Wednesday, February 25, 2009

So, why exactly are we supposed to feel sorry for this criminal idiot?

This sob story has been making the rounds the last few days, and I thought I would take a look at the math of it.

First, watch the video:

I'm sorry, but she DESERVES to lose her house. In fact, most of the people being foreclosed on deserved it. God know my mother deserved it.

But let's get back to this example in particular. Why on earth would a school bus driver (it never mentions what her husband does so maybe he has a better job) think that she could afford an $800,000 house?

I don't care if a lender "makes it too easy" for you, it's still your decision to accept responsibility, and you know what you are doing when you sign on an $800,000 house.

And don't try and tell me this woman was conned by predatory lenders. Commenters on other sites dug up the following public records:

She has owned a condo at 6001 Arlington #721, Falls Church, VA since 1999 (and still owns it).

She purchased 3438 Charles Street, Falls Church, VA on 1/05/05 for $510,000 and sold it on 6/10/08 for $429,000.

Her current home - 1920 N. Dinwiddie Street, Arlington, Va -was purchased with her husband (Luis Guillermo Flores) on 11/16/06 for $800,000.

What she is, is an unsuccessful flipper.

Again though, lets just assume she's a normal "homeowner", not a greedy and stupid flipper (nothing wrong with greed, but you'd better not be stupid at the same time), and go back to the numbers; because they just don't make sense.

This woman purchased a 5 bedroom 3.5 bath, 3500 sq foot house, on a 7500sq ft lot, in one of the most expensive suburbs of Washington (with some of the highest property taxes, at $0.89 per $100 assessed value).

Conventionally speaking, a person is usually considered to be able to afford a house between 3.5 and 5.5 times their gross income; depending on interest rates, creditworthiness, other assets etc...

In some markets, that would allow almost no-one to own a home (much of California for example), so standards have relaxed to as much as 7 times declared income.

In any case, your housing costs should be no more than 1/3 your net household income; and ideally no more than 1/4.

In order to afford an $800,000 market price home, under even the loosest standards, the household would need a declared income of about $117,000; or by more conventional standards between $145,000 and $235,000.

Ok, if she's a unionized bus driver, with government benefits, pension etc... and we assume her husband makes at least as much as she does... That could be within their range.

However, with a 30 year fixed mortgage at 5% that would require a payment of $4,300, not including PMI. No way did they put 20% down... I doubt they put anything down at all, so add another 1% annual PMI on, $8,000 a year or $667. At an assessed value of $800k at purchase, and a rate of $0.89 per $100, that's also an additional $7120 a year, or $593 a month in taxes.

$5560 a month...

Again under the best of circumstances, that would require a takehome of $16,680; or a gross income of around $24k a month (presuming a best case scenario of a 30% overall tax burden) or about $285k a year.

That seems somewhat out of reach of a school bus driver and her husband... unless her husband is a lobbyist, or a government "consultant" (it is Arlington after all).

As with the income multiplier, in some markets these cost percent standards would allow very few people to buy homes, so they've extended mortgage terms to 40 years, and are allowing up to 40% of monthly takehome to go to housing.

That same mortgage on a 40 year fixed at 5% (never happen, but lets play the game) is about $3900 plus PMI and taxes for about $5160 a month.

Oh and I know what you're going to say "Well, they didn't have a fixed rate, they chose an I/O option arm).

You're right, I bet they did. You know how much an I/O payment would be at 5.7% on an $800,000 house? $3900 before taxes and PMI. The exact same as the 40 year fixed.

Given a 40% housing cost percent allowance, that would require a monthly takehome of $12,900; or (again assuming just a 30% tax burden. highly unlikely) a gross income of $18,420 a month, or just about $220k a year.

Now, I'm not a bus driver. I'm a senior technical executive at one of the largest banks in the world. By senior executive, I mean there are 4 people between me and the CEO.

I don't make that much, or even close to it. In fact, I HAVE made that much, during the peak of the dot com boom when I was contracting at $240 an hour; but that wasn't "real" and everyone knew it. It was as much a bubble as the housing was (actually they're deeply related, and I'll talk about that in a later post).

Based on my actual income, and presuming a 95% loan (which you can't get anymore) and the same PMI and taxes, Bankrate says I could afford a house between $500,000 and $650,000 (I tried several permutations with slightly different results each time) and monthly payments of as high as $3500 a month.

I wouldn't consider those affordable personally, but that's what Bankrate says. By my own much more conservative standards, I'd say I could afford, at most, about $2200 a month. On a 30 year fixed at 5%, that would put me into about a $425,000 house without PMI or taxes.

My actual house is worth about $300k (or was when I moved in. Recently it was assessed at $225k) and my payment is about $1500.

Now even in the craziest days of the housing boom, you still had to at least pretend to meet that 40% monthly/7x multiplier requirement; and sign legal documents to that effect.

Which means in order to buy that $800,000 house, that "poor innocent victim" had to intentionally and knowingly commit massive fraud.

She may not think of it this way, in fact I'm sure she doesn't; but that woman is a nothing more than a fraudster. Not only should she be foreclosed on, she should be prosecuted; as should the broker who worked the deal.