What Prevents Access to Affordable Mortgage Loans?

New Episode: The U.S. Housing Supply Crisis: Homeownership Demand Challenges

Hi! I’m Pete Carroll, executive of public policy at CoreLogic and today, I’m going to talk about what’s impeding access to affordable and responsible mortgage loans.

Traditionally, when we think about responsibly underwritten loans, we talk about the “three Cs” of mortgage underwriting: capacity, credit, and collateral.

Capacity means that the borrower has reliable employment and enough income to sustain their mortgage payments over time. Credit means that the borrower has a clear history demonstrating their willingness to consistently repay their debts. And lastly, collateral means the borrower has put a meaningful amount of their own cash, or equity, into the mortgage, giving that borrower “skin in the game.”

Finally, lenders have traditionally taken care to verify the prospective homeowner’s employment, income, assets and any debts the lender relies upon when determining whether the prospective homeowner should be approved for the mortgage loan. With these metrics in hand, lenders could identify responsible borrowers for loans.

As a result, lenders have tended to focus on three key metrics, or underwriting criteria, among others for prospective borrowers: debt-to-income ratio, which is a measure of the potential borrower’s cumulative monthly debt burden relative to their gross monthly income, credit score, which quantifies the borrower’s risk of not repaying their mortgage, and finally, down payment and loan-to-value ratio, which is the measure of how much the prospective borrower will invest in the home as a percentage of the loan amount required to purchase the home at its sales price.

In order to make mortgage credit more available, so more people had the means with which to buy a home, lenders would mix and match the relative strengths of these and other underwriting criteria. For instance, a prospective homeowner might have a high debt-to-income ratio, suggesting that the homeowner may have trouble sustaining their mortgage payment, but on the other hand they have put a large down payment into the home and have an excellent credit score. These so-called “compensating factors” are how lenders traditionally trade-off the risk profiles of different prospective homeowners when determining their mortgage credit approval policies.

This traditional approach of boiling down, quantifying, trading-off, and automating mortgage approval decisions has been very productive over the last 25 years in terms of scaling access to affordable mortgage credit to prospective homeowners. However, this approach is reaching its limit. There are many in the industry who believe there are still millions of credit-worthy prospective low-to-moderate income (or LMI) homeowners who can responsibly qualify for mortgage financing. We just need new methods to qualify them.

Technology innovation has unlocked all sorts of new capabilities that can help responsibly expand credit access to LMI prospective homeowners, who are disproportionately people of color. As previously mentioned, they directly benefit from accumulating equity in their home over time.

In addition, multiple research studies demonstrate that increasing rates of homeownership foster a sense of belonging in the community. Moreover, when responsibly underwritten, affordable mortgage loans are available to LMI communities, this, in turn, stimulates the construction of entry-level housing in the community, creating a virtuous cycle of economic growth.

In our next episode, we will discuss some of the solutions to these homeowner “demand” challenges, including restoring trust in the U.S. homeownership system and identifying new opportunities to create responsible, yet affordable mortgage financing.

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