If you want a vivid illustration of why subprimes have turned out to be the mess they are, the graphic below, courtesy Russ Winter who also supplied this explanation:
The term used here, “DTI proforma” , measures what debt payments to income on 2005 and 2006 vintage subprime teaser loans would have required if the loan were fully indexed, fully amortized, and included insurance and property tax. The results are shocking.
This chart paints a very sorry picture as to how many borrowers can be rescued.
Do the math. Even using the teaser rates, and the phony affordability mortgage servicing burden figures, 65% were devoting over 40% of their income to their mortgage and related costs. 40% is usually considered the max for prudent lenders. That number rises to over 80% with the correct computation. Oh, and that assumes the “income” part of the equation is accurate. Remember that a high proportion of subprime mortgages were stated income loans, and for those, income was typically exaggerated by a considerable degree.
Bottom line: very few subprime teaser borrowers can be saved, even with the heroics of keeping them at their starter rates. No wonder the servicers aren’t trying to do mods. In most cases, there isn’t any point.
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Fitch assumed a 50% DTI in 05 and 06 in its ratings if no DTI was provided for the loan, and I’ve seen no proof the others didn’t perform the same “tricks” to hit their numbers. I’d assume 100% or greater instead of 50%.. why bother with pesky income values if you’re going to flip the house in 2 yrs anyway?
We have no way to know what % of the gigantic 45-50% entry in this graph should be much further up the chain. I think the pain is worse than this.