How the Mortgage Market Has Changed Since Great Recession

A report from Clever Real Estate said in the years since the Great Recession, the mortgage market—currently exploding in refinances—remains a “mixed bag.”

“Credit has tightened, and mortgage lending practices are stricter,” said Francesca Ortegren, Research Associate with Clever Real Estate. “Still, mortgage lenders continue to lend to subprime and deep subprime borrowers, and applicants are dealing with new challenges and rising non-mortgage debt.”

Francesca Ortegren

The report noted while the Great Recession technically only lasted two years (2007-2009), its disastrous effects stretched much longer. A major contributor to the crash, Otregren said, was a “deceptively unstable” mortgage market.

“The economy seemed strong, interest rates were low, and mortgage lenders were open to lending to subprime candidates, meaning more people could own a home,” Ortegren said. “The American Dream was on the horizon for many who would have otherwise missed out on such a huge milestone. Investors were convinced homes would continue to appreciate in value, despite the warning signs. However, a spike in subprime mortgages also meant banks were lending to risky borrowers, who are more likely to default on their loan payments. Leading up to the financial crisis were loads of red flags like this coupled with economic growth, leaving many suspicious of recent growth, wondering whether another crash is unavoidable.”

Today, the report said, the median home value is $243,000 (compared to $197,000 in 2009), and homeownership rates are beginning to increase after the sub-crisis drop. As home values and purchases continue to rise, so does the total mortgage debt in the U.S. At the end of 2019, Americans held over $9.5 trillion in mortgage debt — officially surpassing 2008 levels of mortgage debt.

“People — especially younger generations — carry much more debt and have less wealth than older generations at the same age and are participating in financially questionable purchases (like buying a home with almost no money in savings),” Ortegren said.

The report identified several key comparisons between the Great Recession market and today’s market:

–The housing market has largely recovered since the 2008 financial crisis, but recent lifts on lending restrictions and low interest rates might put us at risk for market corrections.

–While the largest share of mortgage down payments are within the 20% to 40% range, the proportion of down payments less than 20% has increased 75% since 2008.

–The average debt-to-income ratio dropped 22% in the decade following the crash, but still remains high (97%).

–The good: A smaller proportion of mortgage applications are approved and loan default risk is only 2.3% (compared to over 16% in 2006), and the average American’s credit score hit all-time high of 703 in 2019.

–The bad: Subprime lending has increased 63% since 2010, and banks lent out over $4.18 billion to subprime mortgage borrowers.

–The ugly: Americans are $14 trillion in debt, and non-mortgage debt is $1.55 trillion more today than it was in 2008.

–Younger borrowers face greater challenges to homeownership in 2020, as student loan debt has reached $1.51 trillion, twice 2008 levels.

–While most debt types lower delinquency rates than 2008, auto and student loans have not; both have higher delinquency rates now than they did prior to the recession.

–Decreases in mortgage originations are likely a function of the fact that most homebuyers don’t have much in savings to put toward a down payment (inflating LTV) and Americans hold a lot of debt (i.e., high DTI), so tighter restrictions on mortgage lending can lead to fewer homeowners.

–In 3rd quarter 2019, U.S. homeowners held $15.8 trillion in real estate equity — on average that translates to nearly 64% of real estate’s value in equity.

–Average FICO credit scores reached a record-high of 703 in 2019, up 20 points since 2009, “which is great news for borrowers,” Ortegren said. “The continuous hike in scores is likely due to a variety of factors, including increased credit card use, actively seeking out higher credit limits on accounts, and increased ability to monitor one’s score through free online sources.”

The economy, including housing, took a “huge hit” as a result of the Great Recession and it took quite a bit of time to recover, Ortegren said. But low interest rates and a stronger economy and housing market have paved the way for recovery.

“While post-crisis regulations, like the Dodd-Frank Wall Street Reform and Consumer Protection Act, have decreased the likelihood of companies negatively impacting the economy through questionable lending practices, some restrictions have been lifted recently,” she said. “The rollback on restrictions that were in place to protect consumers from predatory lending and require transparency in the mortgage market could prove problematic in time.”