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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Jamie Debreceni

Summer for Fall Internship

Professor Edinger

October 26th, 2018

Housing Marketing Crash: Still Affecting How Homes are Sold Today?

According to the Consumer Financial Protection Bureau, a mortgage is "an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you've borrowed plus interest”.  Mortgage loans are used to help people buy a home or borrow more money against a home they already own. In data analyzed by Harris Poll in December of 2017, over 2,000 Americans were surveyed and 75% of them stated that buying a home is a priority, which means the mortgage industry is not disappearing anytime soon. The survey also showed a 32% plan on purchasing a home within the next 5 years and 15% had purchased on within the past half-decade. Both groups stated one of the main reasonings for purchasing a home is the fact that it is a good investment.  When it comes to the types of mortgages, there are two main types when it comes to rating. Fixed rate mortgages typical are 10, 15, 20, or 30-year mortgages. A fixed rate means that the loan has the same interest rate for the entire repayment term. The second type of loan is an adjustable-rate or ARMs mortgage, which has an interest rate that changes over time. The mortgage industry is actually a key factor in the economy of a country as a whole. This report will discuss how the industry affects the economy of the United States, what lead to the crash of 2008, how the crash has affected the number of renters compared to buyers in the United States, how it changed the process of receiving a mortgage today, and my personal experience working in the mortgage industry for over three years now. Overall, the financial crisis of 2008 still affects the way mortgages are sold today.

 Investment properties and real estate businesses provide a source of revenue for millions of Americans. Residential real estate not only provides housing for people and families, but it is also most likely one of their greatest sources of wealth. In 2017, the real estate construction accounted for 7 percent of the United States gross domestic product at 1.34 trillion dollars, which is more than the pre-crisis peak of 1.19 trillion dollars. At the time, in 2006, real estate construction accounted for 8.9 percent of the GDP. With this being said, when the construction decreases, it can and will affect the economy as a whole. This was seen with the recession's high unemployment rate and how the decrease in housing construction added to the higher unemployment rate. Kimberly Amadeo, an economic analyst wrote, "a decline in real estate sales eventually leads to a decline in real estate prices. That lowers the value of all homes, whether owners are actively selling or not. It reduces the number of home equity loans available to owners. They will cut back on consumer spending” . There are three main ways housing can impact the economy. The first is consumer confidence meaning rising confidence helps increase spending, which supports the growth of the housing market. Mortgage refinancing is another way the housing market can affect the economy. Refinancing is a source of cash flow. Lower rates in the housing market allow homeowners to refinance their mortgage and freeing up cash-flow for other spending. NASDAQ stated that in the recent years the increase in refinancing has helped drive consumption. The third one discussed is construction and new homes. Besides what is discussed above, building is an effect of the housing market because new ones need to be built and others need fixing up. This provides employment for many Americans and when the rates increase, building decreases. The housing industry affects the economy of the United States as a whole and the falling home prices in 2007 directly affected and lead to the recession.

Home prices falling initially triggered the 2008 financial crisis, though at the time, no one realized it. In July 2007, the average price of an existing home had fallen over 4 percent since its peak in 2005. When discussing the housing market crash, there are five main contributing factors outlined by Sheree Curry, a writer for the Washington Post. One of the contributing factors was the rise of self-employment, which lead to low-doc loans. This rise occurred after the recession of the late 1990's and this brought the abundance of borrowers that were able to apply and get approved for low-doc loans. This loan, as given by the name, is a loan that requires little documents to be able to get approved. Some lenders would only require two bank statements and verification of employment. This led to people receive loans that financially, they could not afford. As the home prices fell, people lost equity. Other contributing factor that led to the housing market crash was adjustable-rate mortgages as a whole. Between 2004 and 2008, over $750 billion of ARMs mortgages originated in the United States. Like stated above, ARMs interest rates adjust with the market, it is not set in place for the amount of time the loan is, like fixed rates. Like low-doc loans, ARMs were provided to borrowers with little or no documentation before the crash in 2008, making it a large contribution. Besides ARMs, equity lines of credits rose in the early 2000s.  Basically, many homeowners used their homes as ATMs to take out money. When the values of homes sunk and were appraising for much less than they were beforehand, lenders reduced the amount of credit that could be extended. Since the crash of the market in 2008, lenders have drastically changed the way and the process of receiving a mortgage and have preventive steps to make sure what happened in 2008 will not repeat itself in the same velocity.

In 2008, the financial crisis created the largest effect on the United States housing marketing since the Great Depression in 1929. Since this, the number of renters has increased 5 percent from 38.5 percent to 43.3 percent. To analyze this shift, Jonathan Garber of Business Insider, looked at the American Community Survey data from 2006 to 2014 to see the difference of age, gender, race, and income in the 50 largest metro areas in the United States. Based off of location, the east and west coast saw the largest shift from owners to renters. Looking at age range, older millennials, meaning people between the ages of 26 and 34 are buying fewer homes compared to people that were their age 10 years ago. According to the data, even though women still rent at a higher rate than men, after the crash of 2008, males were three times more likely to move from owners to renters at 38.1 percent.  The number of women who rent is 44 percent. Wealthy households saw the steepest decline after the crash in ownership, but still own at an 80 percent rate compared to lower-income households that own at a less than 50 percent rate. This makes sense due to the fact that lower-income households were mostly renting at a higher rate compared to wealthy households before 2008. When it comes to race, after 2008, Hispanics become renters more than any of race. Las Vegas was hit the hardest with now more than 50 percent of the city renting, compared to 39 percent pre-crash. Overall, rent checks have increased by 22 percent from 2006 to 2014.  Not only did the price renter were playing increase, the percentage of the rent out of their overall income increased as well, as one can see in the graph above. Even though some cities were affected greatly, other northeast cities like Boston, Hartford, and Buffalo seemed largely unaffected from the boom and the bust the regression had on the renters.

Before the housing crash, it is said that lenders used to joke about how all you need to get a mortgage is to be breathing. Times have changed and now, it might not be as easy to receive a loan, but for the overall economy, it is better. There are six key factors that have changed over the course of the past ten years when it comes to applying and being approved for a mortgage. One of the key factors is a change in down payment requirements. No-down-payment loans are not available for most buyers, unlike in the middle of the housing boom. Most loans require at least a 20 percent down payment, and with anything under that, PMI must be provided. PMI is private mortgage insurance. Some lenders, like Digital Federal Credit Union, offer a 3 percent down payment program only to first time home buyers. They must complete the class and pay PMI until they are past the 20 percent mark. Government-insured FHA loans need at least 3.5 percent down, and if a borrower's credit score is until 580, 10 percent down is the lowest possible. The only loans that are available without a down payment are VA loans, which are offered to members of the military and veterans. Another key change in the mortgage process is the types of loans offered to members or consumers. Borrowers were able to apply to mortgage products such as interest-only loans and option-ARMS, but interest-only are now limited after the crash and option-ARMs have disappeared. Another key factor in the change after the crash to make sure something like that could never happen again is the reliance on a borrower's credit score. Credit scores play a part in whether or not a person will be approved for a loan, but also the interest rate they will receive. For most lenders, a borrower with a score of 720 or 740, is safe to be approved, depending on other financial statements as well though. The best interest rates go to the borrowers with the best credit scores. The fourth key change is something discussed before, the verification when it comes to approving mortgages. Like stated above, many lenders provided low document loans with no income verification. That no longer exists and almost every borrower needs to provide paperwork to showcase their monthly or yearly income in some way, even if they are self-employed. Along with proving income statements, lenders now also verify with the employer that the borrower actually works with the company they say they do and what their role in the company is. This was one of the things I had to do as an intern at DCU. The fifth factor is a person's debt-to-income ratio. Back before the crash, many lenders would approve loans for people with upwards of 50 percent debt-to-income. Now, it is more likely to be accepted with a ratio between 33 percent and 40 percent.  Again, it depends on the others factors as well if a borrower will be approved. Lastly, lenders often recheck the borrower's credit once or twice before closing the loan to make sure nothing has changed throughout the process. The bottom line is that these key changes have helped improve the lack of thought going into the mortgage process before the crash so it will not happen again. Each mortgage application differs and it is up to the loan officers to decide whether or not they want to take the risk and approve it.

In Massachusetts, Senator Elizabeth Warren is looking to make changes to the reform of the Community Reinvestment Act. The Community Reinvestment Act was, "enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulations 12 CFR parts 25, 228, 345, and 195, is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate."  

 Federal bank regulators were attempting to modernize the 1977 bill when Warren released her own bill that would apply the CRA required to other institutions, such as credit unions, which would affect the daily operations of Digital Federal Credit Union. Warren is also looking to make the penalties for institutions that do not follow the CRA correctly stricter. The bill states, ""Obligations under the Community Reinvestment Act ... to provide credit to lower-income and middle-class communities are too weak," along with, "The bill extends the law to cover more financial institutions, promotes investment in activities that help poor and middle-class communities and strengthens sanctions against institutions that fail to follow the rules."

 While this is an important step to make sure there is equality among income classes, it is also important to make sure the lower income borrowers are able to afford and pay back the amount of the loan they are asking for. Approving loans that many could not pay back lead to the housing market crash in 2008, and no one would like a repeat. Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions discusses the fact that credit union's commitment to serving the community and community reinvestment is unlike any other financial institution because every loan made and every dollar earned serves the members. Warren's revamp of the bill to include credit unions is not necessary. Hunt states, "The CRA was designed to ensure banks reinvest in their local communities, rather than using deposits gathered from one community and lending them to another. Extending CRA regulations to member-owned democratically controlled credit unions would add to the regulatory burden while providing no additional benefit to American consumers."  Jim Nussle, president, and CEO of Credit Union National Association also discussed that fact that credit unions do not engage in the activity that made Congress pass the bill 40 years ago.  The bill is an important step inequality, but one must also look at the loan to make sure lenders are not providing loans to people who simply cannot afford them and also take into consideration the work and care credit unions already invest in the local communities.

For my internship this summer, I worked at Digital Federal Credit Union is based out of Marlborough, MA. There are two main buildings located on Solomon Pond Road, the Headquarters and the Operations Center. It currently has over 700,000 members and is the largest credit union located in New England by assets, managing over $8 billion. To the left is the building in which I worked for three summers and one winter break. DCU has 23 full-service branches located in Massachusetts and New Hampshire but has members located in all 50 states. Credit unions are member-owned financial institutions, where they are controlled by the members and emphasize the importance of helping others. They help provide member credits at competitive rates and other financial services. This is my third year returning to the mortgage department at DCU. I started the summer after my freshman at Stonehill College (Summer of 2016). Overall, I have truly enjoyed my time here the past two years. I currently work 8AM-5PM Monday through Friday. I have an hour lunch break, along with two 15-minute breaks.

I work directly with the Mortgage Administration team as a Mortgage Admin Intern helping with designing the mortgage website through HTML, along with in-house monitors to inform the department of statistics, along with daily reminders like how to unlock a computer when a person forgets their password. I also help the servicing team by doing ‘system checks' which entails me going through files and making sure all the paperwork is there and signed before the members can close on their house. Along with that, I help the prequalification team by ‘flipping' files, meaning once a member has found a home, I entered the information like the address and realtor information into the website used to file all of the mortgages. Other tasks include researching 3 percent down programs for managers, assigning and transferring loans, updating HOI binders, and setting up and recreating files. Last, I help upload documents members send into the department.

To the right is the badge I used for all three years to enter the building, along with my specific office cluster. Through working here this summer and for the past three years, I saw how much work is needed to complete the mortgage process. Even though I did not work directly with them, I saw every day how many applications were being denied due to things like credit score or income. Even though it may be difficult for the members trying to buy a home, it is an important step to make sure what happened in 2008 does not happen again. Things like low-doc loans are slowly making a comeback, but not at Digital Federal Credit Union. When a member applies for a mortgage the first three things in the file are a bank statement (if they are already a DCU member), 1003, and a credit report. 1003 is considered the most important form in the mortgage process. It is the basic application form, which is standardized throughout the industry and helps determine the risk of the loan. The credit report is a large make or breaks it for whether or not a mortgage is going to get approved. I believe one of the biggest things I have learned from working here is keeping track of a credit score. I see accounts that look perfect, but if one of the borrowers has a low credit score, the loan will be declined. I now keep track of my credit score through an app on my phone and I get email alerts when it increases or decreases. Other things that are required for a loan to be accepted is tax returns, proof of employment, at least two paychecks within the last 6 months, along with others. It is important to note that Digital Federal Credit Union does make acceptations for members who might not have all of this available because maybe they are in between jobs, but those are the basic forms needed to complete a mortgage. Overall, Digital Federal Credit Union has stricter and more paperwork required for mortgages, along with a higher credit report number needed.  

The crash of the housing market in 2008, not only did it affect the economy as a whole, but it also still affects the way mortgages are sold today. This report discussed how the industry affects the economy of the United States, what lead to the crash of 2008, how the crash has affected the number of renters compared to buyers in the United States, how it changed the process of receiving a mortgage today, and my personal experience working in the mortgage industry for over three years now. The housing market is complex industry, which can truly affect and ruin a lot of people's lives if the process of getting approved for a mortgage is taken lightly. It is important to make sure that in the United States, there are standards that hold people accountable for their financial statements, so the market does not crash again. Overall, I really enjoyed my summer at DCU and I believe I gained a lot of experience of what is it like to work in an office setting throughout the three years I have spent at the company.

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