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Here's an interesting article on the reality of the CA housing market
from a couple of weeks ago in the San Francisco Chronicle. In
another article yesterday or today, it was reported that the county
that I live in has a MEDIAN housing price of around $570k which is up
70% in the last 2 years! Housing for non-owners is supposedly now
available to only 14% of the working people in CA (based on
earnings).
You can bet that when unemployment starts to rise that CA will surely
be in the lead for house defaults and bankruptcies.
JW
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http://www.sfgate.com/cgi-bin/article.cgi?
f=/chronicle/archive/2000/11/08/BU86642.DTL&type=printable
Area Buyers Allot More to Mortgages But Still Stay Out of Basement
Lenders stretch debt-income ratios due to other factors
Kathleen Pender
Wednesday, November 8, 2000
©2000 San Francisco Chronicle
Ever wonder how anyone can afford a house in the Bay Area these days?
Here's one way: Lenders are assuming that borrowers can devote an
ever-growing percentage of their income to house payments.
Bay Area home buyers with good credit ratings can qualify for loans
that will require them to devote 40 to 50 percent of their gross
income (not net, mind you) to housing and other debt payments.
Some mortgage brokers have completed loans where debt repayment
represented 60 to 75 percent of the borrower's gross income.
"I've been able, with a big enough down payment and a good enough
credit score, to do a loan with a debt-to-income ratio of 75
percent," says Margaret Ashwell, a mortgage broker with Pacific
Guarantee in San Francisco.
She did one such loan earlier this year, but the borrower had a
couple of million dollars in other assets and was awaiting a large
IRA distribution that could be used to repay the loan.
For many years, lenders considered debt-to-income ratios a key risk
factor and held borrowers to strict limits.
Under the old standards, housing payments -- including principal,
interest, property taxes and insurance -- could not exceed 28 percent
of gross, meaning pretax, income.
Housing payments plus other debt generally could not exceed 36
percent of gross income. That's called the ``back end ratio.''
But today, people in the mortgage business ``are paying less
attention to debt-to-income ratios than we were five years ago,''
says Douglas Robinson of Freddie Mac, which buys mortgages from
lenders and packages them for sale to institutional investors.
Thanks to improvements in data-mining technology, companies like
Freddie Mac have been able to figure out which factors are the best
predictors of default.
They found that borrowers' credit behavior, which is reflected in
their credit score, is one of the best predictors of repayment.
Collateral, meaning the size of the down payment and the type of
property that secures the loan, is another key criterion.
Debt/income ratios, once given prime importance, are now given "low
relative importance," according to Freddie Mac.
"With better analysis of historical data, we know that people can
absorb a higher debt-to-income ratio and still be viable and pay
their mortgages," Robinson says.
Mortgage brokers say the bigger the down payment and the higher the
credit score, the greater the debt/income ratios lenders will allow.
Credit scores range from 350 to the low 900s, but the average is 600
to 700, according to Fair Isaac in San Rafael, which developed credit
scoring. (Fair Isaac is working to make credit scores available to
consumers, but if you want yours now, you'll have to ask your
lender.)
"If I have somebody in the 800s, I can close my eyes and do the
loan," says Ashwell. But anything in the 700s is also very good.
If someone is putting down 20 percent and has an average credit
score, they can ``routinely'' get a loan with a debt/income ratio of
42 to 49 percent, she says.
If a borrower is willing to keep his or her back-end ratio below 40
percent, "you're in like Flynn with everybody," even with a low down
payment and less-than-stellar credit score, she says.
For adjustable-rate mortgages, housing payments are based on
the "fully indexed rate," which is the rate you would pay in the
first month, excluding teaser rates.
Ashwell says that in San Francisco, at least half her clients have
total debt-to-income that tops 40 percent.
In Marin County, mortgage broker Max Kemsley says that 45 percent is
a "typical" back-end ratio, even for first-time home buyers putting
down as little as 5 percent. "That's considered the norm. No one
blinks an eye," he says.
Kemsley says borrowers can get even higher debt-income ratios if they
have a good chunk of change left over after the down payment and
closing costs.
"If you're only putting down 5 percent but you have a good retirement
fund and a couple of hundred thousand dollars in stocks you don't
want to liquidate because of capital gains, then you're in a good
position to make choices if things change" and you're not able to
make your mortgage payment, he says.
No one keeps track of debt-income ratios in the Bay Area compared
with other places.
"The rules and regulations the banks are throwing out there are
nationwide, but because of the higher prices and incomes here, high
debt- to-income ratios are more prevalent here" than elsewhere,
Kemsley says.
Sometimes borrowers with back- end ratios exceeding 40 percent end up
paying a higher interest rate -- as much as 0.25 percentage point --
because fewer lenders are willing to make the loan, Kemsley says.
Sometimes the lender offering the best rate is not active in the Bay
Area and refuses to make loans where the back-end ratio exceeds 40
percent. "If we were to go to Citicorp or BofA, they'd take it,"
emsley says.
How do people spending half their income on housing make their
payments?
"If they're single, they probably have roommates," says Ashwell.
Sometimes a parent or relative contributes.
In one case, Ashwell says, the wife's name was not on the mortgage
because she had a bad credit record, but she had a good income and
helped pay the mortgage.
So far, soaring debt loads don't seem to be taking a toll on Bay Area
homeowners.
"We have not seen anyone coming in to us in trouble yet," says Joanne
Budde of the Consumer Credit Counseling Service in San Francisco,
which helps borrowers who are in over their heads. "We expect to. But
we haven't yet. The economy is still pretty healthy."
The CCCS recommends that home buyers nationwide spend no more than 35
percent of gross income on rent or mortgage payments, including taxes
and insurance. "In the Bay Area, we'd go to the low 40s," Budde says.
Including other debt, the CCCS says a back-end ratio of 50
percent "is reasonable," Budde says.
However, home buyers have to ask themselves whether they're willing
to change their lifestyles to pay off a huge mortgage.
If you're paying 40 percent of pretax income on housing, you are
probably paying 60 percent or more of after-tax income on housing.
"If almost all of your income is going to pay the mortgage, and
you're the kind of people who like to eat out and travel, then you
might want to ask yourself if you really want to take advantage of
everything the lender is going to offer you," Budde says.
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