Lenders and Grade-A Borrowers
November 26, 2007
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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:
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