“A Crack in the Foundation?” Part 4: A Cautious New World
In the digital age, industries evolve at a breakneck pace, spurred on by technological advents and process enhancements. And yet, as anyone in the mortgage industry knows, change here is less accelerated. We adapt more slowly, seeking respite in the comfort of our well-worn processes and traditions.
The complexity of the mortgage industry necessitates that evolution occurs slowly, and the powers (and policies) that be often set the rate of change. As we look towards the future of our industry, it’s imperative to scrutinize our past to understand the possibilities of our future.
Welcome to “A Crack in the Foundation?”, our four-part series in which we will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.
Part 4 brings us to present day, stopping along the way to check in on how our economy and industry has recovered since the crash. We’ll also explore what history can teach us about building our future, and identify ways lenders can ensure their longevity and prosperity.
Read on to get started.
Welcome to the final installment of “A Crack in the Foundation?” Now that we’ve successfully trudged back through the archives for a reminder of our past, it’s now time to focus on what we’ve learned from it. Traipsing back through the past, patterns emerge. What can we take away from the past to prevent ourselves from falling into the same cycle?
It’s been just over 10 years since the crash, but there’s a creeping sense that we’ve forgotten our past mistakes too quickly.
Home values are shooting up rapidly. In 2016, home prices rose twice as fast as inflation. And in nearly two-thirds of the country, housing price growth exceeded wage growth. While homes in some towns remained affordable, in places like Manhattan and San Francisco buyers would need to fork over between 95 and 120 percent of their average paycheck to afford a mortgage payment.
Sound familiar? Reminds me of that 25% year-over-year price appreciation that was happening in 2005.
The difference is that, this time around, the myth of the American Dream isn’t quite so infectious.
One Trulia survey found that the share of 18 to 34-year-olds who consider home ownership as part of their “American Dream” had dropped from 80% to 71% in just four years.
Trulia Senior Economist Cheryl Young explains:
“The share of young Americans that say homeownership is part of their personal American Dream is falling, likely driven lower by increasing housing costs and a series of obstacles — from student loan debt to unsteady employment — that their older peers don’t have to contend with.”
The American Dream — initially popularized during the Great Depression by the historian James Truslow Adams in his Epic of America — has been shattered.
As Frank Rich notes in New York Magazine:
“No longer is lip service paid to the credo, however sentimental, that a vast country, for all its racial and sectarian divides, might somewhere in its DNA have a shared core of values that could pull it out of any mess.
Dead and buried as well is the companion assumption that over the long-term a rising economic tide would lift all Americans in equal measure. When that tide pulled back in 2008 to reveal the ruins underneath, the country got an indelible picture of just how much inequality had been banked by the top one percent over decades, how many false promises to the other 99 percent had been broken, and how many central American institutions, whether governmental, financial, or corporate, had betrayed the trust the public had placed in them.”
Last time around, the optimism bias got to us. Home prices would always appreciate. Owning a home is the quickest way to build wealth. And so on.
This time around, the borrowers aren’t buying into the idealism of the American Dream. Millennials are skeptical — of taking on more debt, of financial institutions, of the next bubble bursting.
Mortgage lenders can’t reach them without addressing the deeper financial literacy issues at hand. The desire for homeownership is still there. Some sliver of hope for the American Dream remains, but it’s a far more pragmatic dream now.
The financial crisis left all of us — borrowers, lenders, builders, regulators — more risk averse. While regulations like Dodd-Frank altered the financial world and put more safeguards in place, “lenders and investors also lost their appetite for risk and have changed their behavior,” says Sam Khater, chief economist at Freddie Mac. “As a result, mortgage performance is better than it has been in 20 years.”
Recovering from the crisis has been an arduous process, and we’re still trying to find our sweet spot in terms of risk assessment. Have we over-corrected?
At this point, we’re so risk averse that we might even be keeping low-risk borrowers out of the market:
“A study by the Urban Institute found that between 2009 and 2016, there were 6.3 million people with FICO scores between 660 and 710 who normally would have qualified for a mortgage before the crisis who couldn’t get a loan,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings. “The irony is, they might have qualified based on the guidelines from Fannie Mae and Freddie Mac and FHA, but the lenders themselves were reluctant to take on any risk.”
We’ve clearly learned our lessons from the past, and as we see more de-regulation in the industry, maybe it’s time to let our guards down a little bit. With more due diligence built into the origination process, with innovative technology to help us remain compliant, maybe it’s time to start reaching out to those borrowers who could own homes but don’t, either because they don’t know they can or because they’re too afraid to even try.
The mortgage industry has, in large part, made a business out of information asymmetry. That asymmetry is further pushing away millennials that could be homeowners. These potential borrowers can be coaxed out with honesty and no-strings-attached financial education.
Don’t call me a cynic, but I’m not going to hold my breath for the government to lead the charge on financial education. The onus is on us to lead with facts and teach millennials that owning a home is still the quickest way to build wealth, that home ownership is still a smart investment if it’s done right — with guidance from a mortgage professional who empowers you to make that investment with full knowledge of all the nuances of the process
And as a millennial, let me tell you: we are great at detecting BS. We grew up in the age of Internet scams. We are skeptical about being sold to, even more so when it’s by someone who stands to gain personally from selling to us.
The cultural and psychological imprint left by the crisis is deeply embedded, and overcoming that with millennials — need I remind you, now the largest segment of the market — starts with authenticity, empathy, and financial literacy.
The financial crisis, and the economic periods of struggle before that, can also teach us a little something about diversity. A lack of diversity at the top also meant a lack of different points-of-view from which to spot the looming disaster. Different opinions mean a more nuanced approach to mitigating risk.
Research shows that having diverse teams can improve the quality of decision-making at all levels, reduce the echo-chamber effect, and increase the number of perspectives, which in turn provides an environment for catering to an array of borrower needs. And, if we’re really going to see another recession soon, as some economists predict, the more diverse your team, the more likely its predictive capability in the face of uncertainty.
And, to bring it back around to borrowers, diversity helps on that front too. We are increasingly a more diverse population. 44% of millennials are minorities. Generation Z is even more diverse — nearly half (48%) of Gen Zers are racial or ethnic minorities.
Spend more than 30 seconds at a mortgage conference and you’ll quickly see how our demographic makeup doesn’t exactly represent the diversity seen in the millennial generation of homebuyers.
We tend to gloss over the racially targeted predatory lending that happened before the crash, and we need to learn from that experience by not pretending it wasn’t an issue.
As political analyst Matt Bruenig notes:
“Obviously there’s a racial component [to the financial crisis] that I feel has been very overlooked. I don’t think people realize just how bad the Great Recession was for black and Latino families. The level of wealth decline in those groups [was very significant].”
All of that to say, millennials are already wary. Minority millennials even more so. Diversifying your team couldn’t hurt, whether that be in terms of age, gender, race, or what have you. All it does is give more borrowers more of a reason to open up and replace their skepticism with trust in someone who they can relate to.
Another lesson learned from our recent past is the importance of playing the long game. Parts 1, 2, and 3 of this series demonstrated, time and time again, how the quick fixes that created prosperity in the short-term often had a much larger cost in the long-term.
Just look at the Federal Housing Administration. The decades leading up to the crash saw Fannie and Freddie booming, and the FHA was out of the spotlight. As private subprime lending took over the market for low down-payment borrowers in the mid-2000s, the FHA saw its market share plummet.
In 2001, the FHA insured 14% of home purchases. By 2005, that number had decreased to less than 3%. The FHA toed the line and maintained their lending standards, and their actions actually prevented home prices from dropping an additional 25%, which in turn saved three million jobs and half a trillion dollars in economic output.
The long-term game isn’t always sexy but — especially in this industry, where change takes decades to come home to roost — it’s crucial to think about the long-term impact.
We cling to our tried-and-true processes without thinking about the true, long-term costs of those precious minutes lost chasing down borrower docs.
Your team’s efficiency matters to your bottom line. Your team’s process matters to your borrower’s happiness. Stop inhibiting long-term progress for the sake of avoiding temporary discomfort or inconvenience. Update your infrastructure before it degrades. Invest in technology the augments your team’s strengths.
Evolve ahead of the curve, rather than riding its coattails into the future.
We live in a post-crisis world and here, everything is different. With de-regulation on the rise and the uncertainty of GSE reform just around the corner, our foundation feels increasingly shaky, and we have to learn from our past to compensate for that inherent instability.