Subprime Folly Leads to Sound Underwriting

In a Los Angeles Times article titled Countrywide plan may cut mortgage rates for 395,000 borrowers the most important paragraph is as follows.

The idea is to modify a loan’s terms just enough to create a new monthly payment, including principal, interest, taxes and property insurance, equal to 34% of a borrower’s verified monthly income. (bold by ed.)

As I noted in my posts about the subprime lending industry, specifically a post subtitled Cash in Your Hand, and a Hook, I stated the following.

In the subprime lending industry, weak, poor credit borrowers were allowed to spend up to fifty-five percent (55%) of their monthly gross income on their house payment plus monthly long term debts. (bold by ed.)  Subprime lenders were allowing the highest risk borrowers to carry debt loads which even the most creditworthy prime borrowers were not allowed, and which are not, realistically, financially advisable for any individual.

I also noted the following regarding underwriting guidelines for solid, good credit borrowers.

Perhaps the most overly generous subprime underwriting guideline was what is known as the debt to income ratio.  The debt to income ratio is simply the percentage of your monthly gross income that you are spending on your house payment and other monthly long term debts.  For conforming prime loans, meaning “A” paper loans which are underwritten to FannieMae (FNMA) and FreddieMac (FHLMC) guidelines, borrowers are typically limited to spending thirty-eight percent (38%) of their monthly gross income on their house payment plus their long term debts (long term debts are any credit cards or lines of credit with outstanding balances, and any installment loans with over ten (10) months of payments still outstanding).  Bear in mind that his 38% debt to income ratio was set by FNMA/FHLMC for solid, good credit borrowers.

I think the players in the current financial boondoggle all knew, and thoroughly understood, that the debt-to-income underwriting guideline being utilized to approve subprime borrowers, allowing an unheard of fifty-five percent (55%) of gross income as an acceptable debt-to-income ratio, would lead to problems of a magnitude of which we are seeing now.  Fools.

Posted by .(JavaScript must be enabled to view this email address) on 10/26 at 08:48 AM

Name:

Email:

Location:

URL:

Smileys

Remember my personal information

Notify me of follow-up comments?

Submit the word you see below:


Next entry: Dinner with an Obama Supporter

Previous entry: The Second Largest Slave Master in the World

<< Back to main