If homeownership is more affordable than ever, why is it so tough to get a mortgage? That’s a big question confronting many families who find themselves shut out of the mortgage market and unable to take advantage of today’s record low rates and favorable home prices.
Utilizing the “housing affordability” index developed by the National Association of Realtors, Harvard’s Joint Center for Housing Studies in its most recent “State of the Nation” report tells us that owning a home is more affordable than at any time in 40 years.
As the Joint Center explains: “….assuming a 20-percent downpayment, the monthly mortgage payment on the median-priced home was just $644 in 2012, the lowest level since 1972 when records began. This compares with a peak of $1,266 in 2006, when interest rates were at 6.4 percent and home prices were substantially higher.”
Unfortunately, exceptionally tight mortgage credit conditions, including high FICO score and loan-to-value requirements, have made getting a mortgage almost impossible for many would-be homeowners. Those seeking to buy a home for the first time have been particularly disadvantaged.
A major factor contributing to tight credit is regulatory uncertainty. With lenders unsure of the rules under which they operate, they are exercising more caution and originating mortgages only for borrowers with the most pristine credit records.
Put-back risk—the risk that Fannie Mae, Freddie Mac, and the Federal Housing Administration will hold lenders liable for the “reps and warranties” associated with loans purchased by the agencies—continues to be a big concern. In response, some lenders have imposed additional underwriting requirements to further insulate themselves from liability.
Implementation of the Dodd-Frank law also remains a source of uncertainty. While the Consumer Financial Protection Bureau has defined what constitutes a “qualified mortgage” demonstrating a borrower’s ability to repay the loan, we still await a regulatory definition of what constitutes a “qualified residential mortgage,” or QRM. The purpose of the QRM rule is laudable: to ensure that issuers of mortgage-backed securities have some “skin in the game” when they package the loans. The danger, however, is that an overly restrictive QRM definition that fails to align with the qualified-mortgage standard will increase uncertainty and likely hurt first-time and low-wealth homebuyers without making our mortgage system more stable and safe.
On top of all these concerns is the mystery surrounding the ultimate fate of Fannie Mae and Freddie Mac. Without a clear vision for a new system of housing finance, the uncertainty in the mortgage marketplace will continue.
While we welcome the housing market’s recovery, it also means that home prices are on the rise. In addition, mortgage rates may continue to trend upward. Both factors are likely to make homeownership more expensive, underscoring the need to act promptly to reduce regulatory uncertainty so that more families can benefit from today’s record levels of affordability and enter the homeownership ranks.
Former Senator and Housing and Urban Development Secretary Mel Martinez serves as a co-chair of BPC’s Housing Commission.