Fannie Mae Mortgage Portfolio: $64.5 Billion in Alt-A or Sub-prime Loans. Why This is not a Conservative Bailout.
As we inch closer and closer to a full fledged bailout of the two giant government sponsored entities, Fannie Mae and Freddie Mac it would be useful to dig into their financial statement to see how one of their portfolios’ is structured. Unfortunately the general public is under the impression that Fannie Mae somehow operated only in the ultra conservative world of traditionally fixed 30-year mortgage products. Yes and no.
Most will be surprised to realize that Fannie Mae does have a sizable number of questionable loans.
First, the net portfolio value of mortgages with Fannie Mae is $737 billion up from $722 billion since December 31 of 2007:
*Source: Edgar Online
Keep in mind that this includes mortgage backed securities as well that are pledged as collateral. First, let us go through a few important highlights in the mortgage portfolio:
Aside from popular legend, Fannie Mae does carry mortgages that are not traditional 30 year fixed products. In fact, the first arrow highlights that Fannie Mae has $43 billion in adjustable rate mortgages. Not exactly a 30 year fixed payment mortgage.
In fact, we spot $191 billion in the portfolio that is what we would call a conventional mortgage. So that brings our total to $315 billion in single family mortgages. The next point we should look at is the large number of multi-family loans in the portfolio. $105 billion in loans to be exact here. So again, not exactly a single family traditional 30 year fixed mortgage.
The last arrow points to the most alarming part. That is $92 billion in “non-Fannie Mae structured mortgage securities.” When we look at the footnote we find this:
“(4) Includes private-label mortgage-related securities backed by Alt-A or subprime mortgage loans totaling $57.8 billion and $64.5 billion as of June 30, 2008 and December 31, 2007, respectively. Refer to “Trading and Available-for-Sale Investment Securities-Investments in Private-Label Mortgage-Related Securities” for a description of our investments in Alt-A and subprime securities.”
Good to know out of the $737 billion portfolio, only 25% is what we would consider your typical 30-year fixed mortgage product. Don’t you feel better now?
If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!You Cannot Afford a $350,000 Home with a $75,000 Household Income!
You would think that before people make the largest financial decision in their lives, they would do a monthly budget first. Yet during this past decade budgets were hardly brought to the forefront and were pushed to the back of any financial decisions. The new definition of housing affordability should include the idea of maintaining a sustainable long-term budget. Of course many can afford a two year teaser rate but what happens when the payment jumps up? How secure is your employment? Do you have enough to save for retirement after you pay for your home each month? These are all factors that need to be considered to purchase a home.I’ve gotten a few e-mails about buying a home in California. Of course many people that have been sitting on the fence are now thinking seriously about purchasing a home in the state.
Let us take a look at some numbers first:
California Median Home Price
April 2007: $597,640
July 2008: $350,760
Decline: $246,880
Price decline from peak: 41.3%
*Source: California Association of Realtors
A 41.3% year over year decline is stunning for a state that is so large. A year ago 341,130 homes were sold in the entire state. That works out to a monthly average of 28,427 homes sold per month. Last month 39,507 homes sold in the state. Keep in mind that this is a jump but data for the summer is always high. You can expect this number to decrease. In addition, most of the sales were foreclosure properties which are pushing prices even lower. We are going to hypothetically see if you can afford that $350,706 median priced home.
The budget below is for a married couple with a $75,000 household income:
The first thing we need to figure out is the monthly net income. The monthly gross income is $6,250 but after taxes it will be $4,870. A rule of thumb that is very generous by most bankers and lenders is your home payment should not be more than one-third of your gross take home pay. So let us first find out our threshold:
$6,250 / 3 = $2,083 per month
Above, the family will be purchasing the median priced California home with a 5 percent down payment ($17,535). As you can see in the budget, the monthly home payment will workout to $2,470 which is higher than our threshold figure. We’ll go ahead and assume that this couple goes ahead with this move.
You need to realize that it costs money to upkeep your home. That is lawn care, roof, plumbing, and other things come up throughout the year. I am simply setting aside $100 a month for this but this can jump radically if you need major service like a roof replacement. In the budget we also have only one car payment at $300 per month and we’ll also assume that this car is highly fuel efficient. Maybe a Honda Civic or Toyota Corolla.
So to a certain extent, this family is living modestly and not extravagantly. We are also setting aside 10% into a Roth IRA for retirement and putting away $300 a month into an emergency fund.
For a married couple $500 a month in groceries is doable. I know some will argue that this is too low/high but this can be done. We are also assuming this couple isn’t eating out during the work week and brown bagging their lunch.
So can this couple afford the home? The answer is no at least if we follow our initial definition. Yes, a lender may give you a loan especially it they use a home to income ratio (HTI) and don’t look at a debt to income ratio which will include the car and any other credit cards they may have.
At this level, your monthly home payment is consuming 50% of your monthly net take home pay. I would argue that you should use your net monthly pay to calculate what you can safely afford. That is for this couple, they can afford a home with a monthly payment no larger than:
$4,870 / 3 = $1,623 per month
This works out to a home priced around $250,000.
This may seem like a boring figure but keep in mind the median household income for California is $55,734. In inflation adjusted terms, Californians are actually poorer than in 2000 when the median income was $56,638. In fact there are very few counties that have a median household income that comes close to $75,000. Orange County which is viewed as a more affluent Southern California county has a median household income of approximately $70,000. The current median home price in Orange County is $461,000.
The trend in California is unmistakable. Prices are still coming down and if you really dig deep in to a budget like the above, which I imagine is on the conservative side you can understand why so few families can afford homes in the state even after a stunning 41.3% drop.
Hopefully this article allows you to plug in your own numbers to determine whether you can afford a home. If you cannot, there really isn’t a rush to do so. Prices are still trending lower.
