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Mortgage Debt

This may surprise some given that I’ve made much of my career in the mortgage debt markets.  As I have observed the housing market’s ups and downs during much of my career dating back to the 1980’s I have concluded that our system of encouraging people to stretch for homes they cannot afford is among the most harmful aspects of our society’s systems. When I began my career as a loan underwriter at Mercury Savings & Loan the mortgage industry held firm to the 28/36 ratio standard. This standard required that for a prospective borrower to be approved he/she must have his/her housing costs including principal, interest, taxes, and insurance be no more than 28% of his/her total monthly income. Further, the borrower must also pass the total debt service-to-income test at 36%.  This standard insured that, for the most part, only those who could afford a home bought them.  It also insured that families had spare money after their housing costs to afford a decent quality of life and maybe even have some to put away for their retirement.

The 28/36 standard has long since been forsaken by the mortgage lending industry. I recently read that Wells Fargo, perhaps the nations largest originator of loans, just reduced their credit standards in response to a dramatic recent decline in originations. This only means that more unqualified homeowners will purchase homes. More people will live stress filled lives, denying themselves the basic pleasures and living paycheck to paycheck.  And more foreclosures will occur which will dislocate families and benefit the finance industry.

Easy mortgage credit is a drug that many in our society find irresistible, and like other very harmful and addictive drugs, the problems it causes run deep in society. First, by encouraging homeowners to stretch to acquire homes they should not these families will have to cut many corners in other areas of their lives in order to keep their homes. This will mean more meals at McDonald’s and less organic or healthy food choices, ergo more obesity and related illnesses. Many other sacrifices will be made to feed the mortgage (and insurance and taxes) beast. In the end the wrong price will be paid for homes and the winners will be the homebuilders, and the mortgage finance industry, which gets paid money to originate and to service loans, and who then dump the weak credits onto the taxpayers by selling the loans to FNMA and FHLMC. The affordability index, which measures how median home prices in a market relate to median incomes, ought to always be in equilibrium. Unfortunately, easy credit is indeed difficult to resist, appealing to our nature to desire bigger and better.

I wish we could count upon enlightened regulations that enforce the 28/36 ratios without exception.  However, the past 20 years reveals that this is a fantasy and that our government is too easily persuaded by the overtures of the homebuilder and mortgage finance industries. It would be so great to have leadership that can articulate the perils of living beyond ones means, such that people can grow and make these decisions in their own best interests. The message needs to be spread that bigger, fancier, and more costly is not necessarily better.  It may sound crazy but I believe that it would be great to see housing prices collapse in the U.S. to levels whereby the average person could buy the average home in his/her market and do so by qualifying for a mortgage at the 28/36 ratios.  We can all start by saying “no” to the temptation of living beyond our means.  It really is not cool.

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