To: The Federal National Mortgage Association and The Federal Home Loan Mortgage Corporation
I thought it would be appropriate to post this message to you.
I thought it would be appropriate to post this message to you.
I want to thank you for so wisely investing tens of millions of dollars developing an automated underwriting system that uses the most complex algorithms and risk assessment modules to determine Joe Six Pack’s capacity to pay his debt. I also want to thank you for allowing ALL the lender’s underwriters, loan officers, and processors to become dependant upon your forward thinking underwriting systems so they no longer have to perform the monotonous and time consuming tasks of common sense thinking and manually analyzing Joe’s Six Pack’s capacity to pay his debt. I am sure you have saved the mortgage and banking industry hundreds of millions of dollars in people hours, paper, and ink over the years and reduced the probability of human error in the final underwriting analysis and at the same time made hundreds of millions of dollars in automated underwriting usage charges.
To: The Federal Housing Administration and The U.S. Department of Housing and Urban Development, who at one time had the RIGHT IDEA. But for some unknown reason, on October 20th, 1989 you decided to “conform” your processing to the general practice within the lending industry and make it easier for lenders to process FHA loan applications and issued Mortgagee Letter 89-25 - Use of Effective Gross Income To Calculate Borrower Qualifying Ratios and Changes to Underwriting Investor Applications, which changed FHA’s qualifying ratio rules from the "net effective income" approach to using the "effective gross income" ratios of 29%/41% to promote a more accurate analysis of the adequacy of Joe Six Pack’s income and capacity to pay his debt.
And to further conform to the general practice within the lending industry and step forward into the automated underwriting age, you invested millions of dollars developing TOTAL Mortgage Scorecard. Combining TOTAL Mortgage Scorecard’s credit analysis with the functionalities of the multi-million dollar complex algorithms and risk assessment modules of the automated underwriting systems developed by The Federal National Mortgage Association and The Federal Home Loan Mortgage Corporation has also reduced the monotonous and time consuming tasks of gathering documentation, minimizing common sense thinking and manually analyzing Joe’s Six Pack’s capacity to pay his debt. And if that wasn’t enough, on April 13, 2005 you issued Mortgagee Letter 05-16 - Revised Qualifying Ratios and Treatment of Child Support, which increased the gross qualifying ratios to 31%/43% for manually underwritten loan files to enhance homeownership opportunities for low-and moderate-income individuals and families.
WHAT WERE YOU ALL THINKING?
To: The Department of Veteran Affairs, I applaud you on your discipline and sticking to your GUNS by never losing sight of G.I. Joe’s capacity to pay his debt and protecting him by continuing to use old-fashioned conservative methods of “net income analysis” so G.I. Joe can obtain and maintain the American Dream of Homeownership and afford to buy a six pack.
Unfortunately, as you all should be aware by now, something went wrong and the Joe Six Packs of the United States have been defaulting on their mortgages at an unprecedented rate, which is causing HUNDREDS OF BILLIONS OF DOLLARS in losses.
So, in light of this historical event now known as the “Mortgage Meltdown”, I thought that I would take heed of the Department of Veteran Affairs old-fashioned conservative method of analysis to determine Joe’s Six Pack's capacity to pay his debt and maybe offer you a lesson on “Basic Arithmetic 101”. In this lesson, I have chosen to use a very inexpensive $70.00 device, a Hewlett Packard financial calculator, a $0.01 piece of paper, and a $0 .10 pencil with an eraser to put things in perspective for you.
So let’s begin your lesson.
A few years back, Joe Six Pack and his wife Jane, who were First Time Buyers, were thrilled to have received an Automated Underwriting System approval for a Conventional mortgage at a 95% LTV. The automated underwriting system accepted their
To: The Federal Housing Administration and The U.S. Department of Housing and Urban Development, who at one time had the RIGHT IDEA. But for some unknown reason, on October 20th, 1989 you decided to “conform” your processing to the general practice within the lending industry and make it easier for lenders to process FHA loan applications and issued Mortgagee Letter 89-25 - Use of Effective Gross Income To Calculate Borrower Qualifying Ratios and Changes to Underwriting Investor Applications, which changed FHA’s qualifying ratio rules from the "net effective income" approach to using the "effective gross income" ratios of 29%/41% to promote a more accurate analysis of the adequacy of Joe Six Pack’s income and capacity to pay his debt.
And to further conform to the general practice within the lending industry and step forward into the automated underwriting age, you invested millions of dollars developing TOTAL Mortgage Scorecard. Combining TOTAL Mortgage Scorecard’s credit analysis with the functionalities of the multi-million dollar complex algorithms and risk assessment modules of the automated underwriting systems developed by The Federal National Mortgage Association and The Federal Home Loan Mortgage Corporation has also reduced the monotonous and time consuming tasks of gathering documentation, minimizing common sense thinking and manually analyzing Joe’s Six Pack’s capacity to pay his debt. And if that wasn’t enough, on April 13, 2005 you issued Mortgagee Letter 05-16 - Revised Qualifying Ratios and Treatment of Child Support, which increased the gross qualifying ratios to 31%/43% for manually underwritten loan files to enhance homeownership opportunities for low-and moderate-income individuals and families.
WHAT WERE YOU ALL THINKING?
To: The Department of Veteran Affairs, I applaud you on your discipline and sticking to your GUNS by never losing sight of G.I. Joe’s capacity to pay his debt and protecting him by continuing to use old-fashioned conservative methods of “net income analysis” so G.I. Joe can obtain and maintain the American Dream of Homeownership and afford to buy a six pack.
Unfortunately, as you all should be aware by now, something went wrong and the Joe Six Packs of the United States have been defaulting on their mortgages at an unprecedented rate, which is causing HUNDREDS OF BILLIONS OF DOLLARS in losses.
So, in light of this historical event now known as the “Mortgage Meltdown”, I thought that I would take heed of the Department of Veteran Affairs old-fashioned conservative method of analysis to determine Joe’s Six Pack's capacity to pay his debt and maybe offer you a lesson on “Basic Arithmetic 101”. In this lesson, I have chosen to use a very inexpensive $70.00 device, a Hewlett Packard financial calculator, a $0.01 piece of paper, and a $0 .10 pencil with an eraser to put things in perspective for you.
So let’s begin your lesson.
A few years back, Joe Six Pack and his wife Jane, who were First Time Buyers, were thrilled to have received an Automated Underwriting System approval for a Conventional mortgage at a 95% LTV. The automated underwriting system accepted their
Payment-To-Income Ratio of 34.25% and
Debt-To-Income Ratio of 46.89%.
Joe Six Pack’s Credit Score was 730
His wife Jane’s Credit Score was 720
His wife Jane’s Credit Score was 720
At that time they were living in the City of Philadelphia and renting for $1,200 per month. Their family had grown with the addition of a baby so they decided it was time to purchase a single home in the suburbs outside the City of Philadelphia for $325,000 with a $16,250 down payment and obtained a Conventional fixed rate 30 year mortgage for $308,750.
They locked their interest rate in at 6.50% with zero points and NO Origination Fee.
The real estate taxes were $3,500 per year
The Home Owners Insurance was $812.50 per year.
The total cost of acquisition was $27,500
They locked their interest rate in at 6.50% with zero points and NO Origination Fee.
The real estate taxes were $3,500 per year
The Home Owners Insurance was $812.50 per year.
The total cost of acquisition was $27,500
Joe Six Pack’s parents contributed a gift for $10,000 toward settlement charges and Joe Six Pack and Jane contributed the rest from their own savings and had 4 months PITI in cash reserves.
Sounds good so far eh! Slam dunk loan for any Automated Underwriting System.
Sounds good so far eh! Slam dunk loan for any Automated Underwriting System.
Unfortunately, Joe and Jane have now defaulted on their mortgage even though they are still employed. After careful review of their “REAL LIFE” living expenses an interesting discovery has come to surface:
JOE SIX PACK’S EMPLOYMENT PROFILE
Joe had a 12 1/2 year work history at the time he closed on his new home, but had only been employed at a Center City Philadelphia marketing firm for 1 year and was and still is subject to Philadelphia City Wage tax of 3.5392%. In addition, due to the location of his employer, Joe had to drive 8 miles to and from work and was also subject to monthly parking and transportation expenses.
Joe’s Annual Gross Earnings were = $50,000
Monthly Gross Income = $4,166.67
JANE’S EMPLOYMENT PROFILE
Jane had been employed at a South New Jersey computer firm for 2 1/2 years and as a result of the purchase of their new home had to drive 20 miles to and from work each day and was subject to bridge tolls and transportation expenses.
Jane’s Annual Gross Earnings were = $39,200
Monthly Gross Income =$3,266.67
JOE SIX PACK’S EMPLOYMENT PROFILE
Joe had a 12 1/2 year work history at the time he closed on his new home, but had only been employed at a Center City Philadelphia marketing firm for 1 year and was and still is subject to Philadelphia City Wage tax of 3.5392%. In addition, due to the location of his employer, Joe had to drive 8 miles to and from work and was also subject to monthly parking and transportation expenses.
Joe’s Annual Gross Earnings were = $50,000
Monthly Gross Income = $4,166.67
JANE’S EMPLOYMENT PROFILE
Jane had been employed at a South New Jersey computer firm for 2 1/2 years and as a result of the purchase of their new home had to drive 20 miles to and from work each day and was subject to bridge tolls and transportation expenses.
Jane’s Annual Gross Earnings were = $39,200
Monthly Gross Income =$3,266.67
COMBINED MONTHLY GROSS INCOME = $7,433.33
JOE AND JANES FAMILY PROFILE
Joe and Jane had 2 children, a 13 year old who was in public school and a 2 year old. Since Joe and Jane both worked, they were subject to monthly day care expenses for their 2-year old child.
NEW HOUSING EXPENSE BREAKDOWN
Principal & Interest = $1,985.66
R.E. Taxes = $ 291.67
Home Owners Ins. = $ 67.71
Mortgage Insurance = $ 200.69 @ .78% back then
TOTAL = $2,545.72
PAYMENT-TO INCOME RATIO = 34.25%
RECURRING DEBT
Joe's Auto = $325
Jane's Auto = $225
Joe's Student Loan =$ 90
Charge Cards =$300
TOTAL RECURRING DEBT =$940
DEBT-TO-INCOME RATIO = 46.89%
JOE’S WITHHOLDINGS AND MEDICAL
Monthly Gross Income =$4,166.67
Federal Tax =$ 559.79
PA State Tax =$ 116.67
Philadelphia City Tax = $ 147.47
Social Security =$ 245.83
Medicare =$ 54.17
PA Unemployment = $ 2.50
Medical = $ 291.00
Dental =$ 45.00
NET MONTHLY INCOME = $2,704.24
JANE’S WITHHOLDINGS AND MEDICAL
Monthly Gross Income =$3,266.67
Federal Tax = $ 424.79
PA State Tax = $ 91.47
Philadelphia City Tax =$ 0.00
Social Security =$ 192.73
Medicare =$ 42.47
PA Unemployment = $ 1.96
Medical =$ 0.00
Dental =$ 0.00
NET MONTHLY INCOME = $2,513.25
COMBINED NET MONTHLY INCOME = $5,217.48
JOE’S TRANSPORTATION EXPENSES
Monthly Parking Cost = $200.00
Distance from new home
to employer = 8 miles
Automobile = 16 miles per gallon
Gas = $2.50 per Gallon
Usage = 1 Gallon per day @$2.50
Monthly cost @ 20 work days = $ 50.00
Auto Insurance = $ 90.00
TOTAL TRANSPORTATION =$340.00
JANE’S TRANSPORTATION EXPENSES
Monthly Bridge Toll Cost = $ 40.00
Distance from new home
to employer = 20 miles
Automobile = 20 miles per gallon
Gas = $2.50 per Gallon
Usage = 2 Gallons per day
Monthly cost @ 20 work days = $100.00
Auto Insurance = $ 80.00
TOTAL TRANSPORTATION = $220.00
COMBINED TRANSPORTATION COST = $560.00
ADDITIONAL HOUSING & FAMILY EXPENSES
Gas & Electric =$300.00
Water = $ 55.00
Cable TV/Internet/Telephone = $175.00
1 child in day care = $500.00
At Home Food Cost =$500.00
Clothing =$125.00
Gifts/Birthday/Christmas =$125.00
Cell Phones =$150.00
Gasoline for Private Use =$ 50.00
TOTAL LIVING EXPENSES =$1,980.00
SUMMARY OF FUNDS LEFT OVER FOR FAMILY SUPPORT
Combined Net Monthly Income =$5,217.48
New Housing Payment - ($2,545.79)
Recurring Debt -(940.00)
Transportation Costs -($ 560.00)
Living Expenses -($1,980.00)
MONTHLY FUNDS LEFT OVER FOR FAMILY SUPPORT
Transportation Costs -($ 560.00)
Living Expenses -($1,980.00)
MONTHLY FUNDS LEFT OVER FOR FAMILY SUPPORT
-($808.31)
IRS REFUND = $4,540 / 12 = $378.33
NET MONTHLY FUNDS LEFT OVER FOR FAMILY SUPPORT =
-(429.98)
AND FINALLY,
To: The Members of The Senate, The House of Representatives, The House Committee on Financial Services, The Federal Reserve, The Federal Deposit Insurance Corporation, and U.S Department of The Treasury, it may be a good idea that you pay attention as well to this “Basic Arithmetic 101” lesson since collectively you all have now decided to spend HUNDREDS OF BILLIONS of Joe Six Pack and possibly even G.I. Joe’s and their children’s future contributions to U.S Department of The Treasury to bail out the mistakes made by the multi-million dollar analytical software that was supposed to save the lenders and banks hundreds of millions of dollars in people hours, paper and ink while at the same time accurately predict Joe Six Pack’s capacity to pay his debt. Maybe ALL OF YOU should have invested in an inexpensive $70 financial calculator and a little common sense and just maybe, you could have prevented the
AND FINALLY,
To: The Members of The Senate, The House of Representatives, The House Committee on Financial Services, The Federal Reserve, The Federal Deposit Insurance Corporation, and U.S Department of The Treasury, it may be a good idea that you pay attention as well to this “Basic Arithmetic 101” lesson since collectively you all have now decided to spend HUNDREDS OF BILLIONS of Joe Six Pack and possibly even G.I. Joe’s and their children’s future contributions to U.S Department of The Treasury to bail out the mistakes made by the multi-million dollar analytical software that was supposed to save the lenders and banks hundreds of millions of dollars in people hours, paper and ink while at the same time accurately predict Joe Six Pack’s capacity to pay his debt. Maybe ALL OF YOU should have invested in an inexpensive $70 financial calculator and a little common sense and just maybe, you could have prevented the
IMPLODING OF THE AMERICAN DREAM
AND thank you Dennis Harms, the little Iowa farm-boy-turned-PhD for developing the HP 12C financial calculator in 1981 and to Hewlett Packard for continuing to produce and make available this most valuable tool.
Knowledge Unshared Is Worthless
To learn more about FHA, VA, Fannie Mae, Freddie Mac and Mortgage Insurance guidelines.
VISIT
www.ProfessorDom.com
You won't be disappointed!
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