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.
