I was reading an article online this morning about subprime loans that were defaulting before the rates reset. They quoted analyst Michael Youngblood of Freidman, Billings, and Ramsey as being shocked by this fact. I guess we were to believe that Friedman, and whomever were some sort of experts in regards to these matters although, personally I'm not familiar with them. However, I would question that they are, based on Mr. Youngblood being "shocked" by this phenomenon.
Many/most of the subprime loans allowed for debt ratios of up to 50%, some even went to 55%, or higher.
That was of the gross. That fact is actually gross!
So, in regards to debt to income ratios, how high is too high?
Okay, let's try some simple math:
Income $5000 monthly with a 20% tax bracket. Net $4,000
$5000 x .5 (50%) = $2500-this is available for house payments and total debt, ie; installment loans and credit cards.
If you take the net income, the $2500 monthly expenses now represents 63%, so that leaves $1500 or 37% for everything else.
Unless your self employed or in a similar situation you get the net, not the gross.
Okay, so we still have electric, cable, water, telephone, and other monthly expenses.
Well what about food you may say? Have you seen gas prices lately?
Anybody got any kids out there?
Wow! Good luck with this.
Now, upon buying your new home you needed additional household furnishings and maintenance equipment, you know, lawn mover, tools etc.
But don't worry since you bought the home the preapproved credit cards are rooling through the door, and Sears, Lowes, Home Depot are very anxious to meet you.
When you attend Church you always include a prayer that nothing breaks, because you didn't/don't have any savings.
Does this sound to you, like it does to me, that these loans were designed to fail.
The real question may be how did any of them make it?
This model that I just used was for verifiable income, and does not include the so called liar loans. Let's face it, if this is the picture for those who actually make the money, the stated guys/gals are just way too far out there.
Shocked by the defaults, nope not me!
I do have a question that needs anawering.
What knucklehead made these rules anyway?
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