Where's the key to unlocking the door to homeownership?
Access to credit remains unacceptably tight
When the Bipartisan Policy Center Housing Commission began its work in late 2011, one of our first items of business was examining why it was so difficult for so many creditworthy families to get a mortgage. If we were starting from scratch today, the same issue would be at the top of our agenda.
Back in 2011, home prices had dropped significantly, interest rates were at historic lows, and the affordability of owning a home was reaching its peak. Yet getting a mortgage to unlock the door of homeownership was an impossible task for many lower- and middle-income households.
Still stung by the collapse of the housing market, banks were then understandably cautious about lending to those with less than pristine credit. But other factors were also at work: Concern by lenders about having to repurchase defaulted loans from the GSEs (”put-back risk”), dysfunction in the appraisal process, and a lack of clarity about the regulatory “rules of the road” all had a dampening effect.
A perfect storm of fear and uncertainty had swept through the housing market.
Fast forward three years, and many of these same problems continue to plague our mortgage system while access to credit remains unacceptably tight.
Banks still worry about put-back risk, uncertain about the circumstances in which they will be forced to repurchase loans, despite guidance by the Federal Housing Finance Agency providing relief from representations and warranties following 36 months of consecutive on-time payments. At the same time, the appraisal process continues to be unpredictable. How to appraise non-distressed homes in communities with large numbers of foreclosures also remains a vexing problem.
While the release of the final “qualified mortgage” rule provided some regulatory clarity, the rule’s requirement that the debt of QM borrowers may not exceed 43% of income has raised concerns that many young adults, burdened with large student loan obligations, will be shut out of the homeownership market for years to come. Meanwhile, we still await the final “qualified residential mortgage” rule governing risk retention for loans sold into the secondary market. And Congress continues to debate the future design of our nation’s housing finance system.
Today, there is another troubling factor to consider: Some banks are scaling bank their mortgage operations because the refi boom is over, profit margins are too thin, and the opportunity costs are too high.
That there has been so little progress over the past three years on improving access to mortgage credit is disappointing. While average home prices have increased and interest rates have risen, the affordability of homeownership still remains favorable from a historical perspective. So it’s critical that more creditworthy families have the chance to enter the homeownership ranks before the window of opportunity closes.
A key question is whether a rigid reliance on credit scores, at the expense of meaningful underwriting of the borrower, is worth the price of diminished access to mortgage credit. Does this reliance make sense when the most risky and objectionable products (such as “no doc” loans and “interest-only ARMs”) have been effectively banned from the marketplace?
As Mark Zandi and Jim Parrott have pointed out, the average credit score on loans to purchase homes in 2013 was over 750, some 50 points higher than the average score a decade ago. Before the housing bubble, nearly one-fifth of mortgage borrowers had credit scores below 660. Today, only one-tenth of borrowers have credit scores in this range. In 1999, 25% of first-time homebuyers had credit scores of 620 or below. Today, getting an affordable mortgage with a credit score below 620 is a very tall order indeed.
Zandi and Parrott also point out that every 10-point reduction in the required average credit score increases the pool of potential mortgage borrowers by more than 2.5 percent. So, if the average credit score declined 50 points, making it comparable to the average score before the housing bubble, then the pool of potential mortgage borrowers would increase by 12.5 percent. That translates into more than 12.5 million households, many of whom would opt for homeownership.
We certainly do not want to return to the reckless practices of the boom-and-bust period, but do we want to squeeze all risk out of the mortgage system and limit the opportunity for homeownership to the well-to-do?
Or is it possible to accommodate working families who may be unable to meet today’s tough credit-score and other requirements while still promoting sound underwriting?
These are the questions we must answer.