I am not a big writer.  I'm a big talker, so please don't hold my grammar against me.    I talked over two years ago about the current crisis based upon simple but often forgotten mathematics.  Based upon numbers that just didn't ad up.  Numbers that couldn't ad up if the market didn't keep moving higher.  During that talk I discussed alot of things.  The lowering of interest rates to stimulate spending after September 11th.  I talked about the evolution of the wholesale lending universe and it's thirst for more and more product.  I talked about the fact that with a credit score and down payment you could get a 95% ltv mortgage. (by the way, you didn't need a job, income, previous mortgage history, or sustainable reserves)  I talked about how with the right combination of income and assets we could get the person with a 501 credit score a DU approval under Fannie MAE's expanded level III program.  I talked about how subprime was a very small part of the overall problem.  I talked about how for a decade Fannie Mae and Freddie Mac had been underwriting what the media was labeling subprime mortgages.  But the most important subject that I talked about was that "one plus one equals two, it can't equal four".

Simple math.  We forgot simple math for over fifteen years and now we are feeling the full effects of the laws of science.  For years we helped homeowners and renters believe that two plus two does equal eight.  That on an income of $1 they could afford a home with debt to income ratio of fifty, fifty-five, sixty, sixty-five and even as high as seventy percent debt to income ratios.  DU, DO, LP were all approving these numbers based upon compensating factors or an increasing asset environment.  FNMA and FHLMC were approving existing and new homeowners based on a BET!  A bet that they would be able to refinance if they had to.  Or they could sell.  Or the bank could foreclose and resell the property no problem.  Risk management right? 

That We told them that if anything ever happened they would be able to refinance and consolidate their debt or lower their rate.  We told them that they would have no problem making the rest of their monthly obligations and that now they were homeowners the credit would start pouring in...and it did.  When things got tight we refinanced them and brought those monthly debts back down to manageable levels.  Manageable levels? I find that term interesting?  Manageable only if you account for their ability to utilize or leverage external credit facilities to live their lives.  Why in a period of unprecedented home ownership did the savings rate in this country plunge to the lowest levels of all time?  The issuance a mortgage debt caused the housing crisis.  A blatant and almost intentional disregard for simple mathematics caused this problem. 

Or maybe the mortgage industry is inherently flawed. Ready for the secret?  Are you sure?  Because this information will forever change the mortgage market.  It will fix the problem so we never go through this again!  Are you really ready?.....Here it is.....

Stop calculating debt to income ratios from BEFORE TAX DOLLARS and have ALL EXPENSES accounted for.  There you go.  That simple, because with after tax dollars and complete life expenses you will qualify someone for a home and they will be able to actually pay for it.  Pay for it everyday of the week and twice on Sunday.  

This is were we are headed.  This is why we are not even close to the bottom in the housing market.  Homes needs to return to prices were they can be purchased by a consumer at a maximum thirty to forty percent DTI ratios.  Where they can get paid every week.  Pay uncle Sam, pay their mortgage, pay all their life expenses and put a little bit away for a rainy day.  So that once again, one plus one equals two.

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