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Why The U.S. Mortgage Market Is Broken - YouTube
Channel: CNBC
[0]
Mortgage rates are on the
rise and they're not showing
[3]
any signs of slowing down.
[6]
Mortgage rates have now
risen up above 5% for the
[9]
first time in a long time,
and home prices have also
[13]
been rising.
[15]
If you look at predictions
of where mortgage rates may
[17]
be, say, two or three years
from now, most people are
[21]
looking at interest rates
to 7 to 7.5%.
[25]
A mortgage typically refers
to a loan used to buy a
[27]
piece of real estate for
which that property serves
[30]
as collateral. Today, 63%
of homeowners in America are
[34]
paying off their mortgages,
according to Zillow.
[37]
Every percentage increase in
a mortgage rate
[40]
significantly increases the
monthly payment, especially
[44]
for low and
moderate-income families.
[45]
So there are good reasons
in the broader economy for
[48]
raising rates, but this
isn't good news for those
[50]
trying to purchase a home.
[51]
But experts say that high
rates aren't the only issue
[54]
with mortgages that could
hinder Americans from
[56]
achieving homeownership.
[57]
Our economy has totally
transformed in the last 50
[62]
years, and mortgages have
not.
[65]
If we update our system to
better serve everyone in
[69]
America, it will profoundly
advance us in having a more
[73]
equitable country.
[75]
How do mortgages make it
more difficult to own a home
[77]
in the United States?
[79]
And can anything be done to
solve it?
[88]
The price of a home often
exceeds the amount of money
[91]
that most Americans save.
[93]
Mortgages exist to allow
these individuals and
[95]
families to purchase a home
with a small down payment
[99]
receiving a loan for the
remaining balance.
[101]
But cost still remains a
big issue.
[104]
We have an affordability
crisis in the United States.
[107]
And I would say COVID
actually revealed and
[109]
exacerbated an existing
crisis, but it's only gotten
[112]
worse. So what we
fundamentally have is a
[115]
supply problem, and that
correlates with an
[117]
affordability challenge.
[119]
Americans today are forced
to take larger loans to
[121]
finance a home.
[123]
The Federal Reserve Bank of
Atlanta found that a
[126]
median-income household
would need to spend 34.9% of
[128]
its yearly income on a
median-priced home.
[131]
For reference, households
that pay more than 30% of
[134]
their monthly income for
housing are considered cost
[136]
burden, according to the
Department of Housing and
[139]
Urban Development.
[140]
The cost factor is also why
there is currently a large
[143]
percentage of renters
wondering if they'll even
[146]
ever be able to move from
renting to owning.
[149]
And even condos and
townhouses are raising in
[152]
costs across cities for
half a million dollars and
[154]
up, significantly raising
the down payment amount in
[158]
mortgage loan debt.
[159]
Saving for a down payment is
one of the biggest barriers
[162]
to homeownership.
[163]
The Center for Responsible
Lending calculated that a
[166]
typical worker needs eight
years to save for a 3% down
[169]
payment for a
median-priced home and 30
[171]
years for 20%.
[173]
While certain programs like
FHA loans allow homes to be
[177]
purchased with smaller
down payments, being able to
[180]
afford a high down payment
comes with its own set of
[183]
benefits.
[184]
If you come in with a lot of
money down, it's easier to
[187]
qualify for a mortgage.
[189]
It's also less expensive to
get a mortgage.
[191]
Something like 40% of
families in America have no
[193]
financial margin. They
couldn't even afford a $400
[196]
medical bill or challenge.
[197]
So the idea of being able
to save a 20% down payment
[201]
is almost unimaginable.
[203]
And again, it goes back to
the fact worse than ever
[205]
right now is that food
costs are going up, and
[207]
energy costs are going up.
[208]
Rents are skyrocketing so
much faster than incomes
[212]
right now. All of those get
in the way of families being
[215]
able to save for a down
payment.
[218]
A number of state and local
institutions also offer
[220]
what's known as down
payment assistance programs
[223]
to combat this issue.
[224]
There is not nearly, though,
enough money for those down
[229]
payment programs.
[230]
The other problem has been
that the programs are not
[234]
standardized and it makes
it harder for lenders to use
[238]
them and more reluctant to
use them.
[240]
And it also makes it harder
for people to know about
[242]
them and how they qualify
for them.
[244]
Congress was considering a
big package of downpayment
[250]
assistance for
first-generation homebuyers
[253]
as part of the debate over
Build Back Better last year,
[256]
but the Senate failed to
enact the bill.
[258]
So that's, you know, we're
still hoping that might be
[261]
revived.
[268]
Another prominent issue is
the lack of small-dollar
[271]
mortgages or loans issued
for less than $100,000.
[275]
Having smaller mortgages is
important because by
[278]
definition those are going
to be affordable for a
[280]
family on a more modest
income.
[282]
For first-time homeowners, a
lot of these small-dollar
[287]
mortgages are available for
affordable, low-cost
[290]
properties in urban,
suburban, or rural
[293]
communities.
[294]
And the issue has been
getting worse.
[296]
The total value of mortgage
loans between $10,000 and
[299]
$70,000 and between $70,000
and $150,000 dropped by over
[304]
53% and over 21%
respectively from 2011 to
[309]
2021. Meanwhile, values for
loans exceeding $150,000
[313]
rose by a staggering 240%
plus in the same period.
[318]
It is particularly hard for
people who are buying
[322]
smaller houses with smaller
mortgages to find a lender
[327]
and to get that mortgage.
[328]
And they also,
surprisingly, are more
[331]
expensive.
[332]
Another study found that
denial rates for
[335]
small-dollar loans were
notably higher than denial
[337]
rates for larger loans.
[338]
And it's not because these
loans are riskier.
[341]
Accompanying research found
that applicants for
[344]
small-dollar loans had
similar credit profiles to
[346]
applicants for larger
loans.
[348]
The real reason is profit.
[350]
It costs about the same
amount of money to take an
[354]
application and run it
through your system and fund
[357]
a mortgage and have it
appraised and do all those
[360]
things regardless of how
big the mortgage is.
[364]
So if it costs me the same
amount of money to do a
[367]
$700,000 mortgage as it
does to do a $70,000
[371]
mortgage, but I get all my
fees and my interest based
[376]
on the loan amount. So I'm
going to get a lot less
[378]
revenue on a $70,000
mortgage than I am on a
[381]
$700,000 mortgage.
[384]
The lack of small-dollar
mortgages then drives these
[387]
affordable homes into the
hands of retail investors
[389]
looking for profit.
[391]
Small-dollar homes that
could represent the first
[394]
step on the path to
homeownership for a family
[396]
of modest income are not
being sold with mortgages,
[401]
which means they're
probably being bought for
[403]
cash. That means somebody
with deep pockets is able to
[406]
come in and offer to pay
cash.
[408]
They often buy the homes
through automated systems
[412]
where they buy them without
even seeing the house.
[414]
They get an automated
appraisal, a remote
[417]
inspection, and buy houses
in bulk, and that's pulling
[421]
a lot of houses out of
what's already an overly
[425]
scarce, affordable housing
market for these smaller,
[430]
less costly houses.
[432]
So a lot of harm coming out
of the difficulty of people
[436]
being able to access
small-dollar mortgages.
[438]
In response, homebuyers may
resort to dubious methods to
[441]
purchase a property.
[443]
One example that is
surprisingly prevalent is
[447]
people end up into
something they call Contract
[450]
for Deeds, where it's
essentially you're renting,
[454]
and if you make every
payment on the loan on time,
[458]
you eventually will own the
house.
[460]
But if you miss any
payment, you not only lose
[464]
the house, you have no
equity in it either.
[467]
And there are millions of
these transactions out there
[471]
in the country today.
[472]
And it's because people
don't have the alternative.
[475]
They're being pushed into
those mortgages.
[480]
On top of everything, it's
generally become more
[483]
difficult to qualify for a
mortgage.
[485]
The Housing Credit
Availability Index, which
[487]
represents the lender's
tolerance for risk, has
[489]
remained almost at the same
level since the aftermath of
[492]
the 2008 financial crisis.
[494]
In response to the great
foreclosure crisis, lenders
[497]
and investors got very
tight about their
[499]
underwriting criteria and
have kept them at this sort
[502]
of reactive level since
then.
[505]
The deck is particularly
stacked against borrowers
[507]
with low credit scores.
[509]
As millions of homeowners
went into mortgage
[511]
forbearance programs at the
start of the pandemic, banks
[514]
raised their borrowing
standards for protection.
[517]
During the fourth quarter
of 2021, less than a quarter
[519]
of new mortgages originated
to borrowers with credit
[522]
scores under 720.
[524]
An important part of the
unfairness and the impact of
[527]
that is credit scores
reflect, to a great extent
[532]
how much family and
personal wealth you have.
[536]
If you're a wealthy person,
it is not difficult to get a
[538]
mortgage, but if you have
less wealth and a lower
[542]
credit score, it's really
challenging right now.
[545]
And despite the many
regulations designed to
[547]
prevent lending
discrimination, racial bias
[550]
is still prevalent in the
mortgage industry.
[553]
According to the most
recent data from the Home
[555]
Mortgage Disclosure Act,
denial rates for home
[557]
purchase applications were
18.1% for black applicants
[561]
and 12.5% for Hispanic
white applicants, compared
[564]
to just 6.9% for
non-Hispanic white
[567]
applicants and 9.7% for
Asian applicants.
[571]
Lenders can look up
additional debts of a
[573]
potential homebuyer,
including that of medical
[575]
debt and student loan debt
relative to the loans that
[578]
are in default, which can
limit opportunities for less
[581]
established potential
homebuyers.
[583]
Expecting communities that
have not historically had
[586]
the privilege of financial
liberties to be financially
[589]
secure when making one of
those important purchases of
[593]
their lifetime is like
expecting an athlete with no
[596]
training or coaching to win
a national championship
[599]
title. It's just
unrealistic and it's indeed
[602]
a stretch and has certainly
added to the difficulty of
[604]
home buying in the U.S.
[609]
The easiest way to solve
today's mortgage market is
[611]
resolving the supply of
housing in America.
[614]
If we don't increase the
supply of starter homes,
[618]
first-time homes, and homes
that are accessible for
[621]
working families with low
and moderate incomes, then
[624]
it's going to be really
hard to solve it just from a
[626]
lending perspective.
[627]
We've got to have more
housing. If you just provide
[630]
more credit, it drives up
housing prices even more
[634]
without expanding the
supply.
[636]
Another important aspect is
having a mortgage market
[638]
that supports the needs of
all Americans.
[641]
If we have more supply, we
also should work on down
[644]
payment assistance and we
think we're going to need
[646]
more subsidy there, and
financial counseling and
[649]
preparation to help
families clean up their
[651]
credit and be well prepared
to be able to obtain loans.
[655]
Several measures can also be
taken to overcome some of
[658]
the systemic barriers that
prevent certain subgroups
[661]
from achieving
homeownership.
[662]
Our mortgage system just has
to work for today's economy
[668]
and people who are doing
the right thing scrambling
[671]
to put together a living,
saving as much money as they
[675]
can. But those are just
tougher in this new economy.
[680]
And our mortgage system has
to serve those people who
[683]
are playing by the rules
and not getting a chance to
[685]
get ahead.
[686]
If we want to overcome some
of the systemic barriers to
[689]
homeownership for
households of color, we
[692]
really want to recognize
that and think really hard
[696]
about unpacking those
systemic barriers and doing
[698]
something to address them
directly, like looking for
[702]
alternative ways to assess
credit, looking for ways to
[705]
count income from gig
economy jobs, and second and
[709]
third jobs and seasonal
jobs, and from other
[712]
household members who are
contributing and looking for
[715]
ways to help people with
down payment assistance to
[719]
establish that collateral.
[721]
Continuing to question and
improve the mortgage system
[724]
in the United States is key
to preserving the ideals of
[727]
the American dream.
[729]
Our mortgage system is one
of the main factors that
[734]
decide who has a stable
financial life, who has a
[737]
secure place to live, and
who builds financial wealth.
[741]
And it needs to serve all
of America and it's not
[745]
doing that. And so unless
there are very deliberate,
[750]
significant interventions
and changes in our system,
[753]
we're going to look back in
20 years and find that we're
[757]
even in a worse place than
we were in 2022.
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