($416,000) ………… Commissions and Costs at 8%
============================================
$769,000 ………. Net Gain (Loss)
============================================
29.5% ………. Gross Percent Change
19.2% ………. Net Percent Change
3.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$5,200,000 …….. Asking Price
$1,040,000 ………… 20% Down Conventional
5.11% …………. Mortgage Interest Rate
30 ……………… Number of Years
$4,160,000 …….. Mortgage
$1,142,088 ………. Income Requirement
$22,612 ………… Monthly Mortgage Payment
$4,507 ………… Property Tax at 1.04%
$767 ………… Mello Roos & Special Taxes
$1,083 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$535 ………… Homeowners Association Fees
============================================
$29,504 ………. Monthly Cash Outlays
($3,468) ………. Tax Savings
($4,898) ………. Principal Amortization
$2,086 ………….. Opportunity Cost of Down Payment
$670 ………….. Maintenance and Replacement Reserves
============================================
$23,895 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$53,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$53,500 ………… Closing Costs at 1% + $1,500
$41,600 ………… Interest Points at 1%
$1,040,000 ………… Down Payment
============================================
$1,188,600 ………. Total Cash Costs
$366,200 ………. Emergency Cash Reserves
============================================
$1,554,800 ………. Total Savings Needed
[raw_html_snippet id=”property”]
Man, I really strongly disagree with you on this crucial point 43% debt-to-income is WAY too high. That’s 43% on the loan before you’ve bought quart of milk or a stick of butter. How many people can do that on today’s wages?
The banks would never lend money to people with a 43% DTI.
The difference here is that their lawyers and lobbyists probably fought like hell to twist the CFPB’s arm to get this outrageously high number.
And what do the banks get out of it?
Well, once you get under the QM wire, then Uncle Sam will guarantee the loan, right? So, of course, they want the DTI as high as possible, because they won’t pay a dime when the loan goes sideways.
Sounds like another taxpayer fleecing to me.
Baaaaaaa.
A blanket 43% DTI for all income levels makes little or no sense. If you make $1M/yr and are carrying $430k in PITI, then you can probably still live, and live rather well. If you pay 30% tax rate, you still have (.7*1000 – 430)/12 = 22.5k after tax discretionary income to cover all the rest or your expenses.
If you are making 50k and have PITI of 21.5k and pay a 20% tax rate you are going to be left with (.8*50 – 21.5) = 1.5k after tax to make all your other expenses.
Scaling this to 100k income = 3k, and 200k = 4.5k. These will be reduced somewhat from progressive taxes, but you get the idea.
Financing at 43% DTI can make sense in some circumstances. For instance, lets say you have 2 incomes and are going to drop down to 1 income for a short period of time (a couple of years while the kids are young). If your current DTI would be 31% and losing the income pushes it up to 43% for a short while. This is manageable given the fact that you are not making less than 100k on one income. If you have no other debts, do not expect to need to incur other debts for the next few years (2 new cars that are paid for), have more than ample emergency fund and retirement fund, then a higher DTI could work for you.
Now, the question I am faced with is: Do I pay off my car loan that is at 0.9%, and save myself 600/mo., thereby increasing the amount I can borrow by 100K? With the changes in the jumbo loan market lately, paying off consumer loans is making more and more sense. Jumbo loans have been cheaper than conforming high balance loans for the last couple of months.
Recently, I’ve seen jumbo rate sheets where the the 0.5% rate hit for less than 25% down has been removed. So I can put 20% down, get a better jumbo rate than conforming high-balance, and use the 5% to pay off the car. In addition, I can finance up to 43% of a single income, which is only 26% of our combined income, get the house we want, and carry the mortgage until the kids are both in school and my wife goes back to work. Sounds too good to be true. What’s the catch?
From an financial standpoint, keeping the 0.9% auto loan to term makes a lot of sense since I am being paid to keep the loan (the funds are earning more than 0.9% considering compound interest and a declining loan balance). But, I can increase the PITI substantially, and get the house I really want. I won’t have to move in 7-10 yrs either, so there is the 6% sales commission to consider.
This increase of the front-end from 31% max to 43% max seems like a massive housing stimulus to me. How is this going to affect auto sales when 12% of the available gross income can now be spent on housing?
The sad part is that a 43% DTI cap is considered to low by bankers. They are all complaining how this will cut into their business. One local lender told me that nearly 1/3 of their 2012 business had back-end DTIs higher than 43%.
Apparently, borrowers haven’t done the math you show, or they are Ponzis counting on fresh infusions of debt to make up the difference.
These new laws are confusing like Perspective said yesterday. I thought at first the QM laws had a front end ratio of 36%? But I know they have changed the qualifications several times.
At 43% it will be difficult if you make under $125,000. If you made a lot more then you could probably do it with no problem. But you are saving zero for retirement.
Paging all OC ‘baller’s’…..
”Understand you cannot have your house rise in value yet “money” still retain some mythical tangible wealth. Perhaps in the land of OZ, but there in no such historical period that anyone can point to”. –MartinArmstrong
I think it was Mike who said, “Let them eat paper!”
The banks know how to lend money, and who they can lend to.
We can agree about that, right?
The banks have certain criteria they follow religiously when issuing a loan. They want a down payment (to show that you are responsible enough to save money and have a stake in paying the loan). They want good credit scores, so they know you are trustworthy.
And they want to know that you have a job or regular income. That’s all.
That’s what the banks want, and you know something, they’re pretty good about getting their money back too, because they don’t lend to stiffs.
But the reason they don’t want the CFPB to use these same rules, is because they want to generate tons of credit to all kinds of people who’ll never pay the debt back…AND THEN HAVE TAXPAYERS PICK UP THE TAB FOR THE LOSSES.
That’s what this is all about.
It shouldn’t take the freaking CFPB more than a year to figure out who they can lend money to and who they can’t! It’s a joke. This is all a big bankers fleece job.
And look what the banks are fighting for in the QRM rule, that is, the garbage they bundle into MBS and sell to investors. They want zero retention risk, in other words, they don’t want to hold any capital aside in the event the MBS blows up.
NO CAPITAL FER CHRISSAKES! The arrogance. And these are the MFs who just blew up the financial system!
So let me ask you; would you buy an insurance policy from a company that kept zero reserves for paying off claims in the event that your house burned down?
Then why in hades would anyone ever buy jack from these crooks.
It’s outrageous!
The stinking banks run this country and it’s gonna take a revolution to get rid of them. The French had the best idea.
Chop, chop.
Mortgage applications slip 2.5%
Mortgage applications inched down 2.5% from a week earlier during the week ending August 23, the Mortgage Bankers Association said Wednesday.
Furthermore, the refinance index dropped 5% from a week earlier and the purchase index ticked up 2% from last week.
As a whole, the refinance share of mortgage activity continued to decline and decreased to 60% of total applications.
The average contract interest rate for a 30-year, fixed-rate mortgage with a conforming loan limit escalated to 4.80%, the highest rate since April 2011, and up from 4.68%.
Additionally, the 30-year, FRM jumbo edged up to 4.78% from 4.74% last week.
The average 30-year, FRM backed by the FHA also jumped to 4.52%, the highest rate since 2011, and an increase from 4.40%.
Meanwhile, the 15-year, FRM elevated to 3.84%, the highest rate since 2011, up from 3.71%. In addition, the 5/1 ARM rose to 3.50% from 3.44% a week ago, the highest rate on record since April 2011.
Wait for the revision, let’s see what actually closes.
Pending home sales fall 1.3 percent in July as mortgage rates rise
Signed contracts to buy existing homes faltered in July, as home buyers faced significantly higher interest rates along with rising home prices. The pending home sales index from the National Association of Realtors fell 1.3 percent from June but is still 6.7 percent higher than July 2012. These contracts indicated lower home sales closings in August and September.
“The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown,” NAR chief economist Lawrence Yun said in a statement. “However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West.”
Pending home sales fell in three out of four regions in July. Contract activity month to month was down 6.5 percent in the Northeast, down 4.9 percent in the West and off 1 percent in the Midwest. Activity was higher by 2.6 percent in the South.
The figures come on the heels of very weak sales of newly built homes in July, down 13 percent from June, according to the U.S. Census. Analysts blamed higher interest rates and some expected existing home sales to fall even further than this latest reading. Interest rates are about a full percentage point higher today than in May.
Mortgage applications had been lower for much of the summer, and refinances continue to fall, but applications to purchase a home rose 2 percent last week from the previous week, according to the Mortgage Bankers Association.
This, even as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $417,000 or less increased to 4.8 percent, the highest since April 2011. They are still down 6 percent in the past month. Mortgage rates, however, have been moving lower this week on weak economic data.
Higher home prices could also be hurting potential sales, as very low inventories continue to cause bidding wars from coast to coast. Inventories of existing homes are down significantly in most of the nation’s major housing markets.
Closed Sales Up in July, August Looks Weak
After observing a slowdown in sales throughout June—typically the peak selling month for the year—online brokerage Redfin reported a rebound in July, though other market indicators continue to cool.
According to Redfin’s data, “this July saw a healthy jump in homes sold throughout most of the 19 markets covered in this report,” improving 3 percent month-over-month and 17.6 percent year-over-year from a rather disappointing July 2012.
In fact, according to the Seattle-based brokerage, July 2013 saw the highest number of homes sold in the past four years, with the 19 markets together seeing about 94,000 sales.
“July’s numbers are probably the result of buyers shaking off the impact of mortgage interest rate increases, and opting to lock in rates before they rise further,” explained analyst Tommy Unger. …
While sales numbers picked up, Redfin believes the gains won’t last.
“With less inventory, higher interest rates and continued buyer fatigue, August won’t see the same 7 percent month-over-month sales increase as in 2011 and 2012,” Unger said. “In fact, based on current closed and pending sales, we expect a slight month-over-month drop in home sales for next month.”
At the same time, reports on home price growth and inventory were less positive in July.
Eased Mortgage-Risk Regulation to Be Proposed by U.S. Agencies
An eased version of a rule requiring lenders to keep a stake in risky mortgages that they securitize, a restriction designed to discourage the kind of lax underwriting that contributed subprime credit crisis, is set to be proposed by U.S. regulators tomorrow.
The 500-page draft regulation written by a panel of six agencies will replace a more stringent proposal for the Qualified Residential Mortgage rule. The first version, which was released in 2011, drew protests from housing industry participants and consumer groups who said it would be too restrictive of home lending.
The plan would require banks to retain a slice of mortgages when borrowers are spending more than 43 percent of their monthly income to repay their debt. The earlier proposal would have required banks to keep a stake in loans when borrowers were spending more than 36 percent of their income on all loan payments and in loans with down payments of less than 20 percent.
The regulation, mandated by the 2010 Dodd-Frank Act, will reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.
The proposal would align the qualified residential mortgage rule with similarly named guidance governing risky home lending: the qualified mortgage, or QM, rule. That regulation, issued by the Consumer Financial Protection Bureau in January, contains no down payment requirement. For loans in which borrowers are spending no more than 43 percent of their income on debt, the QM rule protects banks from being sued by investors or homeowners for faulty underwriting.
Here’s more of your typical happy talk from America’s favorite propagandist, Bill McBride:
The 4-week average of the purchase index has generally been trending up over the last year (but down over the couple of months), and the 4-week average of the purchase index is up about 6.7% from a year ago.
Read more at http://www.calculatedriskblog.com/#D4ag3qbpjCuj0TWG.99
Wow, so mortgage apps are up, Bill?
That’s right, they’re up to the level they were in 1997.
That’s right, they’re up a whopping 6.7% from the second worst year on record.
Oh, did Billy Bob forget to tell you that.
Musta been a mistake, eh?
Pathetic!
Enjoy!
http://www.businessinsider.com/the-future-is-bright-2013-8
*scroll down to the ‘all comments’ tab. Evidently, readers ain’t buy’n much of what he’s sell’n.
Oil hit $112 a barrel overnight and it’s mostly due to what is happening in Iraq not Syria. Attacks Kill at Least 65 in Iraq, Many More Hurt. This is really inflationary and I don’t see how they are going to keep rates under 5%. And with incomes not increasing how do people with DTI of 59.8% make their payments.
Let them eat paper.
CTRL P. Let Them Eat Paper.
CTRL P to pay for the wars, the bailouts, the subsidies, the socialist utopian pipe dream.
They are going to print the dollar off a cliff.
I’ll take the gold. Mellowruse can have the paper.
NAR Finally Admits Rising Rates Crippling Housing
Pending home sales missed expectations for the first time in 3 months, falling 1.26% MoM (vs a 0.0% expectation). This forward-looking measure of housing based on actual contract signings suggests that all the anecdotal evidence of an artificial echo-boom in real estate coming to an end. With the West down 4.9% and Northeast down 6.5% MoM (the biggest 3-month drop in 3 years), even the much-vaunted fair-and-balanced National Association of Realtors are forced to admit that “higher mortgage interest rates and rising home prices are impacting monthly contract activity.” Whocouldanode?
http://www.zerohedge.com/news/2013-08-28/nar-finally-admits-rising-rates-crippling-housing
Mortgage rates continue to slow the market
As higher mortgage interest rates continue to slow the market, pending home sales reflected such changes, dropping 1.3% to an index score of 109.5 in July from 110.9 in June. However, pending sales are 6.7% above July 2012, when the index was at 102.6.
July marks the 27th consecutive month of year-over-year gains for pending sales, according to the National Association of Realtors.
According to Lawrence Yun, chief economist at NAR, there is an uneven pattern throughout the country. “The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown. However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West,” he said.
“More homes clearly need to built in the West to relieve price pressure, or the region could soon face pronounced affordability problems,” Yun added.
In the Northeast, the PHSI dropped 6.5% to 81.5 in July, although it remains 3.3% above year-ago levels. The Midwest slipped slightly, down 1.0% to 113.2 in July; it remains 14.5% above July 2012.
Pending sales in the South were up 2.6% to an index of 121.5 in July and up 7.7% from July 2012. The index dropped in the West, falling 4.9% in July to 108.6 and down 0.4% from July 2012.
NAR expects existing-home sales to be up 10% for the year, totaling an estimated 5.1 million. Existing-home sales are projected to reach approximately 5.2 million next year.
The national median existing-home price is expected to rise nearly 11% in 2012 alongside ongoing supply and demand imbalances. Looking ahead to 2014, as rising construction takes some of the pressure off of home prices, NAR predicts price gains will moderate to 5-6% in 2014.
“It takes up to two months for pending sales to close which means this report points to trouble for final sales in both August and in September,” said analysts at Econoday. “Note that a big 5.8% jump in pending home sales in May translated to a big 6.5% jump in final sales of existing homes in July. But that was pending home sales data for May. The data for the subsequent two months have shown declines.”
“We should see existing home sales decline in the next couple of months since pending sales are usually a good leading indicator of existing home sales one and two months later,” said Trulia (TRLA) Chief Economimst Jed Kolko. “But today’s pending home sales decline was modest, suggesting that rising rates aren’t going to clobber existing-home sales. Loosening credit and expanding inventory should help sales, partially offsetting the effect of rising mortgage rates.”
According to Sterne Agee Chief Economist Lindsey Piegza, this morning’s report was particularly important given the recent decline in new home sales, as this is the first indication of demand for previously owned homes in the second half of the year.
“Clearly the weakness was not isolated to new construction in July. In a rising rate environment would-be-homebuyers were quick to take advantage of record low interest rates before borrowing costs increased. However, the bounce in activity at the end of the second quarter appears to be fleeting with housing market momentum still positive but waning. Going forward, any additional increase in financing costs will only dampen demand further without job creation and income growth to offset the cost,” she said.
What is old is new again.
New proposed QRM standard offers no downpayment option
The market has been calling for regulators to focus on synching the Qualified Mortgage rule with the Qualified Residential Mortgage standard to ensure safe and sound lending policies remain, without stalling market innovation.
On Wednesday, a proposal for revamping the qualified residential mortgage rule came out. The suggested guidelines will eventually be used to determine when a firm must retain a share of the risk in mortgages sold off to the secondary market
Six regulators, including the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency, announced two approaches to redefining the rule.
The first approach is simple: A loan already classified as a qualified mortgage by CFPB standards could move forward with no downpayment requirement under QRM, allowing these mortgages to escape risk retention requirements.
The alternative approach would require lenders to retain a stake in the credit risk when mortgages sold off are originated without at least a 30% downpayment requirement. The two approaches are very interesting — on one hand, the market seems to get a much easier standard, but on the other, a higher downpayment would take effect. The first approach, or no downpayment requirement, is the preferred approach at this point
This is a poison pill approach. By introducing two options, and by making one of the undesirable, they ensure they get the more relaxed standard.
Where did this 30% down payment requirement come from? Why not the more reasonable 20%? Could it be that choosing between a 20% down payment and a 0% down payment would have resulted in regulators choosing the 20% down option? By making it 30%, they ensure that regulators would not select that option and instead, we get a housing market with no down payment requirements.
So, if I purchase a Irvine house in April 2014 with zero down and then mortgage rates increase to 6.5% in 2015 and values drop by $150,000 I can stop paying my mortgage? I can short sale or try get another loan modification? Because that is what going to happen.
This means permanent Fannie and Freddie, because no private mortgage money will back a zero down loan.
How can this even be taken seriously?
I would not count on prices decreasing all that much, if at all. Once all the created currency starts circulating in the main stream economic sectors, prices and wages may start climbing. In real terms, home prices will probably decrease, but in nominal terms, they may keep rising.
And it won’t matter if anyone takes it seriously or any other way.
It is easier to ride a horse in the direction it is going.
There is still a good chance prices will decline nominally, more than most expect. We are in uncharted waters. The imbalance and malinvestment is enormous (thank you ZIRP). We know not the monster we have created (derivatives and bond bubble). Even with the grand inflation, an economy seeking balance must swing the other way like a pendulum (contraction).
We have created 2008 Part Two, bigger and badder, and few are discussing leaving the eye of the hurricane. Most believe the government can solve this via monetary magic. It can’t.
Another update.
QRM revisions strike the right balance
The release of a revised proposal by federal regulators to define the Qualified Residential Mortgage rule received a round of applause from market participants Wednesday.
Policymakers offered two approaches to redefining the rule.
The core proposal would align the QRM rule with the Qualified Mortgage rule, which sets standards for safe lending.
The alternative approach would require lenders to retain a stake in the credit risk when mortgages sold off are originated without at least a 30% downpayment requirement.
An earlier version of QRM proposed a 20% downpayment requirement for all QRM loans.
Consistency between both standards seems to be the bright spot in the regulators announcement, confirming that regulators took into consideration the unanimous reaction from various groups in the housing market.
“The hope has always been that these new mortgage regulations would give banks more clarity and certainty about which mortgages are risker, giving them the incentive to write more lower-risk mortgages,” pointed out Trulia (TRLA) chief economist Jed Kolko.
He added, “Consistency between QM and QRM standards helps reinforce the clarity for banks.”
The new proposed QRM version will give Americans more access to mortgage credit while helping to keep the mortgage finance system safe and sound, according to The Nation Housing Conference.
“This new proposal shows that regulators listened to the comments from the wide range of stakeholders involved,” said Chris Estes, president and CEO of the National Housing Conference.
He continued, “Aligning the QRM rule with the QM rules will allow more American families to become homeowners and ensures that housing markets can remain strong in the future. This is especially important for communities that are still rebuilding from the foreclosure crisis.”
While the new direction regulators are taking is viewed as positive, the finalized details will determine who can purchase a home affordably.
“The debate over QRM all too often breaks down on the notion of the size of the down payment,” said members of the Coalition for Sensible Housing Policy.
10Y back up, MBS back down today…what a ride!
[…] you remember the 43% debt-to-income ratio cap created by Dodd-Frank? Well, FHA is exempt from that requirement, and they now provide oversized loans to over half their […]