As origination costs continue to climb due to regulations and the sheer cost of compliance, lenders are finding fewer borrowers knocking on their doors. According to the Mortgage Bankers Association's weekly survey, loan application volume fell nearly 20% in the past four months compared to the same period in 2012.
Unemployment rates are shrinking and the housing prices are slowly, but surely, recovering. So why are fewer would-be borrowers applying for loans? Part of the answer has nothing to do with the state of the housing supply or the mortgage industry: the growing burden of student loan debt.
According to the Consumer Financial Protection Bureau, student loan debt has surpassed the $1 trillion mark. Seven out of 10 college graduates in 2012 have an average of $29,400 in student loan debt, compared to $26,600 for 2011 graduates, according to the Project on Student Debt at the Institute for College Access and Success.
The high student debt burden is stifling the willingness to enter into a mortgage from both the lender’s and the consumer’s perspective.
From the lender’s side, the Qualified Mortgage rule has codified tightened standards for lenders wanting to close QM-eligible loans by requiring a debt-to-income ratio of less than 43%. With more young adults making large student loan payments instead of saving up for a down payment, combined with car payments and possibly credit card debt, the 43% DTI becomes a very difficult barrier for lenders working within the QM standards.
The issue is already coming to a head. According to David Stevens, president of the MBA, first time homebuyers usually make up 40% to 45% of the mortgage market, but today that percentage sits around 35%. The QM rule is subliminally regulating a whole new generation of Americans out of homeownership—the American dream halts after education, job and family.
If lenders are reluctant to make loans to young consumers, the student debt load is making consumers reluctant to seek them. Young adults are unwilling to add additional debt to their already hefty monthly payments. Add the experience of watching their parents suffer through a down cycle in home prices, and they do not have the confidence that a home is as strong of an investment as previous generations.
So what's the solution, knowing that QM is a fact of life? For starters, applicants for student loans should be presented with disclosures like the bureau's Know Before You Owe forms for mortgages, highlighting loan terms to prevent confusion and showcase their best options. Key findings from the CFPB’s 2013 mid-year summary of customer complaints highlight common pain points specific to student lending, including, “problems getting information, receiving conflicting information and payment processing of loans,” according to a summary by the customer analytics firm Beyond the Arc.
Taking on additional debt makes prioritizing a complicated feat, one that requires guidance and explicit terms that not only encourage purchasing a home, but ensure borrowers can make monthly loan payments for both student and mortgage obligations.
Lenders are keen to offer college students—some without much of a credit score or a credit score at all—loans to pursue their education, believing they will find jobs after graduation and make substantial monthly payments to pay off the debt. The cost of education is now taking a toll on the housing market. Major life decisions—such as buying a home—are being temporarily or permanently delayed because regulations deem them “unqualified” for a mortgage loan, even though these would-be homebuyers were qualified for a student loan a few years prior.
Specific disclosures for borrowers considering student loan debt would highlight the most important information to borrowers and help them understand the long term implications of taking on large student loans. An unintended consequence of the QM rule is regulating an entire generation out of homeownership. Young consumers may not know now what the QM rule means now, but they will soon find out when they choose to pursue a mortgage and discover stiff barriers to entry. Transparency of student loan terms and conditions would help future homebuyers plan to afford student loan payments and purchase homes.