What we in the affordable housing arena have known for a long time is suddenly being realized by the rest of the world. The Housing Crisis is not a failure of housing policy over the past 30 years that was designed to give an opportunity and access to housing finance to qualified under served and under represented Americans. We in the industry recognized early on that the key to successful homeownership initiatives was not just access to capital but financial literacy and homebuyer education.
So, it appears that housing may in fact NOT be the cause of the housing crisis. What the data is now starting to reveal is that Americans are drowning under non housing debt.
There was a time when 30/36 meant something not just to banks doling out loans but also to consumers. 30/36 represents what is known as front and back ratios in the lending world. The front ratio is the proportion of a borrower’s income that lenders will allow for principal, interest, taxes and insurance (PITI) on a property. Thus an affordable mortgage is one in which a household is not spending more than 30% of their gross annual income on housing payments. The back ratio is the proportion of a borrower’s income that lenders will allow for PITI plus other monthly debt obligations (car payments, student loans, credit cards, etc.). Lenders in days past would not extend any additional credit to you if your total debt to income ratio exceeded 36% of your gross annual income.
The Calculated Risk blog points to an alarming statistic from the latest Home Affordable Modification Program (HAMP) report. As shown in the table above, the median borrower who received a permanent modification had a back-end debt-to-income ratio of 77.5 percent before the modification. That means 77.5% of their gross income is spent making debt payments! Even after receiving the modification, this ratio drops only to 61.3 percent, which is still a large burden to sustain and could continue to lead to more foreclosures.
The question has been asked and we will gladly answer that the challenge to modifying more delinquent borrowers through the HAMP program is that many households actually have an affordable mortgage with a front ratio of 31% or less thus making them ineligible for the program. Most Americans did not buy more house than they could afford…they bought more stuff in addition to their homes that they could not afford. The question then becomes what is the lifeline for those drowning under non housing debt. Unfortunately, for far too many Americans that lifeline seems to be bankruptcy court.
So, it appears that we housing enthusiasts have come full circle…financial literacy, homebuyer education, and most importantly debt management may be the keys to unlocking the housing crisis door and preventing us from ever going down this path again in the future.