Credit Innovation: The Unsung Hero of the American Dream
John Paasonen is Co-founder & CEO of Maxwell, Denver. The company was founded in 2015 and works with lenders looking for a digital mortgage services and technology partner. Its platform is designed to make teams more efficient and improve their borrower experience. The company’s website is https://himaxwell.com/.
I love credit. After a 20-year career in banking and financial services, most of it in consumer credit, I’ve seen how leverage–used wisely–empowers consumers and generates wealth, especially in real estate.
Since the idea of credit financing was created, it has fueled economic progress. The infrastructure demands for large factories, industrial farming, canals and railroads during the Industrial Revolution drove the creation of the modern banking system. Credit expanded buying power. Before the creation of the modern mortgage in the 1930s, purchase power was only as big as the cash in a homebuyer’s bank account. Introduction of longer maturities in the mortgage credit system marked the first time American consumers began to carry long-term debt. By the time the 30-year, fixed-rate mortgage came into vogue in the 1940s, credit made the homeownership dreams of millions of Americans come true and has fueled wealth creation in this country.
As a society, we quickly became more comfortable with the idea of carrying debt, and as we did, credit innovation drove waves of growth at both the macroeconomic and individual level. We know better than anyone the insurmountable value created by mortgage credit; we get to witness the “American Dream” come true each day for Americans who use credit to buy homes worth far more than their annual income. As of 2016, the average net worth of a homeowner was $231,400, compared to only $5,000 for a renter. Homeownership and related services are 20% of our country’s GDP, and studies have shown that homeownership drives higher education rates, more civic involvement, and safer neighborhoods.
But the market is challenging today. Increasing housing prices and low inventory, especially for first-time homebuyers, are an ongoing issue. Every one of Maxwell’s lenders has a stack of pre-approved homebuyers that can’t find or afford their new home. In 1988, the average price of a home was $147,700 with 1,995 square feet. Just over 30 years later, the average home price is $383,500 with an average size of 2,641 square feet. So while the mortgage industry can’t build new homes, we do have a powerful tool at our disposal to drive change in the industry: credit innovation.
And change it must. Not only is our market different, but our society is too. In 1960, 68% of twentysomethings were married; in 2008, that number was just 26%. The average age of a first-time homebuyer in 1960 was 24 to 25; in 2018, the average first-time homebuyer was 34. Add to that the growing burden of student loan debt, for Millennials and their parents alike. We’ve seen the Millennial generation peak later in being able to afford a home. Today’s prototypical borrower looks remarkably different than that of 50 years ago, and the gig economy and ‘side hustle’ phenomenon has further added to this transformation with more diverse and variable streams of income. So why haven’t we dramatically adapted our financing products to accommodate these dramatic shifts in borrower dynamics?
The U.S. is one of the only countries in the world to have a 30-year fixed mortgage loan, with France as the only other notable exception. In the U.K. and Australia, it’s not uncommon for borrowers to refinance every few years as interest rates move. Of course, digital lending platforms like Maxwell make that easier and less expensive to do here now. But so would broader product mix, the innovation for which is already afoot. Take SoFi, for example, who offers borrowers an option to refinance their student loans and roll them into their mortgage loan at a lower interest rate. Even Fannie Mae has been driving innovation with the release of its HomeReady product.
If the American Dream is to prevail, it has to evolve with our economy and our society. The 30-year fixed mortgage made sense 50 years ago, but it’s not always a fit for the homebuyers today. In a market with rising home costs, stagnating wages, and limited inventory, new answers must come from within our industry.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
