Real Estate

The future of affordable lending

Modernizing the mortgage process

In 1997, a company then known as Apple Computers adopted the slogan “Think Different.” This well-regarded marketing campaign became known as a Steve Jobs classic, because it spoke to the possibilities of influencing and changing the world around us.

C1That’s essentially our philosophy at Freddie Mac. As the U.S. population ages and becomes more diverse, borrowers’ needs and expectations are changing. People across the lending industry are thinking different to find solutions to issues that will benefit our neighborhoods, our industry and our country for decades to come. The most dynamic area where that is happening is in the affordable housing space.

When I arrived at Freddie Mac in 2015, one of the questions I received most frequently was, “Why aren’t Millennials buying homes?”

Due to the market cycle at the time, most of the housing industry was focused on refinancing. Naturally, this precipitated a decline in the share of first-time homebuyers—down to about 30% of all homebuyers.

Fast-forward to today: Nearly half of the mortgages Freddie Mac has purchased so far this year were to first-time homebuyers—a great number. But more work needs to be done.

The affordable housing challenge

The last time the United States built a large stock of housing was after the conclusion of World War II when soldiers were returning home. A recent Freddie Mac analysis shows that the U.S. is short approximately 2.5 million homes needed to keep up with current demand. From 1968 to 2008, a span of 40 years, there was only one year in which fewer new housing units were built than in 2017.  And wage growth is just now keeping up with house price appreciation, for the first time in seven years.

Moreover, existing homeowners, many of them Baby Boomers, are not looking to move up or to move out of their current homes. And frankly, for those that may want to, they face the same challenge as a Millennial looking to be a first-time homebuyer: It’s difficult to find a home they can afford that will also meet their needs.

The impact of years of low wage growth, rising home prices and increasing rents results in consumers saving less for a down payment. And when they can save money, it will not go as far in meeting minimum down payment requirements on a mortgage. Moreover, many borrowers making a lower down payment must take on the added cost of a third-party credit enhancement such as mortgage insurance.

Additionally, lenders have a disincentive to focus on more challenging borrowers with smaller loan sizes. This is because pressure has increased on the way loan officer compensation is paid, along with increased production and fixed costs of making a mortgage. If fixed costs are high, and all revenue is generally a percentage of loan balance, then lenders have considerably less margin on loans with a lower balance. Further, regulations prohibit differential compensation to loan officers, which limits an employer’s ability to improve incentives for this type of lending.

A new approach and a new attitude around affordable lending is required. We are thinking different in this area and leading discussions among the affordable housing ecosystem on how to make an impact.

Mortgage modernization

By leveraging advanced analytics and working with financial technology companies to source data and verify information, the industry is helping to simplify the mortgage process and ensure certain and final sales in the secondary market. Any efficiency brought into the loan production process, any dollar saved, is a benefit to borrowers. And the benefit is exponentially greater when the efficiency is realized for the lower-income consumer or the inexperienced first-time homebuyer.

The utilization of new digital tools has taken off over the past few years. Every lender is trying to find new ways to control costs while looking for opportunities to better serve a changing customer base. By leveraging data analytics, the mortgage industry can more fully-digitize application processing, speed up underwriting and bring borrowers to the closing table sooner. This also translates to great efficiencies when making loans to low-to-moderate income borrowers.

Not only do these technological efficiencies reduce cost and processing time, they can also greatly reduce lender repurchases. These new technologies are promising, and many are already delivering meaningful results.

Modernized homebuyer education and preparation

Borrowers need and deserve education, guidance and solutions to help them prepare for becoming a homeowner. Whether it’s learning about the importance of utilizing credit as a tool, homebuyer responsibility or resources to help borrowers stay in their homes, we’re a trusted partner.

For example, down payment programs are likely to be needed more than ever in coming years as young people look to purchase their first home. Along with our partners, we are looking at ways to simplify lender adoption, reduce lender and borrower costs, and drive stronger engagement and use of these programs.

Another promising area is leveraging one of the industry’s oldest, most trusted and most respected partners—housing counselors. By enhancing the homebuyer counseling process with digital self-service tools, prospective homebuyers could address barriers to mortgage qualification on-demand and at their convenience. This would allow housing counselors to focus more on troubled areas such as reducing debt, improving credit and establishing better budgeting behaviors. And other innovations will help bring their expertise closer to the mortgage manufacturing process.

The secondary market will be a catalyst to help the industry think different about the affordable housing ecosystem. It touches many points in the system, working with lenders, providing low down payment options for low-income and first-time homebuyers, and working closely with investors, who buy the securities.

The lending industry can also become involved with education and outreach efforts across the company. It can get involved at the community level, assisting families in markets that range from urban to rural, where lenders can work with housing groups, community organizations and everything in between.

In a well-functioning housing ecosystem, real estate professionals, housing organizations, community groups and other stakeholders work together to promote the flow of business and help expand responsible homeownership.

The future affordable lending will require that we all work together from across the ecosystem, think differently about future opportunities, and leverage new tools and resources to make home possible. Lenders should be all for building the future of home through insights, education, mortgage products and business solutions.

All of us. All in. All for home.

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