Income to Mortgage Ratios in the new Banking System???

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Submitted by DoJC on February 25, 2008 - 9:04am

I was recently reading that in CA the ratio of household income to mortgage loan was at 12:1 for a while until the tires came off, and they've lowered to 11.1:1 recently. (That's to say that banks would loan a person with $100k in income $1.2M before, and $1.11M recently) These figures leave me with some pretty serious questions:

1. What has been the ratio of any loans you've heard about in the last two months? Any first, second, or third hand accounts of income to loan ratios?

2. What is the ratio banks will allow from now on?

I ask as all this relates to buying a home in CA, how far the prices fall, and when is a good time to buy. For example: if the new ratio is closer to as low as 4:1, or even 6:1, I see some REALLY serious problems coming down the pike for CA. I've printed, and am reading through, the California Budget Project report titled: Locked Out 2008: The Housing Boom and Beyond. In it we find that in Orange County the median income is $70,232, while the median home price is 625k. That comes out to be nearly a 9:1 ratio. San Diego County is also pretty bad off, but slightly better than OC. There we find a median household income of $59,591, and a median home price of $470k. That is a slightly more manageable 8:1 ratio.

So, what does this mean to us? Here’s my take on some potential outcomes:

1. People are going to have to come up with some serious down payments that are large enough to reduce the loan to the proper ratio, or they won’t be able to buy a home.

2. Home prices will have to drop considerably more than they already have. Talks of 25% are a good start, but with a 6:1 ratio any of the more exclusive and/or expensive neighborhoods are suddenly going to go from stagnant in the sales department to something even more glacier/ice age-like

3. Banks, while taking MASSIVE losses due to other bad loans and recent past mistakes, are going to have to take another set of massive risks and start giving loans at much riskier ratios of 10:1, or even 11:1. Not likely due to a certain instinct for self-preservation that will, in a Pavlovian way, cause them to shrink back from risk like a child who just stuck a needle into an electrical socket.

4. Some combination of #1 & #3 – banks will increase their ratios in CA once the home prices stabilize some, and will require at least 10% on all loans with a high ratio, with a push for closer to 20% whenever possible.

Any thoughts on this? Please post general information on ratios if you're uncomfortable using real figures. It would greatly help the flow of info and ideas.

Submitted by vizcaya on February 25, 2008 - 12:42pm.

The ratio that I approved on was 1 to 3.75. Or a mortage of 300k loan from a 80k annual salary. For me, I would not want to try to go any higher than that ratio. We have to be able to live, and enjoy life. It would suck to be a slave to your house.

Banks will be forced to bring those ratios down, otherwise people will continue to goto into default.

Submitted by HLS on February 25, 2008 - 2:17pm.

DOJ, you've got some really bad info.
Loaning $12 on $1 of income was never possible.

Nobody on earth approves loans based solely on annual income, and there was never a time that even 10:1 was a measure.

Borrowers are qualified on gross income vs. total monthly debts, (minimum payments) including mortgage, property taxes, hazard insurance, HOA fees, credit cards, car payments, school loans, child support/alimony etc. Usually only monthly debts that are on a credit report are used.

The higher your income, the more disposable income you should have.

There is no exact ratio, but up to 60% of gross income is not impossible.
It's more debt than I recommend, but many people don't want to listen.

Lenders will approve people for more debt than they should take on.

Median numbers mean absolutely nothing, and are misleading.
Median income earners don't buy median priced homes.

Your "potential outcomes" are the kind of misleading projections that the media loves.

Submitted by Ex-SD on February 25, 2008 - 3:09pm.

I haven't had a mortgage in over 20 years and never had a HELOC. My wife and I are extremely conservative with our money and when we bought homes with a mortgage, we never bit off more than about 25% of our income for a mortgage payment. I've seen too many people lose their jobs, get divorces, have medical hardships, etc. and I always had the mindset that I wasn't going to ever let a house put me in a financial bind. When we lived in SD, we eventually owned our primary residence and a really nice second home that we rented out......we owned both free and clear. My point is that many financial genius's will tell you to leverage, leverage, leverage...............but leverage can easily land you in the poor house. Use common sense when getting a mortgage.

Submitted by Deal Hunter on February 25, 2008 - 5:19pm.

Debt to income ratios cannot be considered in a vacuum in today's credit market. I work in loan advocacy (mostily in loan mods for now) and in commercial lending. There has been a MAJOR shift in approval considerations away from income/debt ratios.

This is counter-intuitive as FICO and property values are in such flux that a lender should depend on the fundamentals such as income/debt ratios in approving the loan. However, this is just not what I am seeing in the market.

FICO continues to be the top consideration with property value as a close second. My theory is that the banks and lenders have relied so heavily on FICO and LTV to determine the INTEREST RATE at which to lend that they just plain don't know how to value a loan on any other criterion.

Originators, unless they carry their own loans, must still package loans to be sold to Wall Street. Wall Street has yet to give originators new qualifiers, so it's business as usual at the mortgage desk. A quick approval comes with low LTV and high FICO. Debt/income ratios are all over the place even within the same lending institution.

For example: A recent loan mod I worked on with Countrywide approved a loan with the borrower being 36% negative each month after new payment arrangements. This was on a FICO of 710 and LTV of 95%. Find the logic in that one.

Submitted by HLS on February 25, 2008 - 5:43pm.

The major shift that you are seeing now is on the back end for loans that were originated with loose standards. They are being generous on the back end now because they don't want to foreclose if they can keep a FB buried in their debt. Mods are very different than originations.

On the current origination side, a low LTV, low DTI and high score doesn't get a quicker approval than a marginal loan. Conforming approvals are computerized and the answers are spit out within 60 seconds, even for a 680 mid score, 50% DTI and 80% LTV... the rate is the same as a 780 score, 25% DTI and 50% LTV.

I don't know if there are any conforming lenders that "carry their own loans" today,, virtually all get sold to FNMA, FHLMC or FHA. There are very few exceptions granted, if any.

There are people with high credit scores, low DTI's.. BUT no equity. When upside down, there is no chance of a refi with a new lender. Many people have not grasped this reality yet.

Submitted by DoJC on February 25, 2008 - 8:29pm.
Submitted by DoJC on February 25, 2008 - 9:03pm.

Here are a few more excerpts, with links this time, to show ratios of up to 10:1 exist in various parts of CA:

#24 "My dad made money on his house, and it will work for me too."
FALSE. Your dad bought his house when houses were cheap compared to salaries, maybe 3 or 4 times annual salaries. Go ask him. Things are different now. Here is a chart of median house price vs median income in Palo Alto:

Year Median House Price Median Income Multiple
1980 148900 24743 6.0
1990 457800 55333 8.3
2000 910000 90377 10.0

Most bankers use a multiple of 3 as a "safe" price to income ratio. We are well beyond the danger zone, into the twilight zone. Another rule of thumb is that a fair house price is between 100 and 200 times the monthly rent. If a house rents for $2000 per month, then a fair price is from $200,000 to $400,000.


There are more, but this is a good start to show that we have been a bit higher than 4:1 on price to income charts for CA.

- Doug

Submitted by HereWeGo on February 25, 2008 - 9:15pm.


A little off topic, but what's going on with mortgage rates? Fannie and Freddie debt would seem to be rocketing upwards, yield-wise. Has this all happened since the Congress increased the conforming limits?

Bloomberg now has a 30-year fixed benchmark of 6.08, whereas 1 month ago it was 5.47, 3 months ago 5.89, 6 months ago 6.17 (start of credit crunch), and 1 year ago 5.75.

Submitted by patientlywaiting on February 25, 2008 - 9:45pm.

Ex-SD wrote:

"My point is that many financial genius's will tell you to leverage, leverage, leverage...............but leverage can easily land you in the poor house. Use common sense when getting a mortgage."


That's very wise advice. I agree. Your children are lucky. :)

Most people spend everything when they leverage. That's why families who have lived in America for generations don't have anything to their names. Let's say a husband and wife can pay-off two houses in a lifetime of regular work. Their two children should have no need for mortgages.

Submitted by HLS on February 25, 2008 - 10:55pm.

Fannie and Freddie are in HUGE trouble.

Although conforming limits have been raised (in theory)
there are NO loan programs available yet. Perhaps mid March, and as of now they will only be valid until 12-31-08

The "system" desperately needs to book some profits.
There are already billions in losses, and much more to come. The system is broken, and NOBODY knows where to get the parts to fix it.

I don't know exactly what is going on, but see that the spreads are increasing.

Banks are talking about bailing out insurers, cuz if they don't we will see that they are all insolvent. Better to cough up $500 million to keep them all afloat awhile longer instead of allowing the $10 Billion scam to be exposed.

Every amateur thinks that they can predict long term mortgage rates, but I can't tell you what they will be tomorrow.

All the websites, all the averages, and internet quotes, it's all CRAP. It depends what somebody actually qualifies for, and most people don't understand that.

Most people who shop by rate get screwed. Rates change constantly, but people don't see it.

On January 22nd, 30 YR fixed PAR rate was 5.25%. On Jan 23 it was down below 5% for about an hour and closed that day at 5.375%...It tested 5.25% again, and has gone straight up from there to around 6% now.

The no cost loans, the no fee loans, and the average rates do nothing more than fool people, who don't understand the difference. (Many "no fee" loans still have costs)

The industry is still full of scum, misleading and overcharging borrowers in rate and fee, and not explaining the products, because they don't understand it themselves.

I think that when the "new" conforming rates (NCR) finally kick in, people may be sorry that they waited, and find out that they don't qualify anyway.

It's only going to make borrowing cheaper for many people who qualified at higher rates.

The house of cards is collapsing. The powers are getting VERY desperate. The talk of "negative equity certificates"
is beyond rational.

I see so many people in trouble and/or denial.

Submitted by patientrenter on February 25, 2008 - 11:00pm.

HLS, I wouldn't get too worried about mortgage money drying up. If Fannie/Freddie start to dry up, then the govt will buy some loans off them at a higher value than they could get in the open market, so they can keep lending.

Patient renter in OC

Submitted by HLS on February 26, 2008 - 1:26am.

I have NO concerns about money drying up, where/when did I say that ?? There is no shortage of money for qualified borrowers.

It is and will continue to be harder to qualify than it was 2 yrs ago, but just back to traditional guidelines that were in place for decades before the feds turned the faucet on and broke the handle and didn't bother calling a plumber for 5 years.

I'm in no denial about what's going on, trust me.

Submitted by DoJC on March 5, 2008 - 1:33am.

Did anyone see the homepage of this site? Seems that the price - income ratio was even higher than I thought. Seems to have topped out at nearly 15:1, and hasn't been below 6:1 in the entire graph posted here:

- Doug

Submitted by SDEngineer on March 5, 2008 - 11:03am.

The new article on the front page uses per capita income, which is generally quite a bit lower than household income, which is the income figure usually used in the housing price ratio.

SD's always been high - 4-5x household income is pretty much the average for the past 30 years (discounting this particular bubble).

IMO, you can thank "stated income" no or low doc loans, combined with option ARMs, low teaser rate ARMs, and IO payment loans for the massive run up in household price ratio - no bank would ever make a 10x income loan, but they were willing to turn a blind eye and give a wink during the run-up as long as the buyer was willing to lie and say they made enough to afford it. The banks drank the kool-aid too, and figured that as long as the borrower could somehow afford to pay the teaser rate IO payments that the house would appreciate, the buyer would refinance (or sell), and everyone would continue to make money hand over fist.

Submitted by DWCAP on March 5, 2008 - 11:54am.

Remember median and average incomes are skewed because of households that have really low incomes. College students and Seniors living off SS and such are all households that need to be recorded, but have terribly low incomes. No college student making $8/hr 3 hours a day, 5 days a week in the bookstore + a summer job painting houses is buying a house (atleast not without the bubble) but they are counted as households if they are fileing their own taxes and such. It would be alot more insightful to be able to strip these portions of the population out and see what housebuying (ie 25-60 years old)households median income is. I have a feeling itll be alot closer to 3-4X income. In the bubble ill bet it topped out at 8-9X, and that wasnt sustainable. 15X is congressional level stupidity and the banks deserve to go outa buisness if they were doing that on verified income loans.

On the otherside, the college student and Senior households also give fake numbers on demand for housing. College students tend to pile in to reduce rent costs, meaning that 1-2-3 people may be 1 bedroom, and seniors generally are sellers of housing rather than buyers. So when the stats say their are X households and Y number of houses that doesnt necessary add up to Z demand for houses not being met. Seniors often move into assisted living homes,using far less housing than they use to. In College some Fraternity houses held between 20-60 guys, and if they were all on their own (a lot I knew were) they are all counted. If we all lived that way we could probley fit in a few more million people no problem. Think of all the people we could put just in La Jolla with all those "guest bedrooms" that are never being used. What does a 60 year old couple with no kids need with a 6 bed 4 bath house???? Not much cept to show it off to their friennds who are 58 with one grown kid outa state and only have 5 bedrooms.

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