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Sunday, July 30, 2006

Pity for those with no "PITI"?

I've commented on this before at Inman News and other blogs, but it deserves it's own post. Here is an exerpt from my letter to the editor:

To help borrowers qualify for a home loan and to get payments in line with a lenders loan program, it is necessary for the taxes and insurance to be dropped as a portion of the monthly payment. The term PITI (Principle, Interest, Taxes & Insurance) does not apply to throngs of borrowers across the country. For many today, the term is "I". They only pay the interest, literally.

For borrowers that could not qualify under the lowered standard of just Interest only(but still pays taxes and insurance as part of the monthly payment) , some lenders dropped it lower and eliminated the taxes as part of the payment. The line in the sand was drawn: either qualify this way, or, no new home.

The lending standards of "low, lower, lowest" gave me a chuckle. It reminded me of the Seattle Mariner vetaran pitcher Jamie Moyer who baffles batters with his slow, slower and slowest wizardry of pitches.

But where does this leave the borrower? Obviously, they must budget for paying property taxes on their own. Taxes are not cheap. If a borrower is stretched to the limit without property taxes included in their mortgage payment what is the probability of budgeting and paying property taxes when due? Many probably won't, or can't.
Today, in the Orange County Register, county officials announced that property tax delinquencies have reached an 8 yr high while sending out bills to the sweet tune of $3.8 Billion in tax revenue, the largest bill for property owners in 15 yrs. Well, it's not a big deal in Organge County. You can skip payments for 5 yrs before they can take your home—if the lender doesn't beat them to it.
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Dukes said...

Keep them coming Tim. Those of us who noticed the "math not working" in buying a home will be proven right. We will be very happy that we didn't resort to lunacy financing. You can only keep rose-colored glasses rosy for so long. At some point reality sets in.

I encourage others to read Ben's blog this morning on the absolute mess going on in Phoenix, let me remind all that Phoenix was also a "never can go down" area. With job growth, not enough houses, retirees moving there, blah, blah, blah.

Right now what we are seeing here: "a failure to look reality in the face" has come and gone in other areas and they are starting to deal with the aftermath. We are making it worse for ourselves here (well, some of us are) - our spoiled refusal to take the medicine which will eventually be forced on us all will just make it worse.

seattle long term owner said...

In the last 5 years, this kind of financing thrived because of instant equity... which fed the refi business which fueled the housing boom and the dirty cycle goes on...

It's one big pyramid scheme... now that the pyramid is collapsing, the only way to get things going a little longer is to get people qualified with just interest only...

these are the people that tend to be poor in math anyway, (not to mention financially), and they don't realize that they're going to end up holding the bag when the pyramid crumbles...

Yes, pity for those who bought without PITI to qualify... this is the worst kind of predatory lending... giving people the illusion that they could afford a home when they never really could... this is the ultimate perversion of the american dream...

Peckhammer said...

It's one big pyramid scheme... now that the pyramid is collapsing, the only way to get things going a little longer is to get people qualified with just interest only...

If only that were true...

I know of one bank in town that was exploring the possibility of getting illegal immigrants into the home-loan game.

seattle price drop said...

I bought in a state without the PITI requirements. Was responsible for budgeting taxes, insurance, etc. and paying those bills on time and guess what- it works! Because I can add! And put the money I know I'll need aside! It really works!!

But I guess that has not been common in WA in the past. I was not aware they had relaxed those standards here.

The only benefit I can think of for having them is that it cuts down on the amount of tax repossesed properties.

So, S Crow, can we perhaps look forward to a bit more of that happening in the future in WA.? Buying properties for back taxes?

S-Crow said...

Sea. P. Drop-

The quick answer is probably not. The point I was trying to convey in my letter was that in order to get marginal buyers into a home, and the ratios in line, they loan program allowed for the borrower to forego collecting taxes/insurance as a normal impound towards the mortage payment.

To add salt to the wound, the many of these loans were interest only, fixed for 2 yrs, and then adjust according to the LIBOR index every 6 mos. with a pre-payment penalty rider to boot.

If you see me sign folks with these products you would probably be amazed at how professional we are regarding discussing the loan docs. But in the back of my mind, I'm like anyone, thinking, "I'm not certain you should really be doing this." But, it's not my job to nor can I discuss the merit of the loan, only the facts.

That's why blogging is so cool. I get to give my opinion and the public gets a very rare inside glimpse into what's really going on in the market, both good and ugly.

There is absolutely no way I could blog like I do if we were owned by a broker, lender, title company or other financial services company. No way. I'd be looking for a job.

Chachi said...

One thing I think you should include on your blog (in a high-profile post), is a relatively little known (or reported) fact. This is that the Federal reserve, under Bernanke, will issue very strict lending guidelines to banks to curb the risk that is being termed "systemic risk". This means that so much loose credit has been issued that our entire banking system is literally at risk of failure. Currently, the S&P bond rating agency has lowered the debt rating used to back mortgage backed securities due to their high default rate (approaching 50%).

Additionally, our country is in the only period of negative savings since just prior to the great depression. These are not scare tactics, they are facts.

Interest rates will play virtually no role in the coming crash, it will be due to literally a drying up of credit that will stop the buying potential of thousand of homebuyers who are currently sub-prime or taking exotic loans. This will kill the market instantly since the first time buyer will stop the move-up buyers.

If these facts were stated more widely, I think people would begin to get a real sense of what's been driving the market and where it is heading.

Finally, Goldman Sach's recently published a research note stating that they predict the national housing prices will fall for the first time in history. If this doesn't wake people up, nothing will.

Anonymous said...

One thing to keep in mind is that during the depression, many people lost their homes because the banks called the mortgages due. How many of us, today, would be able to come up with our mortgage balance if asked? I wonder how many people would have been able to keep their homes if not for this ugly action by the banks.

Anonymous said...

Anon 8:45-

Your point is just one of many for the benefits of looking at purchase price and NOT interest rate when buying a home.

If you bought at 250K on 10%, would you have a better chance of paying the balance off than if you bought 500K at 5%?

jcricket said...

How many of us, today, would be able to come up with our mortgage balance if asked?

The good thing is that none of us will have to deal with this (come up with the entire mortgage balance), because it is is illegal now. As long as you can make your monthly payment, banks cannot force you to pay back your mortgage any faster than the amortization schedule you got when you set up the loan.

The law was changed in the wake of what happened during the depression, and it's one of the things that makes holding a mortgage safer today than in our parents and grandparents time.

And before the bears go dismissing Ric's commentary, he agrees with you on the rules of owning a home: Your home is not an investment, get a fixed rate mortgage, stay under the 28% limit, etc.

matt said...

jcricket, as per Ric Edelman's advice

Last year, Wal-Mart sold several hundred thousand drills to people who didn't want them.

What these people wanted was a hole in the wall, but to get one, they first had to buy a drill.

The same is true for your mortgage:

Never pay off your mortgage? The bank can't call a mortgage now, that is true, but instead the country faces collective punishment, the taxpayers have to pony up for loan defaults because lending company's like Fannie Mae and Freddie Mac are federally insured. Collective punishment for a few poor decision makers, however this only works if there are a few not a massive wave of foreclosures.

Never paying off your mortgage is a ridiculous notion hatched in the heady days of bubble-land. Marrying your house to your retirement is insanity, you're playing with fire and are going to get burned. Especially in an overheated market.

Personally, I'd just walk down to Hertz rental and rent that drill

jcricket said...

Way to misread what Ric says. He says never pre-pay your mortgage. He doesn't say don't ever pay your mortgage. He's talking about people on a fixed-rate mortgage at rates of 7% or below, who are within the recommended loan limits and can still afford to put money away into retirement or other investments. And he's right. When all that's the case, you are usually better off investing your money in the stock market than paying down your mortgage faster.

Getting a fixed rate mortgage fixes your housing costs. Usually, over 30 years that works out in your favor quite a bit. Paying off your mortgage faster gives you back a rate-of-return exactly equal to your interest rate. When rates were 10 or 12%, that made a lot of sense. When they're 5, 6 or 7%, you've historically been better off investing in the stock market.

biliruben said...

My 2007 assessment came in the mail Friday. up 23% 2006 to 2007.

It didn't appreciate that much on Zillow! No fair!

23%. Take PITI from me.

biliruben said...

What do you want to bet that that assessment won't be declining along with my houses value in the years to come.

Christina said...


Did you do any home renovations? My assessment went up by 7% this year. I remember howling in protest when it went up 12% one year -- that was when the land value was hiked up by 70% -- 2004. This year seems tepid, but I'm not yet in a hot area: maybe in five years. The people I know who recently bought homes are not buying them in my zip code.

I do not count as a realistic indicator of market value. The calculator from the Office of Federal Housing Enterprise Oversight, or the difference between the assessed value and what I paid for it, I add to the current assessment to determine market value.

biliruben said...

Nope. In fact we've done some serious damage. ;)

That's what 4 cats and a dog will get ya.

I added a fence, and am doing some landscaping, but nothing particularly value-added.

I have no idea why it would go up so much. The area isn't particularly hot, and the house is tiny.

Now that I look again, they did do a bit of a land vs. home value switch, and I do have almost a quarter acre, so that must be it.