Dave Witherow

The 28-33% Mortgage Payment Rule: Confronting Reality

Markham-
I agree wholeheartedly with your observations and concern about legitimate, long-term affordability. Clearly any plan that does not allow a "buyer" (a term used in the loosest possible way) to make affordable payments for the long-term is just postponing the problem, elongating the housing crisis, and hiding the necessary bottom in housing prices. And while we can debate whether the right number is 25%, 28%, 31% or 33% of gross income, my deep concern is whether lenders are restructuring mortgages with regard to affordability of the long-term payments versus just the initial payments. One of the major reasons we're in this mess is that lenders were basing their mortgage debt-to-income ratios on the initial mortgage payment (often the teaser rate or a negative amortization amount), instead of applying that ratio to the payments that would happen after the loan rate reset or recast. Obviously this is a time bomb, and I think that some of the major lenders are doing it again, qualifying their loan modifications based on a new below-market initial rate (e.g., 2.5% for Countrywide). If lenders are allowed to do this as an expedience for 'avoiding foreclosures', the "glut of future foreclosures" you refer to seems almost inevitable.

This is the thing that keeps me awake at night.