Home Mortgage Lending

Homeownership is a crucial step to building wealth. Home equity is Americans’ largest asset. It is also often how families pass wealth on to their children, who continue to pass it on through the generations. Rates of homeownership increased during the 1990s and into the early 2000s. The rate peaked at 69.2 percent in 2004 and stood at 65.8 percent as of Q2 2022. Since the housing market collapse of 2006–2012 and the subsequent financial crisis, the homeownership rate has been decreasing. 

Rates of homeownership vary by race and ethnicity. Black families often rent and are, therefore, unable to take advantage of the financial benefits of homeownership. As a result, there is approximately a 30-percentage point difference in the homeownership rates between Black and white Americans. This is known as the Black-white homeownership gap. The Brookings Institution found that the 2021 homeownership rate for Black families was 46.4 percent, compared with 75.8 percent for white families. This gap is greater today than it was prior to the passage of the Fair Housing Act when race-based housing discrimination was legal. The widening of the homeownership gap is due to a variety of factors. They include longstanding discriminatory practices, the disproportionate impact of economic downturns such as the Great Recession on communities of color, and the impact of institutional investors on housing in communities of color.  

The homeownership gap contributes to the overall racial wealth gap. The Federal Reserve’s 2019 Survey of Consumer Finances found that the typical white family has eight times more wealth than the typical Black family and five times more wealth than the typical Hispanic/Latino family. 

Mortgages are essential to enabling most families to own a home. 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 (in 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 (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 true for borrowers who can no longer afford their mortgage payments because their incomes decrease. When the housing market collapsed, 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 improved substantially in the subsequent years. In April 2018, the national foreclosure rate fell to the pre-crisis level, according to CoreLogic. 

The economy entered a deep but brief recession in 2020. Unemployment reached the highest level since the Great Depression, but job growth has recovered for most sectors. Temporary forbearance and eviction moratoriums delayed foreclosures for many. But with the end of these temporary programs, borrowers have had to repay their mortgages and any unpaid obligations to avoid foreclosure. 

Home prices have recovered in most areas since the Great Recession. CoreLogic estimates that 1.8 percent or one million homes with residential mortgages have negative equity as of second quarter 2022. This compares with the peak of 26 percent of loans with negative equity in the fourth quarter 2009. Home prices continued to increase throughout the pandemic, with a slowing in growth toward the end of 2022 as a result of increasing home mortgage rates. 

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 New York Fed Consumer Credit Panel/Equifax, Consumer Credit Panel/Equifax, the median credit score for new purchase mortgages increased from 721 in 2007 to 773 as of second quarter 2022. The government plays an important role in the mortgage market, with more than two-thirds of loans having some form of government guarantee. In second quarter 2022, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration, and the Department of Veterans Affairs accounted for more than 66 percent of first-lien mortgage origination volume. 

Dodd-Frank Mortgage provisions: The Dodd-Frank Act (Dodd-Frank) included important mortgage provisions to protect consumers, the mortgage market, and the U.S. economy. Most important, lenders must 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 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. 

Shared-equity homeownership: Shared-equity homeownership is an alternative option to renting and traditional homeownership that can expand access for families with low and moderate incomes. They include limited-equity cooperatives, community land trusts, and deed-restricted homeownership. Typically, a nonprofit or government entity provides a subsidy to lower the purchase price of a housing unit, making it affordable to a buyer with low income. In return for the subsidy, the buyer agrees to sell the home to another family with low income. This helps preserve affordability for subsequent homebuyers.