Since the early twentieth century, the goal of homeownership has been almost synonymous with the American Dream. Because of the real and perceived benefits of owning a home, there has been a steady progression of governmental efforts to make this status achievable. Despite the longstanding national policy to encourage homeownership, however, a recent string of reports has presented some troubling news. These reports provide a disturbing picture of homeownership trends over the past several years and some clues about what is causing these trends. While the economy officially moved out of recession back in 2009, and there are signs that the value of homes has begun to climb again, there is a widespread belief that changes in the marketplace have not worked to the benefit of average Americans who want to own the home in which they live. Taking a comprehensive look at the housing finance landscape leads one to the conclusion that many of the policies we are pursuing as a nation have the unintended consequence of reducing the ranks of homeowners in the United States.
The most disturbing report comes from the Harvard Joint Center for Housing Studies. In its annual report issued in June on the state of housing across the country, the Joint Center described a continuing, steady, and precipitous decline in the nation’s homeownership rates. This trend began in 2006 and has continued, unabated, through the second quarter of 2013. More troubling is that the trend is most pronounced within those demographic groups with the most ground to make up: African-Americans, Hispanics, young people, and first-time home buyers. The report goes further to attribute much of the cause of the decline to increasingly stringent lending standards on the part of mortgage lenders nationwide.
A second body of data came out in March and April of this year, when both Freddie Mac and Fannie Mae released loan level data on large pools of mortgages originated in 1999 through 2012. The data show a strong correlation among loan characteristics, such as credit scores, the appraised value of the collateral, and the track record of the borrower in paying the loan. The data also reveal that the correlation between marginal credit and/or excessive leverage at origination and poor loan performance grows stronger as property values decline in an economic downturn.
The third major release occurred with the final progress reports of the Monitor of the $25 billion settlement fund that resulted from the litigation brought by the federal government and 49 state attorneys general against five of the largest mortgage loan servicers. When examined in the aggregate, the performance of the five settling servicers as described in those reports shows overall compliance with a major restructuring of mortgage loan servicing systems throughout the country, as well as payments of billions of dollars to hundreds of thousands of borrowers who may or may not have suffered injury as a result of servicing practices. The Monitor’s reports immediately drew mixed reactions from policy makers, but there is near universal agreement on one point: the cost of administering a mortgage loan that has gone into default will increase dramatically in the years ahead. As a result, there are increasing incentives embedded in the servicing rules to make only those loans that have the highest probability of performing throughout their lives.