By Nick Timiraos
Sean Dobson wanted to start a mortgage bank four years ago to
serve borrowers with middling credit or irregular income. He
eventually decided that growing regulatory hurdles and other costs
would erase his returns.
Instead, he purchased thousands of homes in states from Texas to
Indiana and now rents them to people who might have been his
borrowers.
U.S. consumers and businesses have enjoyed ultralow borrowing
costs since the financial crisis because the Federal Reserve pinned
interest rates near zero. At the same time, regulators and lenders
intent on fortifying the financial system have clamped down on
risk-taking, making it harder for many borrowers to get loans.
The result is that lending for housing, a pillar of the U.S.
economy, has bifurcated. Well-off households and home builders have
their choice of loans, while many others without solid credit or
stable incomes are locked out.
That dynamic is one reason the U.S. has seen such anemic
economic growth despite aggressive efforts to encourage investment.
Money has been cheaper and more abundant than ever, but -- for some
-- much harder to get.
Policy makers have focused on "lowering the cost of capital
instead of increasing the availability of credit," says Mr. Dobson,
chief executive of Amherst Holdings, an investment firm in Austin,
Texas.
Private investment across the economy is now about 6% above its
prerecession level on a per-capita basis, but that obscures large
differences. Spending on consumer durables, which include cars,
appliances and smartphones, is 21% above prerecession levels.
Residential real-estate investment, however, is 22% below its
prerecession level, according to the Federal Reserve of St.
Louis.
Home prices and sales have risen since 2011, with prices
nationally surpassing their 2006 highs, before adjusting for
inflation. But new construction collapsed so drastically during the
bust that even today it has returned only to levels normally seen
in recessions. Sales of new homes are running about 30% below the
average between 1983 and 2007 and are lower than every one of those
years except for the recession of 1990-91.
"We are at a point when housing should be going gangbusters.
It's not going anywhere," says Lewis Ranieri, a financier who
pioneered the market for mortgage-backed securities in the 1980s.
"The people with access to credit have become rich, and the people
without access don't even have a chance to climb up the
ladder."
Homes are generally the biggest purchase Americans make, and
housing dollars ripple through the economy by triggering spending
on appliances, furniture and landscaping.
Single-family home construction accounted for 2% of gross
domestic product, on average, during the 1990s. It has averaged
just 1% of GDP since the recession ended in 2009.
Lending for home purchases hit its highest level since 2007
during the April-to-June quarter, but almost all the growth has
come from borrowers with credit scores of at least 700. Credit
scores run between 300 and 850, with scores below 620 considered
subprime. Borrowers with scores below 700 accounted for just 15% of
originations, the lowest share of such lending since at least 2000,
according to data provider Black Knight Financial Services.
Regulators have defended the spate of rules implemented after
the crisis while acknowledging the strain. "No economic sector that
precipitates a global financial meltdown could possibly expect to
escape far-reaching reforms," said Richard Cordray, director of the
Consumer Financial Protection Bureau, in a speech to mortgage
bankers in October. Nevertheless, he added, "the market is not yet
supporting access to credit for the full spectrum of creditworthy
borrowers."
Analysts at Pacific Investment Management Co. estimate between
one million and 1.4 million Americans who would have been eligible
for a mortgage in 2002, before the loosening of lending standards
that caused the subprime crisis, couldn't get a mortgage today.
The bifurcation has made the banking system and the economy less
susceptible to the kind of losses that triggered the 2008 financial
crisis, but also shows how policy makers retreated from a
bipartisan push of homeownership.
The homeownership rate has fallen on a year-over-year basis in
every quarter for the last 10 years, and a surge in renting has
dropped the homeownership rate to a 50-year low.
Banks would rather extend more credit to large, established
firms than make lots of smaller loans to mom-and-pop builders, many
of which lost money during the downturn, says Charles Schetter,
chief executive of Smith Douglas Homes Inc., a large, privately
held builder in Atlanta.
"For the first time, the burden of regulation is setting up a
threshold of scale," says Mr. Schetter, whose company will sell 700
homes this year. He started out in the industry building homes with
his father, "when anyone with a hammer, a pickup truck and access
to local tradesmen" could start a company, which he says would be
difficult today.
Consolidation in the home building and banking industries
predated the financial crisis but accelerated during the downturn.
Banks with more than $100 billion in assets held around two-thirds
of construction loans in 2016, up from less than half during the
housing bubble and less than one-third in 2000, according to the
Mortgage Bankers Association.
Suppliers and vendors throughout the housing ecosystem were left
reeling from the crash, and builders say their challenges finding
plumbers, electricians and house framers has begun to limit their
ability to build homes.
Jim Ellenburg started his own flooring supply and installation
company in 2009 after he was laid off from a firm that closed when
builders couldn't pay their bills. He couldn't get a loan to start
the company, so he used his credit cards. Now that his company has
a solid record -- he expects $90 million in sales this year in
three states -- banks are eager to lend.
"That's part of the problem: You can't get credit until you can
demonstrate you don't need it," says Mr. Ellenburg, owner of
Cartersville Flooring Center in Cartersville, Ga.
With home prices nationally now above their highs of last
decade, investors who took huge risks buying tens of thousands of
homes as the market hit bottom are reaping the benefits. Some of
their renters are former owners who couldn't pay their mortgages
after the bust and weren't able to buy again when homes became much
cheaper because they couldn't meet lenders' tightened
requirements.
Mr. Dobson's rental-home firm, Main Street Renewal, rents 11,000
homes in 18 states, primarily in the South and Midwest. "Unless
something changes dramatically in Washington, this is the way a lot
of people are going to be in their first home," says Mr. Dobson,
who is still tinkering with ways to start a mortgage bank.
On a recent Saturday afternoon, Margaret Wooten of the Chicago
Urban League counseled renters at a homebuying fair on the basics
of getting a loan in today's more stringent environment.
On a packed bus touring foreclosed properties about to hit the
market on Chicago's South Side, Ms. Wooten explained how banks'
insistence on using tax returns to verify incomes -- put in place
to satisfy the new ability-to-repay regulations -- had created
bigger hurdles for small-business owners and the self-employed.
They sometimes legally write off business expenses to lower their
taxable income but then can have trouble proving their higher
take-home pay to lenders.
"No, you didn't have to pay Uncle Sam, but you're not going to
get that home, either," she told attendees. Ms. Wooten cautioned
against going out to buy furniture or a new car after getting
approved to buy a home.
"Do not touch anything after you've been approved," she said.
"Leave your credit as it is."
By some measures, mortgage standards aren't any tighter today
than they were in the early 1990s. But demographic changes,
including more households delaying marriage and a higher share of
younger households with less inherited wealth, suggest that, when
combined with more-stringent credit rules, a homeownership rate
below the historical level of 64% "is absolutely here to stay,"
says Laurie Goodman of the Urban Institute think tank.
"I've sat through four years of home-buyer classes where people
know they are missing out on the deal of a lifetime and can't get
the credit to compete for it," says Glenn Kelman, chief executive
of Redfin, a real-estate brokerage that operates in 37 states.
Policy makers have struggled for decades to find the right
lending balance. Beginning in the 1970s, regulators tried to end a
discriminatory practice known as "redlining," in which banks
avoided predominantly African-American neighborhoods.
By the late 1990s, Wall Street rushed into the subprime-mortgage
business, long dominated by local niche lenders, transforming pools
of those loans into highly rated securities. When the Fed started
raising rates in 2004, lenders lowered standards to keep loan
volumes from falling.
"No one thought about affordability or sustainability," says Ms.
Wooten, the Chicago housing counselor. "The only thing they thought
was, 'Everybody can be a homeowner.' That was crazy."
When property values fell in 2007, the riskiest loans defaulted,
credit tightened and the economy ultimately fell into a
recession.
Congress responded in 2010 by passing the Dodd-Frank Act, which
created the new Consumer Financial Protection Bureau, and asked it
and other regulators to flesh out several new sets of rules,
including requiring lenders to ensure borrowers have the ability to
repay loans.
The government took control of mortgage giants Fannie Mae and
Freddie Mac, which together with agencies such as the Federal
Housing Administration guaranteed most new mortgages. Fannie and
Freddie increased fees for riskier borrowers, widening the gap
between mortgage rates available to borrowers with good and weak
credit.
By late 2011, the Obama administration had grown worried about
the cumulative effect of the new rules and ultimately prevailed on
regulators to back off some of the most stringent proposals.
"There was a lot of concern that steps intended to protect the
market would end up locking people out," says James Parrott, a
former White House official involved in those efforts who is now a
mortgage-industry consultant.
Lenders have been reluctant to extend credit to the limits of
what government programs allow because of concerns over lawsuits if
loans ultimately default, and because the costs of managing
delinquent mortgages have soared.
"If we had our druthers, we would never service a defaulted
mortgage again," said J.P. Morgan Chase & Co. Chief Executive
James Dimon in a shareholder letter earlier this year. "We do not
want be in the business of foreclosure because it is exceedingly
painful for our customers...and our reputation."
J.P. Morgan cut its mortgage offerings to 15, from 37, and said
it had "dramatically reduced" its participation in low-down-payment
lending through the FHA. "It is simply too costly and too risky to
originate these kinds of mortgages," said Mr. Dimon.
(END) Dow Jones Newswires
December 04, 2016 13:18 ET (18:18 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.