Haven’t the Mortgage Lenders Learned Yet?

This repost from the My Total Money Makeover forum would indicate that mortgage lenders have learned absolutely nothing from the current subprime mortgage mess!  Isn’t this how so many people got into financial trouble to begin with?

Yesterday I talked to a Wachovia mortgage consultant (my landlord wants me to buy the condo I’m renting). I knew I wasn’t ready to buy, but I figured, what the heck, let’s see what they have to say.

Nice girl, but when I gave her the honest numbers about my salary and self-employment income AND my $700/mo minimum debt payments, she told me I would qualify for around $210,000-$220,000. So I said, “Really? Wow! How much would the monthly payment be?”

“Well, that’s the thing . . . It would be about $1450 if you bundled in tax and HOA.”

Well, gee, thanks but no thanks! I had already told her that my monthly debt payments are $700/month, so that would leave me $700/month for everything else in my life!

Now I don’t have any handy-dandy financial calculators I can link to, but these numbers look “wrong” to me.  Just how long is this mortgage?  What is the interest rate?  What kind of terms?  Was there any down payment in this discussion?  The person who posted this thinks it was a quote for a zero down fixed 30 year mortgage, but the numbers still sound off to me.

This is just a shining example of complete irresponsibility on the lender’s part.  They are trying to approve someone who brings home approximately $35,00 per year for a mortgage of $210,000 … almost SEVEN times her annual income.  The recommended mortgage amount should be no more than twice annual income according to “old” common sense conventional wisdom.  On what planet is this a “good idea”?  The payment quoted is approximately 50% of her monthly bring-home (after taxes) income, about double the usual recommended percentage.  As another MyTTMO member quipped, “…lenders are still giving people enough rope to hang themselves.”

All I can say is this mortgage “consultant” is either blatantly incompetent or trying to set this person up for failure.  It’s rather obvious the mortgage lender won’t be holding this note, but trying to sell it off.  The mortgage consultant doesn’t care if this mortgage is insane for this income level, or that one tiny hiccup in the querent’s financial life will trigger an inevitable foreclosure if she took this ridiculous loan.  The mortgage lender won’t be around for that.

And that right there is one of the main problems behind the current subprime mortgage crisis here in the U.S.  The lenders who originated these bad mortgages didn’t keep them … instead they handed them off as fast as a hot potato or a hand grenade with the pin pulled.  The people who approved this kind of mortgage get paid simply on making a mortgage, not necessarily making GOOD rational loans.

Perhaps the solution to fix the current subprime mortgage crisis is too simple: make lenders hold the mortgages they write and approve.  I think suddenly we would see a level of sanity return to the market quick fast and in a big hurry!  Down payments would suddenly come back into fashion.  Reasonable debt to income ratios would once again be considered.  Exotic and financially toxic mortgages would disappear.

 Maybe it’s just a pipe dream….