Has the Mortgage Pendulum Swung Too Far? Reviving Access to Mortgage Credit

Abstract

In the wake of the financial crisis, mortgage lending to lower-income and minority borrowers overcorrected and has not recovered. While homeownership is a riskier investment than previously realized, still it remains a proven path to increased wealth on balance for lower-income households. There are a number of reasonable reforms that could achieve greater access to credit while containing default risk. These include strategies to reduce down payments safely and to keep monthly payments manageable, combined with fixed-rate loans. Pre-purchase counseling is important to preparing applicants for the financial demands of homeownership and strengthening their credit histories, while rapid foreclosure prevention counseling can reduce foreclosures dramatically for borrowers who miss payments. In addition, larger, structural changes to the lending industry, mortgage regulation, and housing finance are needed to remove artificial institutional barriers to the flow of responsible credit. In the short term, these include countercyclical rules to minimize credit bubbles and investor reforms to alleviate lenders’ liability concerns for inadvertent misrepresentations and minor underwriting errors affecting loans. In the longer term, mortgage finance could be re-envisioned to integrate housing counselors, real estate professionals, and economists into the mortgage supply chain to produce better borrowing decisions at favorable pricing. Closing the circle, ensuring an adequate supply of affordable rentals would give lower-income households the flexibility they need to make the right housing decisions for their personal circumstances at each stage of their lives.