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Lenders and Grade-A Borrowers

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November 26, 2007 – Comments (7)

Here is a great post that explains why those mortgage backed securities -- even the "good" ones -- are bound to remain rotten for a long time to come. It's because the underlying loans are being made on Goldilocks underwriting standards.

I got a file from a fairly young (24) borrower that had a 731 credit score. A perfect payment history for the four years he’s had credit. He’s had a decent job for a year and a half—was a student prior–and he earns about $37,000 per year. Right now, he lives with his parents, has no expenses. He’s got a car payment of $176.00, and his student loans are currently in deferment—he’s got up to 2 years.

In his checking account, he’s got less than $500, and roughly $1800 in an employer matched 401(k) that has doubled this year because of the performance of international funds.

His Realtor (who is a good, conscientious agent) showed and sold him a $138,000 house. He qualifies on the “My Community,” program with a rate of 6.5%. His taxes are $2220 per year, and the condo fees are roughly $60 a month.

His “total” payment at $1225.50—and his debt ratios are in the popular 35/45% wheelhouse. His closing costs are being paid by the seller, so he’ll have the cost of an appraisal and an inspection tied up in this house—so $500-700 bucks will be in the deal.

Of course, he gets an the best grade available, this gets him the best pricing available.

But let’s take a look at his real budget:

7 Comments – Post Your Own

#1) On November 26, 2007 at 11:37 AM, saunafool (98.94) wrote:

Compared to stories I've heard from California and Washington D.C. this loan really does look Grade A. The guy is going to be pinched and if he loses his job, he probably defaults if he can't find a new job in a hurry, but let's take a look at the bright side.

First, the guy has only been out of school for 2 years, so he's probably about 24. Any 24 year old buying a house (unless he is the guy who started Facebook) will need to borrow to his limit.

I would also say that it is realistic for a 24 year old to anticipate a rising income over time. It makes no sense for the article to assume the guy will not get a raise for 4 years. In 4 years, he should be making at least 10% more than today, giving him the kind of padding to his disposable income that makes sense.

Sure, on the downside, he could lose his job and lose his mortgage. On the upside, he could get married or live with someone (either roommate or mate) and all of a sudden his cash flow situation looks fine.

In short, maybe it's not Grade A prime, but it's not dog food like the $500,000 loans going to couples with combined incomes of $70,000 or so in the bubble zones.

The other thing is that if home prices fall 20%, this guy is out $25,000. Hurts, but it's possible to recover. Lose 20% on $500,000 (that isn't your money), and you will spend a long time digging out of that hole. 

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#2) On November 26, 2007 at 11:38 AM, wingedcreat0r (34.10) wrote:

I don't understand why this guy shouldn't be able to afford this home. I do understand the point that the blogger wishes to express. However, I feel some of his points are way too generalized.

I wonder if mortgage companies ever took those factors into account when handing out loans. I know they didn't with me.

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#3) On November 26, 2007 at 11:59 AM, jeremiaharn (< 20) wrote:

Yeah, but the tendayteam.com blogger is right in that mortgage underwriters SHOULD take these things into account.  I think that was his point.  And, 'dog food' is not relative...a default is a default no matter how safe the borrower seemed or how much down payment he lost.

Jeremiah Arn 

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#4) On November 26, 2007 at 12:16 PM, abitare (58.10) wrote:

Another good post. The Japanesse recession is the closest similarity to the US. In 17 years the Japanesse real estate and stock market have not recovered the high of the 1990s.

My WAG:

Real estate will lose 30 - 70% from 2005 peak. 

Stocks will lose 20 - 50%.

Recovery time: UNKNOWN, decades?  

I am own SKF and SRS.  

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#5) On November 26, 2007 at 12:33 PM, TMFBent (99.83) wrote:

Let's also note that this "blogger" IS a mortgage agent.

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#6) On November 26, 2007 at 2:09 PM, genuinechris (< 20) wrote:

Yes, I'm a mortgae agent--and a blogger.  Maybe more of a "mortgage" agent--but in any case, the model is still broken, it's still getting worse, and not better.   Thanks for the link love.       

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#7) On November 29, 2007 at 2:45 PM, HKendrick (< 20) wrote:

saunafool,

 Don't ignore the fact that chris "best-cased" most of his expenses - and fairly accurately, I might add.  He didn't even take into account things like rising property taxes, which, if the borrower's home is located in any respectable up-and-coming bedroom community, will almost certainly bite him in the butt.  Out here in Chicago, many people "escaping" my fair city for any number of hyper-growth suburbs are getting nailed by this as those communities need to build countless new schools to keep up with population growth.

 Squints

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