Home Mortgage Lending

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, homeownership rate has been decreasing. As of the first quarter of 2020, the rate was 65.3 percent, according to the Census Bureau.

The amount of mortgage debt carried by homeowners age 50 and older has increased over the past three decades after accounting for inflation. It more than doubled from an average of $62,585 in 1989 (converted to 2019 dollars) to $160,112 in 2019. More concerning is the increase in mortgage debt of homeowners age 75 and older. Their average mortgage debt almost tripled from $30,409 in 1989 (converted to 2019 dollars) to $116,090 in 2019. Almost 28 percent of families headed by someone age 75 or older now carry mortgage debt.

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 homes of people age 50 and older were lost due to foreclosure between 2007 and 2011. The economy has improved substantially since then. In April 2018, the national foreclosure rate fell to the pre-crisis level, according to CoreLogic.

However, the economy has entered a deep recession during the COVID-19 pandemic. Unemployment reached the highest level since the Great Depression. Foreclosure rates were expected to increase as a result of millions of jobs lost. Foreclosure rates were expected to be even hihger in states that experienced natural disasters such as hurricanes, flooding, or wildfires. Temporary forbearance and eviction moratoriums delayed foreclosures for many. However, once these temporary programs end, borrowers will need to begin repaying their mortgages and any unpaid obligations to avoid foreclosure.

Home prices have recovered in most areas since the Great Recession. CoreLogic estimates that 3.4 percent or 1.8 million homes with residential mortgages have negative equity as of first quarter 2020. This compares with the peak of 26 percent of loans in the fourth quarter 2009. Home prices are expected to decrease in some areas as a result of the COVID-19 pandemic, but economists do not expect losses as severe as those experienced during the Great Recession.

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 41 points since 2007. For borrowers in the lowest tenth percentile, the average credit score increased 48 points. The impact of COVID-19 is expected to lead to further credit tightening. 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 2020, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration, and the Department of Veterans Affairs accounted for more than 70 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 the 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 mortgages include those with negative amortization and high points and fees. And it limits prepayment penalties on all residential mortgages. Dodd-Frank also 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 do not, 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 Bankruptcy).

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.