The focus of the presidential election and the current state of the country has recently shifted toward the economy. My husband saw the economy as an issue starting about 16 or more months ago. In fact, he started seeing the decline in the housing market about two years ago. He works in the mortgage business so he has first hand knowledge on how and when things started spiraling out of control. People are pointing to Wall Street and the current administration for all the problems we see today but there are so many people who should share the blame. Interest rates were fairly low and mortgage companies were booming from 2002 through 2006. They had the capital to make the loans because they were owned by big banks or could sell the loans to banks who wanted them in order to bundle them into mortgage backed securities. Issuers and underwriters were making a ton of money which fueled the need for more. Simply put, supply and demand.
In order to generate more loans the mortgage companies had to reach out to a broader population and/or existing home owners who could refinance or upgrade. To do this, new products were devised with the input from the banks and issuers. You could buy a house with no money down, no proof of income and poor credit. You could get an interest only loan, hybrid ARM or option ARM. These were great options for the borrowers because their payments would be lower than if they were to get a 30 year fixed loans. This helped them qualify for a more expensive house. This in turn created more demand which drove up housing prices. What people qualify for and what they can afford are two totally different things. When you qualify for a loan the lender looks at your housing debt to income ratio and your total debt to income ratio. If you have a stated doc loan your income is not verified so some people miraculously earn enough money to make their debt to income ratio (DTI) qualify them for the loan. Either way, some products allowed DTI's up to 65%. The DTI calulation only uses debt like house, cars, credit cards - basically only things that show up on your credit report. It doesn't take into account your groceries, gas, car insurance, health insurance, electric/gas, etc. Also, it is based on gross income, not net income so taxes aren't taken into account. With that said, you could have a monthly income of $5,000 before taxes. Based on the 65% DTI exception, you could have $3,250 in monthly obligations. So what is your tax rate? It varies based on several factors but mine is about 31%. If yours was the same, your take home pay would be about $3,450. That leaves $200 to pay for all your other expenses - could you afford that? The 65% is probably the highest DTI, most products have lower DTI requirements but even going lower you should get my point. Typical housing DTI standards are about 35% to 38%.
OK, this is enough for now. As you can see, the banks and issuers (Wall Street) are to blame for the housing bubble which led to the economic crises we face today. However, there is so much to tell. In future blogs I will expand on the role of Wall Street. Also, this illustrates why mortgage companies are to blame. I will also go into more detail of why they helped make matters worse. I barely touched on the borrower but yes, they too are to blame along with mortgage brokers, appraisers, underwriters and everyone else who share a role in the mess.
The housing market is in a correction right now. Based of statistics going back to the late 1800's and adjusting for inflation, trends were not looking good. In January of this year, home prices were sitting where they should be sitting in about March of 2010 so we were way ahead of schedule. The housing market is probably the largest factor in the largest economy (the US) in the world. When that market goes down, the entire economy goes down. I will share more inside information soon.
In order to generate more loans the mortgage companies had to reach out to a broader population and/or existing home owners who could refinance or upgrade. To do this, new products were devised with the input from the banks and issuers. You could buy a house with no money down, no proof of income and poor credit. You could get an interest only loan, hybrid ARM or option ARM. These were great options for the borrowers because their payments would be lower than if they were to get a 30 year fixed loans. This helped them qualify for a more expensive house. This in turn created more demand which drove up housing prices. What people qualify for and what they can afford are two totally different things. When you qualify for a loan the lender looks at your housing debt to income ratio and your total debt to income ratio. If you have a stated doc loan your income is not verified so some people miraculously earn enough money to make their debt to income ratio (DTI) qualify them for the loan. Either way, some products allowed DTI's up to 65%. The DTI calulation only uses debt like house, cars, credit cards - basically only things that show up on your credit report. It doesn't take into account your groceries, gas, car insurance, health insurance, electric/gas, etc. Also, it is based on gross income, not net income so taxes aren't taken into account. With that said, you could have a monthly income of $5,000 before taxes. Based on the 65% DTI exception, you could have $3,250 in monthly obligations. So what is your tax rate? It varies based on several factors but mine is about 31%. If yours was the same, your take home pay would be about $3,450. That leaves $200 to pay for all your other expenses - could you afford that? The 65% is probably the highest DTI, most products have lower DTI requirements but even going lower you should get my point. Typical housing DTI standards are about 35% to 38%.
OK, this is enough for now. As you can see, the banks and issuers (Wall Street) are to blame for the housing bubble which led to the economic crises we face today. However, there is so much to tell. In future blogs I will expand on the role of Wall Street. Also, this illustrates why mortgage companies are to blame. I will also go into more detail of why they helped make matters worse. I barely touched on the borrower but yes, they too are to blame along with mortgage brokers, appraisers, underwriters and everyone else who share a role in the mess.
The housing market is in a correction right now. Based of statistics going back to the late 1800's and adjusting for inflation, trends were not looking good. In January of this year, home prices were sitting where they should be sitting in about March of 2010 so we were way ahead of schedule. The housing market is probably the largest factor in the largest economy (the US) in the world. When that market goes down, the entire economy goes down. I will share more inside information soon.
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