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.
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.