During the bubblicious frenzy, the mantra of the real-estate crowd was as simple. Housing, they said, was nothing like stocks. And in a certain respect they were right. Because although I have never heard of anyone who had to qualify to by equities, everyone that I know of had to get a loan to buy a house.

But in order to get that loan approval, you must first be able to prove to the lender that you can afford it. And therein lies the ultimate problem for the housing bulls. Housing is simply no longer affordable-to most folks, anyway.

In fact, according to a new study released last week by the Center for Housing Policy, most U.S. workers are now priced out of homeownership in the majority of U.S. metropolitan areas.

According to the study, which focuses on housing prospects of healthcare workers, using conventional standards an annual income of $84,957.00 would be needed to qualify for the purchase of the national median-priced home costing $248,000.

Not surprisingly, the study also found that California was the least affordable. The Golden State holds 13 of the top 15 least affordable metro areas. San Francisco led the way, with a median home price of $759,000-which only requires an annual income of $260,000 for you to be able to afford it.

Given these figures it's easy see why there are so few buyers in the market. It's not that they don't want to buy, it's that they simply can't afford to. The starter home has gone the way of dinosaur.

Think about it. We can't all afford to live in a $500,000 home, because very few of us actually make the $171,000 per year necessary to pull it off.

And that, ultimately, is the difference. In the real world-one that is free of the hype and insanity-you simply can't buy something that you cannot afford and hope to keep it for long. The numbers don't lie: home price and income are joined at the hip.

Your stocks couldn't care less what you earn, but your home is dependent on it.

And without affordable housing, the entire real-estate Ponzi scheme cannot be maintained-no matter what David Lereah says.

Mortgage Matters

Dear Steve,

I keep getting junk mail promising loans without closing costs. What's the deal with these promotions? There must be a catch, right?

Sincerely,

E.B.

Dear E.B.,

As you suspect, there is a catch with these types of loans, but it's not always a bad deal.

Let me explain.

As I wrote last week, a bank will pay a yield spread premium (YSP) to purchase a loan that was locked above the market rate for that day. Simply put, your lender is willing to pay extra to the originating broker to obtain a loan at a higher rate. (Higher rates = greater interest payments.)

In fact, a lender will typically pay a broker about 1% commission for a loan that was locked in at 0.375 pts. above the market rate. On a $250,000 mortgage amount, a loan that was locked 0.375% above market would likely yield the broker an extra $2,500 in a bank paid rebate and would add $58 to the monthly payment of the borrower.

This is what is called getting paid on the back end, and is usually gravy to the broker. As I said before, it is all perfectly legal and often happens without the complete understanding of the borrower, even though the broker is required to disclose this information.

But knowledge is power, and borrowers with the savvy to understand yield spread can use it to their advantage-if they ask.

Here's how:

Instead of pocketing the monies derived by the yield spread, some brokers offer all or a portion of this windfall as credit to cover the closing costs on the deal-reducing the costs to the borrower.

To use the previous example, your loan can be locked in at 0.375% above the market, yielding a $2,500 benefit from the lender that can be used as a credit to offset the expenses associated with your loan. At even higher rates, all of these expenses can be covered, creating in effect a "no-cost loan."

This option is particularly useful for the smart borrowers who realize they will in all likelihood be refinancing in the future as rates decline or who anticipate a future move.

In that case, a borrower can refinance at will to lower his rates because the original and subsequent loans cost little or nothing to close. This type of savvy borrowing negates the conventional wisdom that a refinance is not worth it unless the rate can be lowered by 1% or more, because there are no closing costs to be recaptured and equity is not lost by adding these expenses to the amount of the loan.

So while some brokers simply use YSP as a means to earn a profit, others are willing to share them with you to close that deal. Even so, one way or another there is a price to pay. And with these types of deals it is with a rate that was locked in at higher than the market. But in some cases this makes perfect sense.

I hope that helps.

-Steve

By the way . . . Another one bites the dust.  This time it was Tempe-based Clear Choice Financial Inc. On Friday the sub-prime lender announced that it is insolvent, in default on several obligations and has laid off 120 of its 150 workers nationwide. The company, with corporate headquarters near Southern Avenue and McClintock Drive, also announced that it has closed its mortgage-lending subsidiary, Bay Capital, which has offices in Maryland and California.

Also,  here is a note from Bill Fleckenstein. He writes in his column that "A former top executive at a sub-prime lender told me that serious issues are developing, and that large companies like New Century Financial, Accredited Home Lenders and NovaStar Financial will, in his words, ‘hit the wall' very soon."

The banking debacle continues.

Wishing you happiness, health, and wealth,

Steve Christ, Editor

The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at steve.christ@angelpub.com.