Off topic -- WSJ article on idiocy in lending / home ownership.
June 12, 2002
FINANCIAL PLANNING
Stretched Buyers Are Pushing Mortgage Levels to New Highs
By RUTH SIMON and MICHELLE HIGGINS
Staff Reporters of THE WALL STREET JOURNAL
Soaring real-estate prices are stretching many home buyers to the limit.
Despite the lowest interest rates in nearly three decades, mortgages are eating up a record amount of people's
paychecks. Housing payments, as a percentage of disposable personal income, are at their highest level since
the Federal Reserve began tracking the statistic -- up 45% since 1980. And the trend is likely to continue as
low interest rates keep fueling home sales. Yields on 10-year Treasury notes dropped below 5% Tuesday,
signaling that mortgage rates will continue edging down.
The debt explosion has been triggered in part by major changes in mortgage underwriting standards, with
lenders doing everything possible to keep the boom alive. Lenders, including J.P. Morgan Chase, now permit
some well-to-do borrowers to apply up to 50% of their income to their regular mortgage payment. A decade
ago, the norm was 28% to 32% of income.
Financial companies also now require buyers to come up with much
less cash. The average down payment from a first-time home
buyers dropped to just 3% in 1999 vs. 10% a decade earlier,
according to the National Association of Realtors.
The result is that people are qualifying for homes that would have
been well out of their reach a few years ago. Holly Crawford, an
emergency dispatcher in Santa Rosa, Calif., recently bought a
$275,000 bungalow with only a 5% down payment. She took out first and second mortgages for the other 95%
and is saddled with a monthly payment of $1,700 a month.
Now, she says, 40% of her income goes to her mortgage payment. "I have to buckle down a little bit more,"
says Ms. Crawford, who canceled a May vacation to Puerto Vallarta and is putting in more overtime to help
pay for her new house.
Borrowers need to be cautious in today's looser environment. Conservative financial advisers warn against
paying much more than 30% of your income in monthly payments. Any more can leave borrowers vulnerable
to a drop in income or job loss.
The popular adjustable-rate mortgages also have their risks. Some carry interest rates of less than 3% but are
tied to indexes that can rise monthly. "If you get an ARM below 3%, you should be planning for the eventuality
that your payments would at least double," says Keith Gumbinger, a mortgage analyst with HSH Associates, a
financial publisher in Butler, N.J.
No Margin for Error
A more conservative approach is a hybrid ARM, in which the monthly payment is typically fixed for five years
or more, limiting exposure to interest rates.
Even some mortgage brokers are worried by the surge in borrowing. "Some of my clients are taking on too
much debt," admits David Soleymani, a managing director at Cendant's First Capital unit. "They're not leaving
themselves with much margin for error."
While home foreclosures and delinquencies have edged up from a year ago, they still remain relatively low by historical standards. Nationwide,
slightly less than 1% of loans are in foreclosure or at least 90 days past due, according to LoanPerformance, a mortgage-data firm. Still, if interest
rates rise and the economy slows, experts worry about a rash of foreclosures.
Already, people are running into trouble. Two years ago, Mike O'Dell put down $20,000 for a $235,000 home in Minneapolis. At the time, the
$2,495 monthly payment seemed manageable to Mr. O'Dell, a computer consultant who was making around $80,000 a year. But after Sept. 11,
his business plummeted and he and his partner were forced to sell stocks and take out cash advances on his credit card to continue making home
payments. Their credit-card debt shot up to around $65,000 and they started falling behind on tax payments.
Back in Order
The two men eventually signed up with Auriton Solutions, a credit counselor, and are taking steps to put their finances back in order.
The new standards, along with lower interest rates, are a big reason that mortgage borrowing rose a record $574 billion in the 12 months ended
March 31. Easy money also helps explain why home prices have soared -- the median home price was $147,800 last year, up from $97,100 in
1991, according to the National Association of Realtors.
Lenders are using other methods to keep the party going. Normally, borrowers who put down less than 20% must pay private mortgage
insurance. But lenders have also come up with ways to get around that -- even for buyers with no down payment at all. Countrywide Credit
Industries, for instance, offers a combination of an 80% first mortgage with a second mortgage that covers the remaining 20%.
A combination of factors have made lenders more aggressive. The mortgage industry says it was able to change its guidelines because it has
sophisticated computers that allow it to better analyze a borrower's creditworthiness. "We have a much better understanding of risk today," says
Brad Blackwell, an executive with Wells Fargo, a big home lender. Finally, the rise in home prices has protected lenders from bad loans. If a
borrower falls behind on the payments, the home can always be sold to pay off the loan.
Write to Ruth Simon at ruth.simon@wsj.com and Michelle Higgins at michelle.higgins@wsj.com
Updated June 12, 2002
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