We Never Learn

Posted by urbandigs

Sun May 31st, 2009 08:57 AM

A: And this will ultimately lead to more problems later on. I read this in the NY Dear John section this morning, right before I head out for work.

Via NY Post:

DEAR JOHN: I purchased my first home, a condo, for $384,000 in September. I have a mortgage of $332,000 through Wells Fargo and Fannie Mae. At the time of the purchase, my monthly income was $4,000. Since then I have lost a job and a got a new one which pays me $2,600 monthly.

My mortgage is $2,116 a month and maintenance is $194.31.

So I figured I would call Wells to see if I qualify for this "so-called" government relief program. They told me that I did not qualify -- for the loan modification program. And they told me I couldn't even refinance because I don't have enough equity.

The current mortgage is a 7-year fixed at 5.75 percent interest only. I really need to change to a regular 30-year fixed at a lower rate.

If I don't qualify for any help, who does? Do they really want me to default? As of now I haven't missed or been late on a payment. Who gets the help? J.F.

Forget John's response, my reply would have been...'why the heck did you buy a place you could not afford with an annual income of $48,000'?

This woman puts 15% down, or $52,000, and takes out a $332,000 loan while taking home only $4,000 a month in gross income! Forget for a moment that you have to pay income taxes, sure slightly less with deductions, and you have to have money to eat and survive. And what about other debt obligations - credit cards? It doesn't mention anything but certainly I think its safe to assume this buyer has some credit card debt to service?

But, lets assume the best and say she has no other debts and is of great credit! Still, this woman bought a place way above her means, and now she is wondering whether the bank 'really wants her to default'; as if its the banks fault! Its the banks fault for lending, its the person's fault for buying.

DEBT/INCOME RATIO - to calculate d/i ratio, you simply divide your total monthly debt service obligations by your gross monthly take home pay. Generally speaking, banks like to see a d/i ratio of 28% or less. This went completely out the window during the parabolic credit years of 2003-2007, when the party stopped. I was under the impression that natural market forces whipped the banks into shape, where exotic loans went extinct and underwriting standards naturally tightened. In short, I thought the banks realized that they need to start lending to people who are worthy and stop giving people a loan that cant afford one! I was wrong and the same shit is happening now, probably because there is pressure on banks to lend to stop the natural market forces from purging the excess from the system that is ultimately painful to banks. We have become a society that bails out everyone, so why stop making money when you have good ole Uncle Same to bail you out?

Back to the story. This woman made 4,000 a month, or 48K a year, and decided to buy a $384,000 house. Lets do some math. Her monthly nut is $2,116 and a monthly maintenance of $194, totaling $2,310 to service her ownership costs, and this is an INTEREST ONLY loan (hey, at least its not negatively amortizing)!

2,310 / 4,000 = 58% debt/income ratio

ARE YOU F**KING KIDDING ME!! How in the world did Wells Fargo allow this loan to go through? Have we learned nothing? Of course, macro fundamentals kicked in and this woman lost her job. Luckily, she found a new one and now makes $2,600 a month. Her debt obligations on the house alone, forget other possible debts, now takes up roughly 89% of her take home pay! Uncle Sam can forget tax collections on this woman, because her decision to buy just put her smack dab into the money pit! Now her home has lost equity, and Wells decided against refinancing her or modifying her loan to make it easier to maintain! Why would they anyway?

This woman made a very bad decision, bought a house she could NOT afford even with her 4,000 a month original job, and Wells gave a loan that should NEVER have been approved! We fail to learn from the mistakes that got us into this mess, and its probably because politicians are putting pressure on banks to lend to stop housing from falling further and keep the system going! When will we learn! How many more thousands of people are in this same situation?

One element of deciding whether or not you can afford a home, is by calculating what your debt/income ratio will be. Only you can tell how secure your job is and in this economy, nothing is certain. Debt/income ratio should at the very least, come in under 33%, or 1/3 of your take home pay. I prefer to see it under 28%. But you have to calculate in your total living costs of the purchase and your minimum payments on other debts.

This woman clearly didnt care, and probably just wanted to buy anyway - maybe she liked the granite countertops or marble bathroom. I bet a comparable rental would have been $1K/mth - $1,200/mth max. Now she will pay the price. Wells should not have granted the loan, and the market should have STOPPED this person from buying a home naturally. Yet, that didnt occur. Now, we have one more person that will likely eat up all her savings to service her living costs and max out other avenues of available credit, before defaulting. Good job America! Keep on truckin!

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