Thursday, August 16, 2007

Homeowner Arithmetic

I did some calculations to get a better feel for some numbers being bandied about relating to home mortgages.

The FNMA and Freddie Mac loan limits for a "conventional" loan is $417,000. So those government sponsored entities can buy unlimited amounts of home mortgage loans up to that principal amount that meet "conventional" standards. For lower income people, the FHA loan limit is about $200,000 and down payments can be as low at 3%. FHA loans go into GNMA securities which are 100% guaranteed by the full faith & credit of the US.

"Conventional" loans are made at 80% loan-to-value, [more with private mortgage insurance] and have 28/36 payment ratios, meaning that (A) the principal, interest, taxes and insurance ["PITI"] can be no more than 28% of gross monthly income, and (B) PITI plus other debt service can be no more than 36% of gross monthly income.

So what gross income can qualify for the maximum FNHA loan? For a 30 year fixed rate loan at 6.5%, the debt service constant is 7.5848%. Assuming taxes and insurance are about 1.5% of the home's value per year. With a little algebra and setting the loan amount at $417,000, the annual gross income that can qualify for that loan is ... about $140,000. The annual median household income in the US is about $47,000. 80% of all households have median income under about $92,000. So the vast majority of Americans have incomes where standard maximum affordable housing expenses will fit into FNMA and Freddie Mac program limits.

The median home price in the US is about $220,000. A "conventional" loan of $417,000 - the FNMA max- is 80% of value, so that corresponds to a home price of $521,000. Since that is 237% of the median price, obviously vast majority of homes in the US can be financed FNMA and Freddie Mac loan limits.

Hmmm ... the vast majority of Americans have incomes where standard maximum housing expenses can fit into FNMA and Freddie Mac limits, AND the vast majority of homes have prices that also fit into those program limits. So that covers the vast majority of the US housing market. And FHA programs can help lower income people buy homes.

Uh ... what's the crisis?

PS: FHA - reminds me of a fine song from the 1940s, "Will You Still Be Mine" sung by Betty Hutton, that had lyrics referring to events taking a long time. The memorable line was something like, "... when we've paid our FHA note, ... will you still be mine?" FHA loans were for 30 years, a very long time.

PPS: I remember being "house-poor" in 1984, as I bought the biggest home with lots of land that I could afford with conventional 80% financing. Lololol we had almost no furniture for a year!!! It was very cozy, watching TV in the living room leaning on some big pillows!

P^3S: Today's WSJ has a story about a family that is now "house-bankrupt". They make $90,000 gross. So with some algebra, we know they can afford housing expenses no more than $25,000 per year. That means they can afford no more mortgage loan than $266,000. They have a 2/28 mortgage loan with a balance of ... about $560,000. The story reads like a cluster FUBAR: higher RE taxes, lower home prices, a prepayment penalty (!) before 3 years, a big rate reset, on and on. Big dreams plus slimy mortgage lenders is a train wreck. Sad.

P^4S: By the way, this math also shows you that the above subprime 2/28 loan is really worth about 47% of its face balance. A lender haircut plus restructuring would produce a loan marketable to FNMA and Freddie Mac even today.

P^5S: I wonder how many square feet were bought in CA for that $567,000 purchase price?

P^4S: The huge reversal and green close on the Dow and S&P will count as a Day 1 for the IBD "rally" count. Volume was up, too, vs. y'day.

84 comments:

mfl59 said...

is this the big one bunkerman? or is the final washout here?

mfl59 said...

prepayment penalty lmaoooo....like people would even consider prepaying their principal....this is America, bunkerman!!!

Bud said...

rofl mfl....prepayment

Bud said...

I agree B'man. What crisis? Only people who lied or those who were greedy ( lookin to flip) or bad lenders are facing a crisis. the free market will take care of them. No need for the Fed to step in.

Bud said...

Oh also..the wall street guys that made bad investments are facing a crisis . And now they whinin like babies. Gimme a f'ng break!!!

Bud said...

die CFC die !!!!!

Bud said...

Spin ....you need to wait for the final score before you ping me. Yesterday he let me know that the yankees tied it up bottom 9 and that the red sox lost. Uh....the O's pounded riveira in the 10th to win the game. Sweet !!!

die yankees die !!!!!

Bunkerman said...

This "might" be a final washout, but opt exp. tommorrow is worrisome as is any Monday after big drop.

Huge gains in the dollar - looks like a shortage of dollars overseas? Perhaps related to TED spread?

Bunkerman said...

I'm thinking of selling more bonds & buying mnore stocks in Krypto Fund. thinking ...

Bud said...

If the fed cuts rates..........the dollar gonna get pummelled.

Bud said...

Football season around the corner. I am doin my 'research' on nfl teams right now. I will be posting over/under totals soon.

Bud said...

I'll be rooting hard for the atlanta falcons to go 0-16 this year.

Bunkerman said...

Bought a few S&P eminis at 1396. I'm thinking the 10% selloff might generate a bounc-aroo.

Bunkerman said...

Lol, this month's issue of Mad Magazine has a cover wrapper with this inscription: "This white wrapper is the last line of defense between you and stupidity"

lmao

mfl59 said...

die yankees die!!!

die mkt die!!!

Bunkerman said...

In 1970 Penn Central went bankrupt when it couldn't roll its commercial paper.

All rated commercial paper should have bank lines to back it up, especially asset-backed CP. I wonder if that old requirement was loosened as I read that one issuer was "extending" maturities?

Bunkerman said...

ML's High Yield 100 index is at 367 bps over the 10 yr Treasury. That's about right as there is plently of B paper in it.

A canonical "fair" price is about +300 for decent BB paper.

Recent terms were sub-standard, though, from what I hear.

Spin-em said...

I was watching the game Bud.....and said the yankees blew it.....Mr AFO.....rofl

Bud said...

Mern headed to paris and amsterdam today. Good for him. Man did he nail this market or what!!

Bunkerman said...

CFC is on its last oxygen bottle - how long can it last?

They were proudly hiring last week - layoffs Monday?

Frosty said...

Bunkerman you stop out the market tuesday, then I do wed...if you stop today, it will be my turn on friday...gesh...lol.

That large put action last firday helped fool me about this week...hearing beefers, the struggling type, were playing the misdirection thinking we would put at least a short term low and would create an ops expo bounce.

GS and the like the real evil Bunkerman, they are taking the other side to pound those beefers...this is after they sold them all the subprime junk...poor beefers, GS is the devil.

Bunkerman said...

agree Frosty re GS - they suck!

They're a pirahna liek BSC adn like most beefer "trading" funds.

I'm sure they pound down collateral, then put out margin calls & then take the other side to loot the beefers: rape & pillage.

Spin-em said...

frosty still da man....

Bunkerman said...

flipped those eminis for breakeven - applied the green to red rule.

Bunkerman said...

I analysed my time diversification plan.

I think my add point on selling bonds and buying more stocks is either (A) early September or (B) 1375 on the S&P cash index.

I need either more price diversification or more time for the situation to develop. This add will be #2 of 3.

My prior buy was the close on Friday July 27 at about S&P cash 1460.

The fianl add is a pure time play for mid-to-end of October.

mfl59 said...

my bottom call may have been.....wrong...it did provide an easy fade nonetheless

Bud said...

Pirhana's? Rape and pillage? What are you talkin about B'man? Are you the only one allowed to make money on wall street?

Bud said...

Lmaooooooooooo....dylan just said 'pirhana's'...........what's goin on in this world?

Bud said...

Godammit!! Bring back the uptick rule!.......lmaooooooo

Bunkerman said...

looks like margin calls and liquidations in commodities, too.

Bunkerman said...

Gosh, Bud, do you suppose all the CNBC faces re my blog like Warren Buffet? ;-)))

Bunkerman said...

One must keep a short leash on any "bottom" plays nowadays.

Frosty said...

Bunkerman....short leash indeed...should the bears tighten up there stops or press? Perhaps the wise move is to do after those that have held up? AMZN PAYX GRMN VDSI and so on.

Spin-em said...

Frost..does the op/ex play..now add double juice to the downside?

Frosty said...

Philly fed 0...nada? LMAOOO..Bunkerman...you better start that rate cut rant...perhaps you should add some sort of ritualistic dance around a camp fire.

Bunkerman said...

a trailing stop probably works best for bears, Frosty, with some bounce wiggle room.

If the Fed cuts rates, shorts will suck awhile at least.

Bunkerman said...

Well, Mern always said the Philly Fed meant nada.

The Fed should be cutting. They screwed up last Tuesday, just like May 2006.

Bud said...

Oh good......trading curbs..protection for the 'common man'.....lmaoooooooooooo

Frosty said...

Spinny...yeah it sure does...I'm thinking about next week....black monday in play, how could it not be....some good news increases risk for the bears, the options hangover risk grows, wash out risk increases as the value shoppers could begin to put a toe in. Panic players await as well, perhaps that is the last shoe to drop.

Bunkerman said...

I agree, Frosty. Monday could be bad, bad ... or a rip up. Depends on the Fed.

Bud said...

Philly fed has reached mern's 'target'

lolololo

Bunkerman said...

The 2PM hour might be interesting. I suppose GS will be front-running the margin calls.

Frosty said...

Bunerkman....LMAOOO...they have fresh blood in the water...now they smash the carry trade beefers they sold housing bonds...oh my, they are the devil.

Bunkerman said...

Right, Bud ... you're catching on ... slowly ;-))

Bud said...

Can you please clrafy this for me B'man? Is GS a beefer?

Frosty said...

PANIC...she's coming apart captain.

mfl59 said...

beefers love to strike at the lunch hour...

Spin-em said...

Aye captn..Im giving it all I can..the shields just wont hold....We need to hear from the FED-eration

Frosty said...

FEDeration...LMAO

Bud said...

Spin is funny. Last nite he wanted Ben to 'teach the shorts a lesson'. Huh? Lmaooooooo

Frosty said...

Bunkerman....would we no longer be freinds if I faded you here on BAC at 49.32?

maverick said...

frostman, BAC must own everything by now B'man says it is safe to nibble

Spin-em said...

Id really like to punch your lights out Bud.....lmaoooooooo

maverick said...

Uh Spin ....the line forms over here.

Bunkerman said...

Of course GS is part beefer - they run in house hedge funds.

Bunkerman said...

Go ahead, frosty, short it. No problemo. If it goes up, uh.. your problem. If it goes to 40, I double up.

Frosty said...

Bunkerman...in my list of growing risk to the bear run I forgot to add...piss off the Bunkerman.... thought I would give it a shot :)

Bud said...

That is some comeback spin. Swing and a miss. Help him out frosty.

PS. here they come!!!!!!!!!!!!!

Bunkerman said...

Oh Frosty, I'm getting soooo mellow, it's hard to piss me off.

Bunkerman said...

Does anyone smell grilled beefer? Mmmm ... that would taste so good.

mfl59 said...

grilled beefer....lmaoooooooo

Bud said...

B'man don't you miss the good ole days....when beefers were driving the market ( and your stox ) to all time highs?

Bud said...

Beefers playin some hard core ping pong today....i luv it!!!!!

Frosty said...

CSCO...doubled down like a fool....pigeon alert.

Bud said...

Frsoty i bought CSCO too. We'll see.

Bunkerman said...

Doubled on CSCO, too.

Bunkerman said...

BAC is getting close to that H&S bottom set up - looks like 50.20 is the neckline

Bud said...

This feels like beefers runnin retail stops.

Lmaoooooooooooooo

Bunkerman said...

Hmmmm. I'd say a whole lotta beefers got a whole pile of redemptions yesterday.

That's good news, long term.

Frosty said...

Spinny...what is he up to?....beside bitch slapping Bud?

Bunkerman said...

I bought a little silver - was really surprised to see it under 12. LT play, not a trade.

Frosty said...

Bunkerman...ie silver did you buy contracts or the SLV or are you having another truck load delivered?

Bunkerman said...

I bought contracts. I might take it down later in the fall in metal. That will depend on the overall allocations.

Bunkerman said...

I'm starting to have so much (silver) I need to figure out a better depository.

Frosty said...

Bunkerman....just line the walls of your tank with silver...that way when you hit the road ala mel gibson the road warrior, you will be able to buy or fight your way out of anything.

Bunkerman said...

lol Frosty.

My half-track could carry it easily - good idea!

I'll put it in an ammo compartment.

Frosty said...

sounded like maria just busted a nut...did dylan have both hands above the desk, I missed it.

Bunkerman said...

darn. I was buying some fruit & a homemade peach pie at a farmstand when that cash S&P 1370 was hit. I might have tried another chip there - that was my point.

Bunkerman said...

I think Maria is having some wine for lunch, or is starting drinking early

Bud said...

Beefers great job!!!

Frosty said...

those trading curbs really saved the day.

Bud said...

lmaooo frosty..........we need more curbs!!!

Bunkerman said...

right, frosty. And if they put teh uptick rule back in, the market mmight return to normal. ;-)

Bunkerman said...

The best outcome would be if half the beefers go out of business and if the "rich" put their money into passive "real buyers" - index funds - instead of trading beefers.