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.