ISSUE: Mortgage Finance

Mortgage Finance

By Sharon O’Malley and Jean Dimeo

Has the home loan industry recovered?

Executive Summary

Nearly a decade after housing prices peaked in 2006 and then crashed the following year, qualifying for a home mortgage has become an onerous process, with cautious banks enforcing ultra-strict underwriting standards. Mortgage lenders are struggling to find a balance where their lending criteria are strict enough to protect against defaults and government penalties, but flexible enough to allow creditworthy borrowers to qualify for loans. Compounding that struggle are a slew of new government rules for how banks must qualify borrowers, aimed at protecting potential homeowners from unscrupulous lenders; a secondary mortgage market dominated by the government and nearly devoid of private capital; and a generation of young adults who, for reasons ranging from high student debt to their preference for renting over owning their homes, are entering the mortgage market more slowly than their parents and grandparents did at the same age. Among the key issues: Has the mortgage market fully recovered from the subprime mortgage crisis? Should the government step out of the secondary mortgage market? Will higher mortgage interest rates kill the housing recovery?

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Resources

Bibliography

Books

Shiller, Robert J., “The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It,” Princeton University Press, 2008, with a new preface by the author, 2012. The 2013 Nobel Prize winner, Yale professor and developer of the S&P/Case-Shiller Home Price Indices offers six long-term solutions to avoid the problems that led to the rise of subprime mortgage lending and the 2008 financial crisis.

Warren, Elizabeth, “A Fighting Chance,” Metropolitan Books, 2014. The consumer advocate-turned-U.S. senator, widely considered the brains behind the Consumer Financial Protection Bureau, mingles her life story with political narrative and a scathing commentary on financial institutions.

Articles

Anderson, Eric S., “Maintaining Capital in the Secondary Mortgage Market: Housing Finance Reform and the Liquidity Coverage Ratio,” North Carolina Banking Institute Journal, University of North Carolina School of Law, 2015, http://tinyurl.com/o6coxl7. A University of North Carolina law student reviews, analyzes and compares congressional efforts to reform the secondary mortgage market.

Pollock, Alex J., “How to Revive The Private Mortgage Market,” The Wall Street Journal, April 14, 2015, http://tinyurl.com/ngqsgos. The federal agency that oversees Fannie Mae and Freddie Mac should force the companies to raise fees, thus making it easier for private-sector capital to enter the mortgage market, argues a fellow at the American Enterprise Institute.

Stevens, David H., “The New Housing Crisis?” LinkedIn, June 19, 2015, http://tinyurl.com/pvltl8q. The CEO of the Mortgage Bankers Association, a former top Obama administration housing official, argues that Washington policymakers are not paying enough attention to housing issues.

Stewart, James B., “Eight Days: The battle to save the American financial system,” The New Yorker, Sept. 29, 2009, http://tinyurl.com/nw3teh8. The author of the weekly New York Times business-insider column “Common Sense” details “the most important week in American financial history since the Great Depression,” when the architects of the federal bank bailout decided to let investment banking giant Lehman Brothers fail.

Reports and Studies

“22nd Annual ABA Real Estate Survey Report,” American Bankers Association, May 2015 http://tinyurl.com/q97exlh. The industry group representing commercial bankers summarizes key findings of its annual survey of mortgage originations, the characteristics of those loans and the impact of government regulations on the institutions and their lending practices.

“The Financial Crisis Inquiry Report,” Financial Crisis Inquiry Commission, January 2011, http://tinyurl.com/7m5m8vb; Hennessey, Keith, Douglas Holtz-Eakin and Bill Thomas, “Causes of the Financial and Economic Crisis,” Financial Crisis Inquiry Commission, January 2011, http://tinyurl.com/bpo252b. The report of the federal commission appointed to investigate the 2008 financial crisis recounts the history and causes of that event and concludes that it was avoidable. The dissenting statement of three members—Hennessey, Holtz-Eakin and Thomas—zeros in on what they see as the key causes of the crisis; their analysis includes a discussion on “Turning Bad Mortgages into Toxic Financial Assets.”

“A House Divided: How Race Colors the Path to Homeownership,” Zillow, Jan. 15, 2014, http://tinyurl.com/p7ugprv. Economists and staff at the online real estate marketplace analyze federal Home Mortgage Disclosure Act data to compile a status report on the institutional barriers confronting blacks and Hispanics seeking to become homeowners.

“Reforming America's Housing Finance Market: A Report to Congress,” Department of Treasury and Department of Housing and Urban Development, February 2011, http://tinyurl.com/nclhgdo. The document on which President Obama based his 2013 proposals for housing and mortgage finance reform.

Bocian, Debbie Gruenstein, “Mortgages: The State of Lending in America and its Impact on U.S. Households,” Center for Responsible Lending, December 2012, http://tinyurl.com/pgnd9v9. The then-principal researcher at the fair-lending advocacy group Center for Responsible Lending details the history of mortgage lending, its regulatory environment and predatory lending.

Lux, Marshall, and Robert Greene, “What's Behind the Non-Bank Mortgage Boom?” Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School, June 2015, http://tinyurl.com/qa3ento. Two Harvard researchers examine the role of nonbanks—lenders that do not accept deposits—in the mortgage market.

Snowden, Kenneth A., “Special Report: Mortgage Banking in the United States, 1870–1940,” Research Institute for Housing in America, October 2013, http://tinyurl.com/p7np6eq. A University of North Carolina, Greensboro, economics professor presents a thorough history of mortgage banking in the United States, from the early farm mortgage market through the Great Depression and the growth of the urban mortgage market.

Zandi, Mark, and Cristian deRitis, “The Future of the Mortgage Finance System,” Moody's Analytics, Feb. 7, 2011, http://tinyurl.com/onapre3. The chief economist at the financial market analysis company and a director of the firm's credit analytics group analyze how a future mortgage finance system would operate if it were nationalized, privatized or a hybrid, with recommendations for transitioning from the current system.

The Next Step

Foreclosures

Light, Joe, “As Home Prices Rise, the Foreclosure Crisis Continues to Recede,” The Wall Street Journal, Aug. 13, 2015, http://tinyurl.com/nd7pvmo. Foreclosures and mortgage delinquencies both fell during the second quarter of 2015, though foreclosure rates remained higher than the national level in states where foreclosures must go through judges.

Morrow, Matthew, “Are Zombie Foreclosures Killing the Neighborhood?” Fox Business, Aug. 6, 2015, http://tinyurl.com/nhbgqnt. One-fourth of foreclosures in the United States can be classified as “zombie” foreclosures, where homes remain unsold or unattended after former owners vacate them, even though the lender has not taken possession.

Svaldi, Aldo, “Denver leads nation in foreclosure of homes with positive equity,” The Denver Post, July 30, 2015, http://tinyurl.com/ne7lgyf. Almost 84 percent of foreclosed homes in the Denver area sell for more at auction than the amount owed on the original mortgage, roughly double the national rate for positive-equity foreclosures.

Home Sales

Chandra, Shobhana, “Sales of New Homes in U.S. Increased 5.45 in July to 507,000,” Bloomberg Business, Aug. 25, 2015, http://tinyurl.com/npax4kv. New-home sales bounced back in July, adding to evidence that the housing market is strengthening.

Collins, Jeff, “New home index seeks to predict market's future,” The Orange County [Calif.] Register, July 27, 2015, http://tinyurl.com/ns2elds. Seattle-based real estate firm Redfin developed an index that it says predicts changes in the housing market by analyzing current buyer activity, rather than closed sales, with data from its own real estate agents.

Shell, Adam, “Wall Street sees hope in home sales,” USA TODAY, Aug. 20, 2015, http://tinyurl.com/on8ay5a. Stock prices for housing-related companies have risen during the summer following growth in both sales of existing homes and new-home construction.

Lender Disclosure

Harney, Kenneth R., “Already full of complications, closings may soon grow even more worrisome,” The Washington Post, Aug. 19, 2015, http://tinyurl.com/nzdsamv. Bankers, insurance workers and real estate agents say new rules requiring lenders to give borrowers more time to review mortgages could prolong already lengthy transactions.

Lipka, Mitch, “Get ready for electronic mortgage closings,” CBS Moneywatch, Aug. 5, 2015, http://tinyurl.com/nzww9vw. The federal Consumer Financial Protection Bureau said electronic closings, a pilot project to be introduced with new mortgage-disclosure rules, could enhance borrowers' understanding of the terms of their loans.

Pedersen, Brian, “New mortgage-disclosure law has agents, banks scrambling,” Lehigh [Pa.] Valley Business, Aug. 10, 2015, http://tinyurl.com/pgjjmvd. Real estate firms say they will more closely monitor borrowers' paperwork and improve communication with lenders once new requirements for better disclosure and borrower review periods begin in October.

Millennials and Housing

Boak, Josh, “More millennials stuck renting for years before buying home,” The Associated Press, Aug. 17, 2015, http://tinyurl.com/qbyssjw. Millennials are renting for six years on average before buying their first homes, which cost far more relative to their current income than in previous generations.

Fried, Carla, “Here Come Cheap Mortgages for Millennials. Should We Worry?” Time, Dec. 10, 2014, http://tinyurl.com/nhw6aeb. New federal programs catering to prospective millennial homebuyers will allow middle-income, first-time borrowers to make down payments of as little as 3 percent on home purchases.

Martin, Susan Taylor, “Economist says millennials will determine future of housing market,” Tampa Bay Times, Aug. 14, 2015, http://tinyurl.com/p5hezmc. Household formation, employment and income growth among millennials will affect the current housing market's recovery more than those of any other generation, according to the chief economist at Fannie Mae.

DOI: 10.1177/2374556815606118