- Joined
- 10/24/14
- Messages
- 17
- Points
- 13
Additional Dodd / Frank regulatory mandates in 2015 will soon be upon us. Many wonder whether they will do more harm than good? Some of us are asking, can any amount of regulatory oversight help overcome an innate flaw embedded in our financial system outlined below:
The Simple Math:
It takes the 30-year mortgage several years to build 10% equity. The average borrower’s housing expense has risen to approximately 50% of an American’s average net income. The combination of the speed in which the 30 year mortgage pays down the principal balance in relationship to a borrower’s Housing Cost To Income ratio has caused a dislocation within our financial system.
History has documented the difficult task the Fed has endured in keeping inflation rates down to an average of 3% a year over the past 4 decades. 3% X 10 years = 30%. This figure is closer to 50% when compounded over 10 years, yet borrower’s household income has only increased on average, a (total) of 6% over 10 years. Question: How will homeowners be able to afford to make their mortgage payments in several years? What will happen to the economy when borrowers can no longer afford to pay their mortgages and as a consequence their disposable income disappears?
Borrowers who believe they will be able to sell their homes in the middle of the next economic contraction should consider; The median average loss of real-estate values for the past three recessions was over 20%.Thus, there were a significant amount of equity lost between 30-50% recorded nationwide.
Commercial RE price fluctuations follow Residential. Borrowers who can no longer afford to pay their mortgage, sell, or refi their homes are susceptible to foreclosure.
MBS volume has doubled each decade since the 70s. *If 10% of borrowers over extend themselves and the volume of MBS doubles within the next 10 years, how catastrophic will the next recession be?
* 10% percent is statistical average of homeowners who overextend themselves, the same percentage of defaults which started the mortgage crisis. All statistics used were obtained from U.S Census Bureau, the Fed and Fannie Mae, charts available upon request.
“The Simple Math” points toward the 30-year mortgage as being obsolete in our modern day economy.
Given the outcome of the simple math and basic statistics, can anyone offer a possible defense for the 30 year amortization model?
The Simple Math:
It takes the 30-year mortgage several years to build 10% equity. The average borrower’s housing expense has risen to approximately 50% of an American’s average net income. The combination of the speed in which the 30 year mortgage pays down the principal balance in relationship to a borrower’s Housing Cost To Income ratio has caused a dislocation within our financial system.
History has documented the difficult task the Fed has endured in keeping inflation rates down to an average of 3% a year over the past 4 decades. 3% X 10 years = 30%. This figure is closer to 50% when compounded over 10 years, yet borrower’s household income has only increased on average, a (total) of 6% over 10 years. Question: How will homeowners be able to afford to make their mortgage payments in several years? What will happen to the economy when borrowers can no longer afford to pay their mortgages and as a consequence their disposable income disappears?
Borrowers who believe they will be able to sell their homes in the middle of the next economic contraction should consider; The median average loss of real-estate values for the past three recessions was over 20%.Thus, there were a significant amount of equity lost between 30-50% recorded nationwide.
Commercial RE price fluctuations follow Residential. Borrowers who can no longer afford to pay their mortgage, sell, or refi their homes are susceptible to foreclosure.
MBS volume has doubled each decade since the 70s. *If 10% of borrowers over extend themselves and the volume of MBS doubles within the next 10 years, how catastrophic will the next recession be?
* 10% percent is statistical average of homeowners who overextend themselves, the same percentage of defaults which started the mortgage crisis. All statistics used were obtained from U.S Census Bureau, the Fed and Fannie Mae, charts available upon request.
“The Simple Math” points toward the 30-year mortgage as being obsolete in our modern day economy.
Given the outcome of the simple math and basic statistics, can anyone offer a possible defense for the 30 year amortization model?
