1.12.2017 How Many Americans Are Missing Out on the “Deal of a Lifetime”

One of the great ironies of the financial world post-recession is the fact that while mortgage interest rates have been at historic lows for the past few years, many Americans have been unable to get a mortgage loan and thus take advantage of these low rates.

This fact was the focus of a recent article in The Wall Street Journal that discussed how credit restrictions put in place by government regulators in the aftermath of the financial crisis have cost many Americans the opportunity for a “deal of a lifetime.” Credit is cheaper and more abundant than ever before for those with solid credit, the article notes. But it’s much harder to get for those without good credit or a stable income.

The Wrong Focus?

An entrepreneur interviewed in The Wall Street Journal article talked about how he shelved plans to start a new mortgage bank because regulatory hurdles would have erased his returns. He believes that regulators and policy makers have focused too heavily on “lowering the cost of capital instead of increasing the availability of credit.”

According to the article, lending for home purchases hit its highest level in nearly a decade during the second quarter of last year. But nearly all the growth in home mortgages came from borrowers with credit scores of 700 or higher. Borrowers with sub-700 credit scores accounted for just 15 percent of mortgage originations during this time, the lowest share since at least 2000.

Even Richard Cordray, the director of the Consumer Financial Protection Bureau (CFPB), has acknowledged the fact that not all borrowers have been able to take advantage of rock-bottom mortgage rates. “The market is not yet supporting access to credit for the full spectrum of creditworthy borrowers,” he said during a speech last October.

One mortgage industry insider put it this way in The Wall Street Journal article: “We are at a point when housing should be going gangbusters. It’s not going anywhere. The people with access to credit have become rich, and the people without access don’t even have a chance to climb up the ladder.”

Discouraging Data

Other data cited in the article sheds even more light on this dilemma. For example:

  • Spending on consumer durables like cars and appliances is 21 percent above pre-recession levels but residential real estate investment is 22 percent below pre-recession levels.
  • New home sales are currently running about 30 percent below the average between 1983 and 2007. In addition, new home sales are lower than every one of those years except during the recession of 1990-1991.
  • Construction of single-family homes has accounted for just 1 percent of GDP on average since 2009 after accounting for 2 percent of GDP on average during the 1990s.

Perhaps most telling of all, it’s estimated that up to 1.4 million Americans who would have been able to obtain a mortgage in 2002 would not be able to qualify for a mortgage today. Indeed, that’s a lot of people who are missing out on the mortgage “deal of a lifetime.”

Also, the lack of access to mortgage loans has a broader effect on the economy than just housing, the article points out. This is because when people buy homes, they also tend to spend money on things like furniture, appliances and other things associated with homeownership.

Homeownership Rate Also Sinking

Another irony is that the bifurcation that has occurred with mortgage lending — where borrowers with high credit scores can get mortgages easily while those with lower credit scores are often shut out — is leading to the opposite of what many policy makers were striving for a decade ago: Higher rates of homeownership in the U.S.

According to The Wall Street Journal article, the homeownership rate has fallen on a year-over-year basis in every quarter for the last decade. The homeownership rate now stands at a 50-year low due to a surge in renting caused in part by the inability of many potential homebuyers to land a mortgage.

President Trump campaigned heavily on a promise to peel back many burdensome government regulations, including scaling back or even eliminating the CFPB. It will be interesting to see how this plays out over the next few years — and whether it has an impact on credit availability.

We’re interested in hearing from you. What are your observations about credit availability in your marketplace? Send me an email at steven@lendtrade.com.