The success of any stimulus program will be measured by one thing. Are consumer’s spending money again? How will the federal government restore confidence in the economy and how will consumers find that all important disposable income to begin buying things other than necessities?
One of the most important, albeit over looked segments of our economy are homeowners who are current on their mortgage, and haven’t missed a single payment or been late. These people have good credit score, a history of making their payments on time and other assets. These assets may be held in other forms of investments; however they may not be easily convertible into cash.
This group of people has mortgages that may either be fixed or variable and at rates of 6% or higher. The problems may be in the form of a couple of things:
- The current value of their home may have fallen to where the current value happens to also be what the outstanding mortgage balance is, therefore prohibiting a refinance due to the debt/equity ratio.
- Today’s stricter financing regulations may prohibit someone from meeting the new guidelines, since lenders today have recoiled with a knee jerk reaction which has kept many qualified people out of the housing market.
“Is it possible the banks are punishing their best customers in an attempt to recoup the shortfall of their past indiscretions and lax oversight?”
The basis of lending money has always been to factor into the cost of the money the amount of risk that was associated with the borrower. Except for the previous few years when now we are finding out that in exchange for 100% financing, no doc loans and all of the other mortgage opportunities, lenders did not factor in a high enough degree of risk for the loans they made. Risk which is typically expressed as a higher interest rate or upfront points. If these tools would have been used effectively, many people wouldn’t have been able to qualify for a mortgage and consequently would not have gone into default.
If this group of property owners were allowed to refinance at today’s lower more competitive rates, a homeowner could easily save as much as $5000 a year of $416 a month on a $500,000 mortgage by reducing the interest rate 1%. That $416 that could be used for a car payment, new carpet or furniture, entertainment, or anything that would begin to drive the local economy, unless of course you live in California and will soon be the victim of the recently enacted tax increases. Still, however the $300 dollars a month for California residents would be a sorely needed windfall.
This group of people that could begin to pump money into the economy are a proven entity. Their financially solid and not likely to default or hand over the keys in lieu of making the house payment. Plus, will someone answer this last question? “Aren’t property owners less likely to default when the payment has been reduced”.
Isn’t this what the just announced Homeowner Affordability and Stability Plan was based upon? Let’s encourage and untie the hands of folks that can get things moving again.
About Doug Willis
I think that homeowners are less likely to default when their debt is reduced to the traditional 28/36 DTI. So to me, the reduction in payment would have to hit that level. There have been so many exotic loan programs in the past decade, that it is difficult to see how any stimulus can work considering the volume of deleveraging required.
Let’s take South Pasadena as an example and let’s say values fall significantly and the entire city needs to refinance. Your statistics show South Pasadena’s median price above $1 million. In today’s lending standards, how many of the city’s residents would qualify? I don’t know the exact median income in South Pas (I’ve seen between $70-90K). I can’t imagine many qualifying with that kind of income unless they have significant equity.
My feeling is we need to get back to the tried and true 28/36 DTI for anything to work.
Hannah,
While the 28/36 will always be the default ratio, there should be other considerations other than just current income. The primary concern is “can the borrower make the payments?” and sometimes current income just does not reflect the true financial situation of the borrower.
Doug, exceptions don’t make the rule, not when your goal is to enacted a “real stimulus”.
The rules is that most people can’t make it work unless they keep their payments to less than 30% income. The primary concern is can the the borrower PAY OFF THE ENTIRE LOAN not just make the payments right now. Studies and history have shown us that a large 20%+ downpayment, and steady income which requires less than 30% of your income to go towards housing is what works for most people.
Tim,
I believe I was eferring to refinancing. The only conern being “Is the borrower able to make the monthly paymnet”. With most people staying in their house 5-7 years, paying off the entire loan balance is not a consideration. If someone is making a $2500/month house payment at 6.25%, don’t you think they are going to keep mkaing their payment if the rate is reduced to 5%.
Also, the primary concern of a lender is to minimize thier risk. If somoeone has the assets, the credit scores and history they should be able to buy a house if they exceed the normal 28/36 ratios, within reason. I am not talking about taking on a house payment that consumes 50% of your take home pay. The problem is that the stated income programs and the miss use that went along with it have now runined it for the people who could benefit and for who it was intended.
“With most people staying in their house 5-7 years, paying off the entire loan balance is not a consideration.”
Actually yes, that’s the MAIN consideration now. In 5-7 years, the home will likely not be worth as much as it is today. The homeowner will need to have saved additional money to be able to bring extra to the closing when it is time to sell. If they can barely make the payment today, that means they are not putting aside extra savings.
The key has always been that people are able to cover the entire loan balance – either through selling the home, or through paying through the entire life of the mortgage. Given that home prices are going down, and that most people won’t stick around more than 7 years, it’s more important than ever as a responsible lender to take that into consideration. And most of them are doing just that.