In 1997, a company then known as Apple Computers adopted the slogan “Think Different”. This much-loved marketing campaign became a Steve Jobs classic as it spoke about the possibilities to influence and change the world around us.
That’s basically our philosophy at Freddie Mac. As the US population ages and becomes more diverse, the needs and expectations of borrowers change. People in the credit industry think differently to find solutions to problems that will benefit our neighborhoods, our industry and our country for decades to come. The most dynamic sector where this is happening is affordable housing.
When I first came to Freddie Mac in 2015, one of the most common questions I received was, “Why don’t Millennials buy homes?” “
Due to the market cycle at the time, most of the housing industry was focused on refinancing. Naturally, this precipitated a drop in the share of first-time homebuyers, to around 30% of all homebuyers.
Fast forward to today: Almost half of the mortgages Freddie Mac has purchased so far this year have been for first-time homebuyers, a lot. But there is still work to be done.
The affordable housing challenge
The last time the United States built a large housing stock was after the end of World War II, when the soldiers were returning home. A recent analysis by Freddie Mac shows that the United States lacks about 2.5 million homes needed to meet current demand. From 1968 to 2008, a 40-year period, there was only one year in which fewer new homes were built than in 2017. And wage growth barely keeps pace with appreciation. house prices, for the first time in seven years.
Additionally, existing homeowners, many of whom are baby boomers, are not looking to relocate or vacate their current homes. And frankly, for those who want, they face the same challenge as a millennial looking to become a first-time buyer: it’s hard to find a home they can afford that will meet their needs as well.
The impact of years of low wage growth, rising house prices and rising rents is causing consumers to save less for a down payment. And when they can save money, it won’t go that far in meeting minimum mortgage down payment requirements. Plus, many borrowers with a lower down payment face the additional cost of a third-party credit enhancement, such as mortgage insurance.
Additionally, lenders are discouraged from focusing on more difficult borrowers with smaller loans. Indeed, pressure has increased on the way loan officers’ remuneration is paid, as well as increased production and fixed costs associated with granting a mortgage. If the fixed costs are high and all income is typically a percentage of the loan balance, then lenders have a significantly lower margin on loans with lower balances. In addition, regulations prohibit differential compensation for loan officers, which limits an employer’s ability to improve the incentives for this type of loan.
A new approach and a new attitude regarding affordable loans is needed. We are thinking differently in this area and leading discussions within the affordable housing ecosystem on how to make an impact.
By leveraging advanced analytics and working with fintech companies to research data and verify information, the industry is helping to streamline the mortgage process and ensure sure and final sales in the secondary market. Any efficiency brought to the loan production process, any dollar saved, is a benefit to borrowers. And the benefit is exponentially greater when efficiency is achieved for the low-income consumer or the inexperienced first-time buyer.
The use of new digital tools has taken off in recent years. Every lender tries to find new ways to control costs while looking for opportunities to better serve a changing customer base. By leveraging data analytics, the mortgage industry can further digitize application processing, speed up underwriting, and bring borrowers to the closing table earlier. It also translates into high efficiency when granting loans to low to moderate income borrowers.
Not only do these technological efficiencies reduce costs and processing times, but they can also significantly reduce lender buyouts. These new technologies are promising and many of them are already showing significant results.
Modernized education and preparedness for homebuyers
Borrowers need and deserve education, advice, and solutions to help them prepare for homeownership. Whether it’s learning the importance of using credit as a tool, buyer’s responsibility, or resources to help borrowers stay in their homes, we are a trusted partner.
For example, down payment programs will likely be more needed than ever in the years to come as young people look to buy their first homes. Together with our partners, we are looking for ways to simplify lender adoption, lower costs for lenders and borrowers, and increase engagement and use of these programs.
Another promising area is to leverage one of the oldest, most trusted and respected partners in the industry – housing counselors. By improving the homebuyer’s advice process with digital self-service tools, potential homebuyers could overcome barriers to getting a mortgage on demand and at their convenience. This would allow housing counselors to focus more on troubled areas such as reducing debt, improving credit, and establishing better budgeting behaviors. And other innovations will help bring their expertise closer to the mortgage manufacturing process.
The aftermarket will be a catalyst to help the industry take a different view of the affordable housing ecosystem. It touches many points of the system, works with lenders, provides low down payment options for low-income first-time homebuyers, and works closely with the investors who buy the securities.
The credit industry can also get involved in education and awareness efforts across the business. It can get involved at the community level, helping families in markets ranging from urban to rural, where lenders can work with housing groups, community organizations and everything in between.
In a well-functioning housing ecosystem, real estate professionals, housing organizations, community groups and other stakeholders work together to help keep business flowing and help develop responsible home ownership.
The affordable future loan will require that we all work together across the ecosystem, think differently about future opportunities, and harness new tools and resources to make home possible. Lenders should focus on building the future of the home through ideas, education, mortgage products, and business solutions.
All of us. All-in. Everything for the house.