Opinion: I was CEO of one of the largest American mortgage lenders: this decision would reduce the cost of buying a house.
Shopping for a new home is difficult. The cost of one 30-year fixed rate mortgage declined recently, but still hovering around 5%, nearly double the August 2021 rate. Mortgage Demand fell to the lowest levels since 2000. Simply put, Americans face the prospect of spending more of their savings and hard-earned wages to own homes.
Now is the time to take radical action to make housing more affordable for all. The mortgage industry is a feast or famine business. Low rates are good for lenders. But when rates are high, as they are now, real estate executives have little appetite for long-term investments. Nonetheless, housing leaders and regulators should act countercyclically, adopting measures now that will help more Americans buy homes when rates eventually drop.
“ It’s during these lean years that hungry mortgage executives need to look at costs and optimize processes. ”
It’s during these lean years that hungry mortgage executives need to look at costs and optimize processes. I know this because I was the CEO of CitiMortgage after the financial market meltdown of 2008. We were able to avoid a total meltdown because the private and public sectors worked together.
Housing can become more affordable with better and more structured consumer data. Private lenders and federal housing agencies should work together to create such a program, which will ultimately reduce new loan closing costs for homebuyers.
Here’s the problem: it’s expensive to get a loan. The full cost of a retail loan can be as high as $8,500. This is largely because originating a mortgage is an outdated process that relies on paper-based verification of consumer data such as assets, income and cash flow of potential buyers. While there have been many innovations in credit cards and buy now, pay later (BNPL), the fact is that mortgage technology has been stymied by disorganized consumer data.
Homebuyers most affected by high costs are low-income consumers. For example, the 30-year mortgage rate averaged about 2.75% in 2020 and 2021. While some 7 million homeowners refinanced in 2020, nearly 2 million low-income homeowners did not. do.
High costs are not the only deterrent. Homeowners must navigate a complex refinancing process. They must resubmit many of the same documents to their lenders and go through an elaborate reapplication process to lower their mortgage rate, with almost no respite from the cost of closing.
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One solution is to create a robust consumer financial data program. Federal housing agencies would have a secure national database storing dynamic consumer information such as assets, income and cash flow. Consumers could grant potential lenders access to this information via encrypted keys.
To avoid hacking, these keys could be stored in a decentralized way, perhaps even leveraging the blockchain. Over time, this “mortgage key” would become part of the housing vernacular. Lenders would ask consumers for these keys. Such a system would reduce or eliminate much of the paperwork between consumers and lenders.
Additionally, since mortgage credit rules are primarily governed by agency-defined underwriting guidelines, the majority of loans could be automatically underwritten for real-time credit – with manual intervention required to override the algorithmic bias of loans that are rejected. This would help reduce the cost of origination significantly and allow borrowers to overcome a major hurdle to lock in lower rates, which would ultimately lower their monthly mortgage payments.
Fannie Mae and Freddie Mac transformed the homeownership landscape some 50 years ago by offering mortgages and lowering the cost of interest. It was a paradigm shift for the housing market, and now nearly two-thirds of Americans own their own home.
This democratization must continue with a data digitization program. Better and more structured data will lead to more affordable housing.
Sanjiv Das was the CEO of CitiMortgage and Caliber Home Loans.
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