Last week, I focused a bit on what could be one of the more dangerous threats to the mortgage business of the near future. Student loan debt is growing like a mushroom cloud and it threatens to blow away any chance our industry has of enticing young Americans to take on more debt in the form of a home mortgage. I also vented a bit about how partisanship in Congress could be killing a chance that our government has to benefit borrowers in the future by making it hard to get such student debt under control.
Mortgage Bankers Association President Dave Stevens recently commented that “Student debt trumps all other consumer debt. It’s going to have an extraordinary dampening effect on young people’s ability to borrow for a home, and that’s going to impact the housing market and the economy at large.” The Federal Reserve Board recently weighed in too, reporting that the homeownership rate fell twice as much for 30-year-olds who had a history of student loans than it did for those without such debt.
Now, I am so concerned that I was going to file a complaint with the Consumer Financial Protection Bureau (Cop on the Beat!) about the unfair education lending practices and while I am at it I will also complain about payday loans too. Maybe that will get the agency to focus on something other than the mortgage market, but I am not holding my breath.
I can’t convince the CFPB, maybe I can convince you that the real problem is no longer consumers getting handed a raw deal by the mortgage lender; now it's about consumers wising up to the fact that they can’t handle the debt they’ve already been forced to take on in the name of higher education. As these graduates get their first job and begin to earn money, they will face their first buy-or-rent decision - whether to embrace the American dream, which is normally considered to be homeownership, although the college-age generation probably dreams more about unlimited data plans.
But if these burgeoning prospective homeowners do think about moving out of a rental (or the always popular parent basement “rent free” option), they are going to face a tough time during prequalification. After all, if 20% of your income is eaten up with college debt payments, you had better embrace renting until the income goes way up -- probably doubles -- before you can reasonably expect to get a mortgage approval.
Some may call this a problem with the system or big government gone wrong, but people in my profession have seen this problem many times. It’s a sales problem.
If we want to succeed big in the purchase money mortgage market of the future, we’re going to have to educate the potential first-time homebuyers that buying is the right decision to make.
How big of a problem is this? Well, the National Association of Realtors recently completed a study that showed that over half of (would-be) first time home buyers who did not have enough for down payment cited “student debt” as the primary reason. So, what can be done to help tackle this problem?
The first option is refinancing. Not mortgage refinancing, but education loan refinancing. Sen. Elizabeth Warren has recently proposed that rules be changed to allow wide-ranging refinance options for student loan debt, some of which is still above 5%, to much lower rates. This would allow a reduction of payments, freeing up cash flow to put toward a mortgage, and save up for the down payment.
Now, I am sure that we mortgage originators are not going to run out and start refinancing student loan debt instead. But it’s going to become important for originators to understand what options exist for our prospective homeowners, guide them on actions they can take to lower their student loan payments, and thereby move them closer to homeownership. This may mean being an expert on student loan restructuring and referring prospects to the refinance or restructuring options that exist. It also means having tough talks with these first-timers, and making sure that they don’t just stop making the student loan payments to try and save up for the downpayment. After all, a delinquent student loan is a major hit on credit scores, especially for those who have limited credit history to begin with.
The other way to help these prospects is to be sure they know their options for down payment. A recent survey shows that the typical first time home buyer thinks that the required down payment for a home is 11% to 15%. These folks obviously did not take a class in real estate financing at college (do such classes exist at the undergraduate level?), so despite their fancy degrees, these prospects need some more education. A good originator needs to be prepared to teach these consumers what options really exist for mortgages and also the requirements for down payments. I was recently speaking with Rob Chrane of Down Payment Resource, a company that maintains a database of all the local homeownership and down payment assistance programs in the U.S.
On average, he told me 70% of homes now for sale in the United States would be eligible for down payment assistance programs -- assuming that a buyer is eligible. And a lot of first time home buyers are eligible.
That statistic was amazing to me, since I know that so few home buyers avail themselves of these options. So, maybe the best originators will be the ones that will know all about these options and be committed to teaching prospects about them.
Now, this is not as easy as working with the super qualified, or hammering out yet another mortgage refinancing. But the market has changed, and being able to help real estate agents lead these prospects through this maze is a great way to demonstrate an originator’s value to that real estate community. Maybe that is the type of education we need to address the problem of student loans.
Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience.