Haven’t the Mortgage Lenders Learned Yet?
February 5th, 2008 by Ana
This repost from the My Total Money Makeover forum would indicate that mortgage lenders have learned absolutely nothing from the current subprime mortgage mess! Isn’t this how so many people got into financial trouble to begin with?
Yesterday I talked to a Wachovia mortgage consultant (my landlord wants me to buy the condo I’m renting). I knew I wasn’t ready to buy, but I figured, what the heck, let’s see what they have to say.
Nice girl, but when I gave her the honest numbers about my salary and self-employment income AND my $700/mo minimum debt payments, she told me I would qualify for around $210,000-$220,000. So I said, “Really? Wow! How much would the monthly payment be?”
“Well, that’s the thing . . . It would be about $1450 if you bundled in tax and HOA.”
Well, gee, thanks but no thanks! I had already told her that my monthly debt payments are $700/month, so that would leave me $700/month for everything else in my life!
Now I don’t have any handy-dandy financial calculators I can link to, but these numbers look “wrong” to me. Just how long is this mortgage? What is the interest rate? What kind of terms? Was there any down payment in this discussion? The person who posted this thinks it was a quote for a zero down fixed 30 year mortgage, but the numbers still sound off to me.
This is just a shining example of complete irresponsibility on the lender’s part. They are trying to approve someone who brings home approximately $35,00 per year for a mortgage of $210,000 … almost SEVEN times her annual income. The recommended mortgage amount should be no more than twice annual income according to “old” common sense conventional wisdom. On what planet is this a “good idea”? The payment quoted is approximately 50% of her monthly bring-home (after taxes) income, about double the usual recommended percentage. As another MyTTMO member quipped, “…lenders are still giving people enough rope to hang themselves.”
All I can say is this mortgage “consultant” is either blatantly incompetent or trying to set this person up for failure. It’s rather obvious the mortgage lender won’t be holding this note, but trying to sell it off. The mortgage consultant doesn’t care if this mortgage is insane for this income level, or that one tiny hiccup in the querent’s financial life will trigger an inevitable foreclosure if she took this ridiculous loan. The mortgage lender won’t be around for that.
And that right there is one of the main problems behind the current subprime mortgage crisis here in the U.S. The lenders who originated these bad mortgages didn’t keep them … instead they handed them off as fast as a hot potato or a hand grenade with the pin pulled. The people who approved this kind of mortgage get paid simply on making a mortgage, not necessarily making GOOD rational loans.
Perhaps the solution to fix the current subprime mortgage crisis is too simple: make lenders hold the mortgages they write and approve. I think suddenly we would see a level of sanity return to the market quick fast and in a big hurry! Down payments would suddenly come back into fashion. Reasonable debt to income ratios would once again be considered. Exotic and financially toxic mortgages would disappear.
Maybe it’s just a pipe dream….
Posted in mortgages |
February 5th, 2008 at 1:32 pm
Yep, it’s a pipe dream, Ana. That would require too much “common sense” and actual work. Apparently, manual underwriting also requires that a lender have a brain before handing over cash for a mortgage. Imagine that.
February 5th, 2008 at 1:57 pm
Agree completely. Couple of points, the ‘old’ rule of thumb was THREE times your gross salary as a cap, or 33% of takehome pay as a max payment. (circa 1993).
Having said that, it’s pretty routine for places with extortionistic house prices (east/west coasts) to have people pay 60-70% of takehome for what here in the midwest would be a mid-range house. Everyone’s gotta live somewhere, and the stupid mortgage companies will give money to stupid people.
Doesn’t make it right.
February 5th, 2008 at 3:13 pm
Thanks for sharing that. It’s shocking that she’d recommend half the woman’s take-home income. That’s exactly how the subprime mess started. Ugh.
February 5th, 2008 at 5:06 pm
Randall: when the ex and I were house-shopping in 91-92 down in Texas the recommended was twice income and 25% of take home pay. It was the same in 1995 in Indiana. Perhaps we simply got more conservative advice than you did.
Mrs. Micah: Shocking yes. How this mess started (and seems to be continuing!) without a doubt.
Jen: I can dream, can’t I?
February 5th, 2008 at 6:00 pm
I confess I bought my home in 1998, and it was 4 times my annual salary. Of course, I bought via VA Loan…. and the lenders did include the fact that I would be receiving BAH, which I would be receiving once I moved into the house.
But, I was a PV2 in the Army, so can you imagine what 4 times my income was? I will give you a hint; my homes selling price was less than what the sticker price was on my last vehicle.
But, I have now owned it for 10 years, so at least if I should decide to sell I would have definately gotten my money out of it, considering that I really have only paid out of pocket for the house a total of 13 months since I used the BAH to pay the mortgage and while I was in Europe I rented it out.
I had a great Real Estate Agent, though. I “Qualified” for a 70 thousand dollar loan…. about 8 times my income at the time!!!! But he refused to show my any home over 45 thousand dollars, citing that I needed money to buy groceries as well. It was a good thing that I had a good level headed RE Agent, as I was 19 years old and pregnant with my first child when I bought this house, wanted to nest, and truly had NO IDEA WHAT I WAS DOING other than I wanted to be able to paint the house with Polka Dots if I wanted to!!!!!!
February 7th, 2008 at 2:23 pm
Wow! I couldn’t imagine being approved for a $200k loan…At least she had enough since to say no!
February 7th, 2008 at 3:17 pm
I don’t know if you can blame the lenders, Wall Street was really pushing for profits. I don’t think they learned their lesson from the dot bomb days. We all have to pay for it.
February 7th, 2008 at 3:38 pm
Katie: at least someone was trying to look out for you, and it’s turned out fine in your case. My RE agent was trying to put me in a house $30K more than I was comfortable with. Since I am hard-headed and stubborn I said “No.”
Diva: She’s on the Dave Ramsey plan, so the rest of us at MyTMMO would have lashed her with wet noodles if she hadn’t turned it down LOL
Dave: That is why I think the best solution to the problem is to make lenders keep the loans they make. They would learn quite quickly what a reasonable house payment should be! Either that or they would own a LOT of houses…
February 9th, 2008 at 9:13 am
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