Why The U.S. Mortgage Market Is Broken

Why The U.S. Mortgage Market Is Broken

And despite the many regulations designed to prevent lending discrimination, racial bias is still prevalent in the mortgage industry. According to the most recent data from the Home Mortgage Disclosure Act, denial rates for home purchase applications were 18.1% for black applicants and 12.5% for Hispanic white applicants, compared to just 6.9% for non-Hispanic white applicants and 9.7% for Asian applicants. Lenders can look up additional debts of a potential homebuyer, including that of medical debt and student loan debt relative to the loans that are in default, which can limit opportunities for less established potential homebuyers. Expecting communities that have not historically had the privilege of financial liberties to be financially secure when making one of those important purchases of their lifetime is like expecting an athlete with no training or coaching to win a national championship title. It’s just unrealistic and it’s indeed a stretch and has certainly added to the difficulty of home buying in the U.S. The easiest way to solve today’s mortgage market is resolving the supply of housing in America. If we don’t increase the supply of starter homes, first-time homes, and homes that are accessible for working families with low and moderate incomes, then it’s going to be really hard to solve it just from a lending perspective.

We’ve got to have more housing. If you just provide more credit, it drives up housing prices even more without expanding the supply. Another important aspect is having a mortgage market that supports the needs of all Americans. If we have more supply, we also should work on down payment assistance and we think we’re going to need more subsidy there, and financial counseling and preparation to help families clean up their credit and be well prepared to be able to obtain loans. Several measures can also be taken to overcome some of the systemic barriers that prevent certain subgroups from achieving homeownership. Our mortgage system just has to work for today’s economy and people who are doing the right thing scrambling to put together a living, saving as much money as they can. But those are just tougher in this new economy.

And our mortgage system has to serve those people who are playing by the rules and not getting a chance to get ahead. If we want to overcome some of the systemic barriers to homeownership for households of color, we really want to recognize that and think really hard about unpacking those systemic barriers and doing something to address them directly, like looking for alternative ways to assess credit, looking for ways to count income from gig economy jobs, and second and third jobs and seasonal jobs, and from other household members who are contributing and looking for ways to help people with down payment assistance to establish that collateral. Continuing to question and improve the mortgage system in the United States is key to preserving the ideals of the American dream. Our mortgage system is one of the main factors that decide who has a stable financial life, who has a secure place to live, and who builds financial wealth. And it needs to serve all of America and it’s not doing that. And so unless there are very deliberate, significant interventions and changes in our system, we’re going to look back in 20 years and find that we’re even in a worse place than we were in 2022.

Mortgage rates are on the rise and they’re not showing any signs of slowing down. Mortgage rates have now risen up above 5% for the first time in a long time, and home prices have also been rising. If you look at predictions of where mortgage rates may be, say, two or three years from now, most people are looking at interest rates to 7 to 7.5%. A mortgage typically refers to a loan used to buy a piece of real estate for which that property serves as collateral. Today, 63% of homeowners in America are paying off their mortgages, according to Zillow. Every percentage increase in a mortgage rate significantly increases the monthly payment, especially for low and moderate-income families. So there are good reasons in the broader economy for raising rates, but this isn’t good news for those trying to purchase a home. But experts say that high rates aren’t the only issue with mortgages that could hinder Americans from achieving homeownership.

Our economy has totally transformed in the last 50 years, and mortgages have not. If we update our system to better serve everyone in America, it will profoundly advance us in having a more equitable country. How do mortgages make it more difficult to own a home in the United States? And can anything be done to solve it? The price of a home often exceeds the amount of money that most Americans save. Mortgages exist to allow these individuals and families to purchase a home with a small down payment receiving a loan for the remaining balance. But cost still remains a big issue. We have an affordability crisis in the United States. And I would say COVID actually revealed and exacerbated an existing crisis, but it’s only gotten worse. So what we fundamentally have is a supply problem, and that correlates with an affordability challenge. Americans today are forced to take larger loans to finance a home. The Federal Reserve Bank of Atlanta found that a median-income household would need to spend 34.9% of its yearly income on a median-priced home. For reference, households that pay more than 30% of their monthly income for housing are considered cost burden, according to the Department of Housing and Urban Development.

The cost factor is also why there is currently a large percentage of renters wondering if they’ll even ever be able to move from renting to owning. And even condos and townhouses are raising in costs across cities for half a million dollars and up, significantly raising the down payment amount in mortgage loan debt. Saving for a down payment is one of the biggest barriers to homeownership. The Center for Responsible Lending calculated that a typical worker needs eight years to save for a 3% down payment for a median-priced home and 30 years for 20%. While certain programs like FHA loans allow homes to be purchased with smaller down payments, being able to afford a high down payment comes with its own set of benefits. If you come in with a lot of money down, it’s easier to qualify for a mortgage. It’s also less expensive to get a mortgage. Something like 40% of families in America have no financial margin. They couldn’t even afford a $400 medical bill or challenge. So the idea of being able to save a 20% down payment is almost unimaginable. And again, it goes back to the fact worse than ever right now is that food costs are going up, and energy costs are going up. Rents are skyrocketing so much faster than incomes right now. All of those get in the way of families being able to save for a down payment.

A number of state and local institutions also offer what’s known as down payment assistance programs to combat this issue. There is not nearly, though, enough money for those down payment programs. The other problem has been that the programs are not standardized and it makes it harder for lenders to use them and more reluctant to use them. And it also makes it harder for people to know about them and how they qualify for them. Congress was considering a big package of downpayment assistance for first-generation homebuyers as part of the debate over Build Back Better last year, but the Senate failed to enact the bill. So that’s, you know, we’re still hoping that might be revived. Another prominent issue is the lack of small-dollar mortgages or loans issued for less than $100,000. Having smaller mortgages is important because by definition those are going to be affordable for a family on a more modest income. For first-time homeowners, a lot of these small-dollar mortgages are available for affordable, low-cost properties in urban, suburban, or rural communities. And the issue has been getting worse.

The total value of mortgage loans between $10,000 and $70,000 and between $70,000 and $150,000 dropped by over 53% and over 21% respectively from 2011 to 2021. Meanwhile, values for loans exceeding $150,000 rose by a staggering 240% plus in the same period. It is particularly hard for people who are buying smaller houses with smaller mortgages to find a lender and to get that mortgage. And they also, surprisingly, are more expensive. Another study found that denial rates for small-dollar loans were notably higher than denial rates for larger loans. And it’s not because these loans are riskier. Accompanying research found that applicants for small-dollar loans had similar credit profiles to applicants for larger loans. The real reason is profit. It costs about the same amount of money to take an application and run it through your system and fund a mortgage and have it appraised and do all those things regardless of how big the mortgage is. So if it costs me the same amount of money to do a $700,000 mortgage as it does to do a $70,000 mortgage, but I get all my fees and my interest based on the loan amount. So I’m going to get a lot less revenue on a $70,000 mortgage than I am on a $700,000 mortgage.

The lack of small-dollar mortgages then drives these affordable homes into the hands of retail investors looking for profit. Small-dollar homes that could represent the first step on the path to homeownership for a family of modest income are not being sold with mortgages, which means they’re probably being bought for cash. That means somebody with deep pockets is able to come in and offer to pay cash. They often buy the homes through automated systems where they buy them without even seeing the house. They get an automated appraisal, a remote inspection, and buy houses in bulk, and that’s pulling a lot of houses out of what’s already an overly scarce, affordable housing market for these smaller, less costly houses. So a lot of harm coming out of the difficulty of people being able to access small-dollar mortgages. In response, homebuyers may resort to dubious methods to purchase a property. One example that is surprisingly prevalent is people end up into something they call Contract for Deeds, where it’s essentially you’re renting, and if you make every payment on the loan on time, you eventually will own the house.

But if you miss any payment, you not only lose the house, you have no equity in it either. And there are millions of these transactions out there in the country today. And it’s because people don’t have the alternative. They’re being pushed into those mortgages. On top of everything, it’s generally become more difficult to qualify for a mortgage. The Housing Credit Availability Index, which represents the lender’s tolerance for risk, has remained almost at the same level since the aftermath of the 2008 financial crisis. In response to the great foreclosure crisis, lenders and investors got very tight about their underwriting criteria and have kept them at this sort of reactive level since then. The deck is particularly stacked against borrowers with low credit scores. As millions of homeowners went into mortgage forbearance programs at the start of the pandemic, banks raised their borrowing standards for protection. During the fourth quarter of 2021, less than a quarter of new mortgages originated to borrowers with credit scores under 720. An important part of the unfairness and the impact of that is credit scores reflect, to a great extent how much family and personal wealth you have. If you’re a wealthy person, it is not difficult to get a mortgage, but if you have less wealth and a lower credit score, it’s really challenging right now.

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