The Mortgage Crisis and the Era of Dodd-Frank
Americans purchased 5.5 million homes in 2016, the highest number in ten years, but still millions below pre-recession levels. The year of 2008 was a modern low point for homeowners after a housing bubble and subprime mortgage crisis caused household net worth to decline $12 trillion. The United States saw nearly 9 million people lose their jobs and raised the unemployment rate into double digits for the first time in forty years. Total outstanding mortgage debt now sits at $14.29 trillion, almost at pre-crash levels. The mortgage crisis of 2008 touched every area of the U.S. and global economies and culminated in significant new federal laws meant to hedge against future market collapses and protect consumers from predatory credit schemes. Understanding the Great Recession is important to operating in modern credit markets and helps explain the reasoning behind many current federal consumer protection laws.
Despite mostly recovering from the effects of a recession that reduced U.S. gross domestic product by 5.1%, scholars and financial analysts continue to debate the causes of one of the worst market crashes in America since the Great Depression of the 1930s. Relaxed government standards in the new millennium led banks and mortgage brokers to offer home mortgages to subprime consumers with loose underwriting standards. Much of the financing for these mortgages came from “shadow banks,” mostly hedge funds and investors operating further from the scrutiny of financial regulators. Easy money helped the housing market expand and allowed homebuyers to continually upgrade to more expensive homes. Eventually, household debt-to-income ratios became unsustainable; Americans could no longer afford their homes and began defaulting at incredibly high rates.
In the wake of the housing crash, a bipartisan Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new law imposed tighter regulatory and reporting requirements on lenders and established the Consumer Financial Protection Bureau to supervise, investigate and enforce federal consumer protection laws as well as promulgate rules in the finance industry. More recently, the CFPB has proposed new rules to clarify the types of information lenders collect from consumers that are ultimately rejected during the application process. Further in 2008, the federal government assumed control of the National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This ensures that a large chunk of home mortgages are now backed by the federal government. Right now, Fannie Mae and Freddie Mac cover about half of all mortgages and the organizations actually turn a profit for the Department of the Treasury, leading some to argue it may or may not be time to return the two organizations to the private market again. Dodd-Frank and the new cadre of federal mortgage rules seem to be overall stabilizing the housing market again, although delinquencies are up in a few states.
Similar to other financial sectors, FinTech is beginning to influence the home mortgage process. New technologies are helping companies digitize the loan process and speed up approval. For hot housing markets, FinTech may help young homebuyers stay competitive in cities where many buyers are prepared to pay cash. However, some millennials are hesitant to embrace such technologies during their first forays into the housing market, leading many to still hold a preference for personal interactions with a loan officer. However, a 2015 survey by Fannie Mae exhibits a strong preference toward online mortgage shopping. FinTechs dedicated to simplifying and accelerating the home-buying process are also attracting attention from investors.
Even with the passage of more robust regulation and the onset of online automated mortgage processes, the industry still battles bad behavior. Ocwen Financial Corporation, one of the largest subprime mortgage servicers in the country, was the focal point of yet another regulatory investigation last month after complaints of impropriety by borrowers alerted federal agents to potentially improper conduct. The allegations include “illegal foreclosures, deceptive fees, and the mishandling of customers’ home loan payments.” The CFPB has filed a lawsuit against Ocwen; it is not the first. In 2013, Ocwen settled with the CFPB for $2.1 billion over similar problems.
The future of the mortgage industry appears to be strongest for the biggest of America’s banks. Big banks are helped by large resources, more competitive prices, and the ability to link other services to the mortgage. J.P. Morgan Chase is currently offering reward points to customers that secure a new home mortgage. Less clear is the future of mortgage regulation. Congress is in the process of reviewing and debating massive amendments to Dodd-Frank in the form of the CHOICE Act. The effect that proposed legislation might have on the mortgage industry is yet unknown, but some fear that America may be heading toward another big crash. Hopefully lessons learned might save Americans from financial ruin for the second time in a decade.