Bankruptcy

Foreclosures = Affordability Problem?

By Alan White

Critics of HAMP and other efforts to increase mortgage workouts often assert that there are too many homeowners in mortgages they simply cannot afford; due to unemployment and other causes, there is just not enough income to work with.  The data realeased by Treasury on more than one million applicants for HAMP assistance provide some insight into the question: how many foreclosures could actually be prevented? 

As a starting point, we can look at the incomes reported by HAMP applicants, the amount of their mortgage debt, and the value of their homes.  The median income of applicants is around $4,000 monthly, i.e. not much below the national median annual income of $50,000.   Only 11% of applicants have incomes below $2,000 per month, in poverty-level range.

The median mortgage balance owed is between $200,000 and $250,000, also within national norms.  The median property value is between $150,00 0 and $200,000.  Comparing current home values to income, the median ratio is about 4:1.  Thus a typical HAMP applicant might have a $50,000 income, and owe about $250,000 on a house now worth $200,000.  In fact, 86% of HAMP applicants had a home value-to-income ratio of 6:1 or less.  Putting aside excessive unsecured debts for a moment, this hardly sounds like an insoluble problem. 

Of course, looking at home values rather than mortgage balances means acknowledging the need to realign mortgage debt with market values, something the banks loudly proclaim they refuse to do.

The real moral hazard lies in doing nothing about mortgage principal.  Research shows that homeowners will start to walk away when mortgage debt exceeds home values by 50% to 60% or more.  The grim numbers from HAMP are that 65% are underwater, and more than 40% are seriously underwater.  As Congressman Brad Miller is fond of saying, Americans can afford their homes, they just can't afford their mortgages.

Full post as published by Credit Slips on March 09, 2011 (boomark / email).