Home Mortgage Lending

Background

Homeownership is a key to building wealth. Rates of homeownership increased during the 1990s and into the early 2000s. The rate peaked at 69 percent in 2004. Since the housing market collapse and subsequent financial crisis, the homeownership rate has been decreasing. As of the second quarter of 2018, the rate was 64 percent, according to the Census Bureau.

But still, the amount of mortgage debt carried by homeowners ages 65 and older has increased sharply over the past three decades. It went from an average of $31,491 in 1989 (converted to 2016 dollars) to $108,899 in 2016. And the percentage of families headed by someone age 65 or older that carry mortgage debt has doubled since the start of the century, from 14.5 percent in 1989 to 30 percent in 2016.

Carrying mortgage debt at older ages can harm long-term financial security. This is especially the case for borrowers who can no longer afford their mortgage payments because their incomes decrease. When the housing market collapsed in 2007 and the Great Recession hit in 2009, millions of loans went into foreclosure. An AARP study found that 1.5 million loans of people age 50 and older were foreclosed between 2007 and 2011. The economy has improved substantially since then, and unemployment fell to an 18-year low. In April 2018, the national foreclosure rate fell to the pre-crisis level, according to CoreLogic. However, foreclosure rates remain above the pre-crisis level in states where foreclosures go through a judicial process. In addition, states that have been hit with natural disasters such as hurricanes, flooding or wildfires, are also facing elevated foreclosure rates.    

Home prices have recovered in most areas since the Great Recession. CoreLogic estimates that 4.7 percent or 2.5 million homes with residential mortgages have negative equity as of first quarter 2018. This compares with the peak of 26 percent of loans in the fourth quarter 2009.

Access to mortgage credit since the mortgage market crisis remains tight. Borrowers with low credit scores continue to have difficulty obtaining mortgage credit. According to the Urban Institute, the mean credit score for new purchase mortgages increased 21 points over the past decade. For borrowers in the lowest tenth percentile, the average credit score increased 48 points. The government continues to play an important role in the mortgage market, with more than two-thirds of loans having some form of government guarantee. In first quarter 2018, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration, and the Department of Veterans Affairs accounted for more than 69 percent of first lien mortgage origination volume.

Dodd-Frank Mortgage provisions—the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) included important mortgage provisions to protect consumers, the mortgage market, and U.S. economy. Most important, lenders are required to evaluate whether the consumer can reasonably repay the mortgage. This determination must be based on a payment schedule that fully amortizes the loan. The creditor must document and verify the following information about the consumer:

  • credit history,
  • current and expected income,
  • debt-to-income ratio,
  • employment status, and
  • other financial resources.

Dodd-Frank also requires counseling for high-cost mortgages, such as those with negative amortization and high points and fees. And it limits prepayment penalties on all residential mortgages and prohibits incentives to steer borrowers into higher-cost loans than they qualify for, among other protections. It also forbids financing a lump-sum premium payment for credit insurance as part of a mortgage loan. And it prohibits pre-dispute mandatory binding arbitration provisions in loans secured by a borrower’s primary residence. The act also creates an incentive for lenders to refrain from making mortgage loans with onerous terms, negative amortization, surprise changes in required payments, or inadequate documentation. If they don’t, they have to retain some risk in the loan. In addition to federal oversight, mortgage brokers are also subject to state regulation.

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 (see also Banking, Credit, and Debt—Bankruptcy policy in this chapter).

Mortgage servicing—mortgage servicers are companies that collect borrower payments and distribute them to lenders. They also handle customer service, loan modifications, collections, and foreclosure. The Consumer Financial Protection Bureau has identified several problems in the mortgage servicing industry in conducting oversight. These include:

  • failing to provide borrowers with the information needed to avoid foreclosure;
  • starting the foreclosure process too early;
  • mishandling escrow accounts, which are established to collect payments from borrowers for taxes and insurance; and
  • providing incomplete account statements.

The Consumer Financial Protection Bureau also found that the mortgage servicing industry needs to invest more money in mortgage compliance technology and training.

HOME MORTGAGE LENDING: Policy

Mortgage lending

In this policy: FederalState

Policymakers should create and rigorously enforce consumer protections in mortgage lending.

States should prohibit lenders, brokers, mortgage servicers, and all mortgage-related professionals from engaging in unfair, deceptive, or abusive practices in connection with mortgage transactions. This includes those who sell title insurance.

At a minimum, states should:

  • license mortgage brokers and originators and require them to act in the best interest of the consumer,
  • prohibit or limit high-cost lending without independent homeownership counseling,
  • require real estate agents and lenders to disclose conflicts of interest, and
  • enable attorneys general and state regulators to enforce the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Servicing

In this policy: FederalState

Policymakers should issue strong consumer protections against abusive loan servicing practices. This includes requiring servicers to credit payments promptly and prohibiting duplicative and unnecessary fees. Mortgage servicers should credit payments first to the loan itself and then to fees, insurance premiums, and other ancillary costs.

Foreclosure prevention

In this policy: FederalState

Policies should be in place to avoid unnecessary foreclosures.

Servicing policies and procedures should favor keeping people in their homes over foreclosure when possible. Servicing standards should 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.

Modification of mortgage loans secured by a primary residence should be permitted in bankruptcy (see also Banking, Credit, and Debt—Bankruptcy policy in this chapter).

Meaningful mortgage modifications for distressed mortgages owned or acquired by the federal government should be simplified. It should include a modification guideline. Eligibility should be transparent.

Regulators should develop policies and procedures for rapidly modifying mortgage contracts; managing rental conversion; and leasing, selling, or demolishing vacated homes. Future securitizations should be structured to allow timely decisions on requests for mortgage modifications and short sales.

States should also:

  • create foreclosure mediation programs to help homeowners negotiate a possible alternative to foreclosure,
  • establish minimum notice standards for foreclosures, and
  • regulate the activities ofADLs or Activities of Daily Living are the basic tasks of everyday life, such as eating, bathing, dressing, toileting, and transferring. IADLs or Instrumental Activities of Daily Living are activities related to independent living and include preparing meals, managing money, shopping for… foreclosure consultants and similar professions.

State protections

In this policy: Federal

States should have the ability to provide consumers with greater protections. Federal protections should serve as a minimum standard. 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.