Saturday, September 27, 2008

The numbers don't add up. part 1

As of August there had been 2,919,604 subprime loans in the United States.  The loans averaged 90.9% as owner occupied.  In addition these loans had an average interest rate of 8.46%.  Most of the homes bought had been occupied about 36 months.  These loans were written to people with an average FICO score of 618.  FICO scores are usually intended to show the likelihood that a borrower will default on a loan.  A FICO score is between 300 and 850.   Speaking of FICO scores 20 percent of people are below 620 and 80 percent of people are above it.  If you think about grading A - above 780, B - between 745 and 780, C - between 690 and 745, D - between 620 and 690, and F - below 620.  Of the subprime buyers 1,933,597 people got a loan that required a prepayment penalty if they paid the loan off early or chose to refinance.  The average home has a LTV of 84.77%.  The loan-to-value (LTV) ratio is a mathematical calculation which expresses the amount of a first mortgage lien as a percentage of the total appraised value.  So the average subprime buyer bought a home with an average price of $183,917 with equity of $28,010.56.  Then consider that 335,035 had an interest only loan with a variable interest rate and they would start paying their loan with principle usually in less than 5 years.  Many of the people using subprime mortgages were refinancing and taking cash out of their home at closing.  Due to the housing boom most buyers were told that their homes were worth more as were those that were refinancing their home so 1,065,412 of the subprime mortgages written.  Within a twelve month period 57.6% had at least one late payment.  There were 57.3% that were current with loan payment.  The percentage of people that were 30 – 59 days past due or late on their mortgage payment was 10.2%.  The percentage of people that were 60 – 89 days past due or late on their mortgage payment was 5.3%.  The percentage of people that were 90 + days past due or late on their mortgage payment was 9.7%.  Then there were the foreclosures at 10.7%.  It is sad but then again 55.1% received their loan with little or no documentation.  Then there are the ARM adjustable rate mortgage subprime buyers and 62.9% were in such a class.  Usually they had a low interest rate and most of the time it was lower than a fixed rate loan the average ARM was 8.03% and the fixed rate was 8.46%.  This meant that the variable rate would let them buy a larger or more spacious home.  Today the ARM's usually change their rates once a year.  In August the new interest rate was 8.81%. 


Alicia said...

I can count numerous people that I know personally that have done exactly this. Taking out 2nd mortgages, refinancing, etc., just to go on shopping sprees. My husband and I spoke to them trying to suggest that using your home as a form of income is not a good idea. Now, because of the amount of the loan and the values of their homes down the tubes they've abandoned them. And still, just the other day at work, another person is thinking of doing the same thing. Why pay a 2K mortgage note when you can rent a 1 or 2 year old home for $650/month? And I just shake my head as we all pay the price.

Alicia said...

And let us not forget about the interest only, balloon loans. Unbelievable that people were falling for these when fixed rates were 5 and 6 percent!