I had the opportunity to chat with Niki Scevak recently, he’s repurposing data provided by the Home Mortgage Disclosure Act into some very cool and useful charts, maps and other intuitive formats on his new site Mortgage.Homethinking. After poking around for a bit I quickly realized how terribly skewed one set of data is, the loan amount to income ratio.
The HMDA was formed by the Federal Reserve Board, yes that Fed. The HMDA purports to:
‘…requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings’
Two charts from Homethinking representing HMDA data:
According to the HMDA:
The loan to income ratio for California was ~2.3 times income in 2006.
The average loan amount was $320,000.
Calculating backwards, this would indicate that the average reported income for a borrower in a $320k mortgage is ~$139,000/year.
According to the US Census Bureau, the median income for a Californian from 2004-2006 was ~$53,000. At 2.3 times income, this should equate to an average loan amount of ~$122,000. Even incorporating some standard deviations to account for % of Californians who own homes vs those who don’t, the disparity is obvious. You can barely buy a house with wheels in California for $122k.
Scaling up to consider real California property economics…borrowers who acquired a $500,000 mortgage on average should have an income of >~$217,000. A $1,000,000 mortgage would indicate that a borrowers average income should be >$434,000/year.
Between you, me and your monitor this isn’t the case, not even close. One doesn’t need to be in the mortgage industry to know that these ratios are way off to the point of being comical. How do I know this? Let me explain how consumers are typically ‘pre-qualified’ for how much mortgage they can acquire:
Using the $139,000/year income example from above…
Borrower Income = $139k/year or ~$11,500/month. They have documentable, stable job and housing history, good credit, and assets.
Situation arbitrarily qualifies borrower for 6%, 30-Yr Fixed program.
39% debt to income ratio (DTI) allowed within the mortgages underwriting guidelines = ~$4485.00 in monthly ‘credit bureau reporting debt’ (mortgage, car, installment loans, credit cards, student loans…) is allowed.
Lets say the borrower has $1000 in monthly reporting credit bureau debt, not including a mortgage payment. This leaves ~$3485.00 in ‘available monthly debt’ left to ‘qualify’ for a mortgage.
At the interest rate and term above, working backwards from a $3485 payment, would ‘qualify’ one for a $581,000+ mortgage, or a loan to income ratio of 4+, almost twice HMDA’s reported ratio. 90% of borrowers will buy a home within 5% of this pre-approval limit, as the mentality transforms from ‘need’ to ‘want’…fast. Anyway, after some unofficial research I found that almost without fail, consumers end up taking out mortgages at near 4 times their annual income.
It seems logical to implicate the rabid abuse of stated, no doc and otherwise non-provable/ liar income loans but ’stated’ income should be represented and accounted for, even if it is fictitious. Niki made a solid point, stating that 2nd mortgages, home equity lines…loans with relatively smaller principle balances…could be tipping the data.
While this may be a ‘boring’ post to many, I’m intrigued because the Fed is making decisions based on this data, which can be easily misunderstood by those in the Ivory Tower and lead to rash, misinformed policy decisions…and thats not good for (almost) anyone.
Anyway, kudos to Niki for bringing greater awareness to an industry that is shrouded in mystery and scandal…
