Mortgages eating up incomes

Mortgages eating up incomes
September 12, 2007

BY RUBY L. BAILEY and SUZETTE HACKNEY

When Chris Gowman's employer was sold in 2001, he was offered a $4,000-a-month pension.

The former ANR Pipeline worker took it, but ever since, he's had to spend half of it to cover the mortgages on his homes in Roseville and Harbor Springs.


"I'm not living the high life by any stretch," said Gowman, 58, who drives a 1991 Oldsmobile 88. "I have to live a very frugal life to survive."
Gowman is among the 26.4% of Michiganders who spent 35% or more of their income on a mortgage in 2006, according to U.S. Census Bureau estimates released today.

Nationally, the number was higher: 28% of mortgage holders spent what some would call too-healthy chunks of their income to put a roof over their heads.

Experts say they think many in Michigan are like Gowman -- homeowners whose mortgages consumed larger portions of their income as their wages shrank.

And with many likely to have at least one credit card and a car note, householders' total debt could eat much more of their incomes. That leaves the most cash-strapped at risk of losing their homes, said Pava Leyrer, president of the Lansing-based Michigan Mortgage Brokers Association.

"If their hours are cut or they experience a job loss, they have to choose one debt or another," Leyrer said. "Just because you're told yes" for a mortgage "doesn't mean you should take it."

Michigan outpaces nation

The drive to own a home remains strong in Michigan. The state's homeownership rates outpaced the nation's from 2000 to 2006. And at 75%, metro Detroit had one of the highest rates among the 20 largest metro areas.

But in Detroit, an estimated 46% of residents spent 35% or more of their income on mortgages in 2006. About a third or more of residents of Dearborn, Pontiac, Shelby Township, Southfield, Warren and West Bloomfield also spent that much.

In poorer communities, the high percentages could spell trouble, though "it doesn't send up the same red flag in an affluent suburb," said Greg McBride, senior financial analyst for Bankrate.com. "Thirty-one percent of income in a high-income neighborhood leaves a lot remaining."

The Detroit area's building boom of the late 1990s and early 2000s likely contributed to the large income chunks going to mortgages, said Kurt Metzger, a demographer and researcher for the United Way for Southeast Michigan.

Lenders relaxed rules of thumb, including that mortgage debt make up no more than 28% of the buyer's income.

"There's that great American Dream when people jump into these opportunities where they're spending a large percentage of their income on housing," Metzger said. "But that's when they're making money." Those with jobs and little or no debt can likely handle paying as much as 50% of their income for a mortgage, experts said.

"The big question is, 'What are the other debts that people are carrying?' " said Russell Martin, a Chicago-based mortgage broker who has Michigan clients. "Unless somebody is living really extravagantly, they should be able to afford 35% for their mortgage."

Finding an exit route

Financially stretched homeowners should first try to trim expenses -- cut the cell phone bill and stop dining out -- and perhaps get a second job, experts suggested. And, like Gowman, drive an older, paid-for car. If the risk of foreclosure looms, try to refinance to a better interest rate or sell if the payments get to be too much.

"They've got to find an exit route," said Keith Ernst, senior policy counselor for the Center for Responsible Lending in Durham, N.C.

But in Michigan, where property values are dropping and homes are sitting for months on the market, it could be tough.

"That's the troubling part," Ernst said. "The way out isn't clearly marked."