Homeownership, often considered a key to building wealth, increased during the 1990s and into the early 2000s. The homeownership rate peaked at 69 percent in 2004. Since the housing market collapse and subsequent financial crisis, the homeownership rate has been decreasing. As of June 2016, the rate was 64 percent, a level not seen in decades. These decreases in homeownership rates have occurred across the age spectrum: Since 2004 the rate for homeowners younger than age 35 decreased by 6.3 percentage points; for those age 35-44, the rate decreased by 11.6 percentage points; for those age 45-54, it decreased by 8.3 percentage points; and for those age 55-64, it decreased by 6.7 percentage points. Foreclosure backlog and tight mortgage credit conditions explain some of this decline.
Foreclosures remain historically high—Since the peak of homeownership rates in 2004, eight million homes in the United States have been lost to foreclosure. AARP research found that 1.5 million loans of people age 50 and older were foreclosed between 2007 and 2011. Although foreclosure rates have declined to their lowest levels since 2007, according to a 2016 National Foreclosure Report by CoreLogic, they remain above pre-financial crisis levels and the historical norm. States with the highest foreclosure inventory follow a judicial foreclosure process, meaning that mortgage foreclosure is accomplished through a court proceeding and thus takes longer.
In an attempt to speed up the foreclosure process, some judicial process states have implemented new programs to clear the backlog of foreclosure cases. For example, Florida has set up courtrooms for the sole purpose of hearing foreclosure cases, but with different rules from those that guide civil law in other types of cases. According to consumer advocates, many borrowers appear to be losing their ability to stay in their homes as judges push the foreclosures through.
Mortgage debt of older homeowners—over the past two decades, the amount of real mortgage debt carried by homeowners age 65 and older has increased sharply, from an average of $30,732 in 1989 (converted to 2013 dollars) to $117,909 in 2013. The percentage of families 65 and older that carry mortgage debt more than doubled from 15 percent in 1989 to 32 percent in 2013. The increase in debt for older people may reflect that people are facing financial stress and did not have the financial resources to pay off the debt during their working years.
Mortgage market conditions—since the mortgage crisis, mortgage lending has tightened dramatically. Today only the highest-credit borrowers have access to mortgage loans. In addition to high credit ratings, borrowers are required to have higher down payments than in the recent past. Private capital is no longer fueling the mortgage industry. In 2015, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (FHA), and the Department of Veterans Affairs accounted for over 60 percent of the mortgage loan and mortgage insurance markets. Many lenders are unwilling to make loans without the underlying credit of the US government.
As of October 2016, housing prices have recovered in many markets, but on average remain 6 percent below the peak reached in 2006, according to CoreLogic. Despite the rise in home prices, CoreLogic estimates that approximately 3.6 million homes—accounting for 7.1 percent of all residential mortgages—had negative equity as of June 2016. They also estimate that another 965,000, or 1.9 percent of homes with a mortgage, have less than 5 percent equity, which puts these properties at risk in the event of a house price decline. The housing market continues to face challenges in the near future. Uncertainty about the future of Fannie Mae and Freddie Mac and about possible reform of the housing finance system is a major concern that needs to be addressed.
Mortgage provision in the Dodd-Frank Wall Street Reform And Consumer Protection Act (Dodd-Frank)—since 2010, many new regulations have been implemented to address the previously lax regulation of the mortgage market. Dodd-Frank contains mortgage provisions to protect consumers and, in so doing, protect the mortgage market and the US economy. Most important, a lender must make a reasonable and good-faith determination based on verified and documented information that a consumer has a reasonable ability to repay the loan at the time it is made, based on a payment schedule that fully amortizes the loan. The creditor must document and verify the consumer’s credit history, current and expected income, debt-to-income ratio, employment status, and other financial resources.
The law imposes more stringent lending rules, including required counseling for nonstandard and high-cost mortgages such as those with negative amortization and high points and fees (i.e., more than 5 percent of the loan amount). Prepayment penalties are limited for all residential mortgages. Final rules on these issues went into effect in January 2014.
The risk retention (skin-in-the-game) securitization provision creates an additional incentive for lenders to avoid making mortgage loans with onerous terms, negative amortization, surprise changes in required payments, or inadequate documentation. This provision, which applies to all asset-backed securities, requires those who sell products such as mortgage-backed securities to retain 5 percent of the risk (or an alternative amount set by the Securities and Exchange Commission and the federal banking agencies). Certain “qualified residential mortgages” with a lower risk of default may be exempted from this requirement, thus setting a de facto standard for most residential mortgages.
Dodd-Frank also prohibits incentives for steering prospective borrowers to higher-cost loans than those for which they could qualify. It requires that mortgage originators, often mortgage brokers, owe a fiduciary duty to prospective borrowers when recommending mortgages. Brokers will be regulated at the state and federal level. A borrower may use a broker’s violation of the anti-steering rules or ability-to-repay rules as a defense in a foreclosure action.
Dodd-Frank also forbids financing a lump-sum premium payment for credit insurance as part of a mortgage loan. It also prohibits pre-dispute mandatory binding arbitration provisions in loans secured by a borrower’s primary residence. The Consumer Financial Protection Bureau’s final rules on these provisions went into effect in January 2014.
Bankruptcy treatment of foreclosure—the Bankruptcy Code forbids any modification of a mortgage loan secured by the debtor’s principal residence. However, loans on vacation homes, investment properties, and yachts may be modified.
In order to allow homeowners in financial stress to keep their homes, some reform proposals would allow bankruptcy courts to modify loans on principal residences. The mortgage banking industry argues that this would raise the cost and lower the availability of mortgage credit. Recent research suggests, however, that effective mortgage interest rates, private mortgage insurance rates, and secondary mortgage market pricing are all indifferent to whether the property is a primary residence or vacation home. Cost premiums for investment properties may reflect risks distinct from bankruptcy modification.
Some proposals would “strip” or “cram” down debts secured by home equity to the value of the equity. An alternative would create a “soft second” lien from the remaining loan amount. Under this alternative, the borrower would not be required to make payments on the soft second lien. However, if and when the borrower sold the house, the sale proceeds would be applied to the first and soft second liens (see this chapter’s section on Bankruptcy).
Home Mortgage Lending: Policy
Conflicts of interest in the current system of rating mortgage-backed securities should be eliminated. The process used by credit-rating agencies to rate mortgage-backed securities should be more transparent.
States should prohibit lenders, brokers, mortgage servicers, and all mortgage-related (including title insurance) professionals from engaging in unfair, deceptive, or unconscionable practices in connection with mortgage transactions. They should pass legislation enabling attorneys general and state regulators to enforce the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
Risk retention rules and definition of qualified residential mortgages (QRMs)
Policymakers should address the following areas related to QRMs:
- ability to pay and documentation—QRMs should be underwritten to ensure that the borrower has the capacity to repay the loan, according to its terms, out of documented income and taking into account the borrower’s other debt;
- predictors of loan performance—the risk retention rule should allow for consideration of a borrower’s entire credit profile (e.g., down payment, credit history, debt to income ratio) before determining whether risk retention is necessary;
- availability—as intended by Congress, the risk retention rules should assure that QRM loans are widely available to qualified borrowers and become the market standard for consumer safety and cost;
- mortgage insurance—mortgages that have lower down payments and standard private mortgage insurance and that meet all other conditions should be considered qualified for QRM status to ensure the availability of mortgage credit for low- and moderate-income homebuyers; and
- loan servicing standards and consumer protections—the definition of QRM loans should incorporate appropriate loan servicing standards and consumer protections.
Loan applications and administration
The Consumer Financial Protection Bureau (CFPB) should give priority to issuing strong consumer protections to regulate loan servicers, including requirements to credit payments promptly and prohibitions on charging duplicative and unnecessary fees. Mortgage servicers should credit payments first to the loan itself and then to fees, insurance premiums, and other ancillary costs.
The CFPB and states should require real estate agents and lenders to disclose conflicts of interest in their recommendations for any ancillary services required from contract signing through settlement.
Riders on Home Ownership and Equity Protection Act (HOEPA) loans that change the terms of the loan should be abolished.
Borrower certification of lender compliance with the HOEPA advance disclosure requirement should be prohibited.
Preemption of state regulations
Federal regulators should generally avoid asserting preemption claims so states can adopt laws and regulations that may be necessary to protect homeowners from abusive loan origination, abusive servicing practices, and property-flipping schemes.
States should license mortgage brokers and originators and require them to act in the best interest of the consumer.
States should enact legislation on high-cost home loans that restricts unfair prepayment penalties and that prohibits or limits lending without independent homeownership counseling.
States should pass legislation enabling state attorneys general and state regulators to enforce the provisions of the Dodd-Frank Act.
Mortgage modifications and foreclosure prevention
The Bankruptcy Code should be revised to permit modification of mortgage loans secured by a primary residence.
To the extent that the federal government owns or acquires distressed mortgages, it should develop a streamlined system to facilitate meaningful mortgage modifications. The streamlined system should include transparent eligibility and modification guidelines.
A lead agency should be created or given authority to develop policies and procedures for rapidly modifying mortgage contracts, managing rental conversions, and leasing, selling, or demolishing vacated homes. Future securitizations should be structured to allow timely decisions on requests for mortgage modifications and short sales.
Servicing standards should also include the following:
- Servicers should have an affirmative duty to thoroughly evaluate borrowers for loss mitigation options, including principal reduction, prior to proceeding with a foreclosure, and to promptly offer loan modifications when they result in a greater net present value than foreclosure.
- Servicers should not initiate or refer for foreclosure or seek a stay in bankruptcy of a borrower while a good-faith modification evaluation or loss mitigation program application is in progress.
- Servicers should provide borrowers with a single point of contact for all loss mitigation communications.
- Servicer compensation should not favor foreclosure over loss mitigation.
- Servicers should be required to have a reasonable process for dealing with subordinate liens and should have a responsibility to act in the best interests of the first lien holders regardless of any servicer interest in the property.
States should create foreclosure mediation programs to help homeowners work with their mortgage servicer to negotiate a possible alternative to foreclosure.
States should establish minimum notice standards for foreclosures and regulate the activities of foreclosure consultants and similar professions.