Evidence Matters Banner Image

Spring 2016   

    HIGHLIGHTS IN THIS ISSUE:


Pressing Challenges in Housing Finance: Credit Access and Seniors’ Mortgage Debt

Highlights

      • Even as the housing market recovers, lenders are implementing overly strict credit standards that exclude creditworthy borrowers, particularly members of traditionally underserved populations.
      • At the same time, a greater proportion of older homeowners carry mortgage debt, potentially affecting their financial stability and health as they age.
      • New credit scoring models, new products and policies that target creditworthy low-income borrowers, manual underwriting, and efforts to allay lenders’ concerns could expand credit access sustainably.
      • Local programs that provide property tax relief or assist with maintenance costs, along with financing options, can help older homeowners with mortgage debt.



A row of single family homes with white picket fences situated close to each other.

National measures of single-family housing starts and home values indicate that the housing market has largely recovered since the Great Recession.

Nearly a decade after the onset of the housing and financial crises, several indicators show that the housing market is recovering. Housing starts and prices are up and delinquencies and foreclosures are down. Despite these positive signs, important housing finance challenges persist, including tightened access to mortgage credit (especially for traditionally underserved populations) and an increasing number of older homeowners carrying mortgage debt.1 These are high-stakes challenges that affect opposite ends of the age spectrum: younger prospective homeowners and older homeowners in or nearing retirement. Overly strict credit standards that exclude creditworthy borrowers block access to the wealth-building benefits of sustainable homeownership. At the same time, those in their 50s and 60s are now carrying more mortgage debt than did homeowners in previous generations, likely eroding their financial well-being and their ability to maintain their desired standard of living as they age and enter retirement.

Demographic trends make solving these housing finance challenges particularly urgent. Minority households, whose growing share of the population will drive much of the future demand for homeownership, are disproportionately shut out of the current lending environment. At the same time, the aging of the baby boom generation will increase the number of older homeowners, who, as we have noted, carry substantial mortgage debt. Both public- and private-sector innovations have the potential to better bring low-income and minority borrowers into the homeowning market while also assisting older homeowners, all without compromising safety, stability, and consumer protection. Various new ideas have been proposed, such as using alternative credit scoring models, creating targeted mortgage products and programs at the national and local levels, and replacing automated underwriting with manual underwriting, which gives lenders greater latitude in determining a borrower’s ability to repay. Refinancing options and reverse mortgages may be appropriate for some older homeowners with mortgage debt, and financial counseling and assistance programs can provide help to those facing financial hardship.

State of the Mortgage Market

By several national measures, the mortgage market appears to have largely stabilized and recovered since the Great Recession. In the third quarter of 2015, single-family housing starts reached their highest level since the end of 2007, and sales of existing homes exceeded 5 million per month on a seasonally adjusted annualized basis for 10 out of the previous 11 months.2 The overall value of the U.S. housing market neared $23 trillion, with household equity of $13 trillion and household mortgage debt of nearly $10 trillion.3

A little boy and his parents stand smiling in front of their new home.
Homeownership remains an important wealth-building opportunity for low-income and minority households, particularly when borrowers have access to safe mortgage products.

Home values rose to their highest level since 2007, due in part to supply constraints as well as demand; the national vacancy rate for owner-occupied homes currently stands at only 1.9 percent.4 In the third quarter of 2015, the delinquency rate on mortgages of one- to four-unit residential properties fell to its lowest level since the first quarter of 2007, and the percentage of loans in the foreclosure process was less than half of its 2010 peak of 4.64 percent.5 Recent books of mortgage business have exceptionally low default rates by historical standards; many loans currently in the foreclosure process have been there for years, particularly in states with judicial foreclosure processes.

Although these positive trends point to a market recovery, other signs, such as tightening credit and the rising percentage of older homeowners with mortgage debt, indicate ongoing challenges. During the run-up to the housing crash, getting a mortgage was undoubtedly too easy. Now, it is arguably too hard. The Urban Institute Housing Finance Policy Center reports that for purchase loans issued in the past decade, the mean and median borrower FICO scores at origination have increased 42 and 46 points, respectively. As of November 2015, the 10th percentile FICO score for borrowers on purchase loans was 668 compared with the low 600s before the crisis, indicating that the minimum score necessary to obtain a mortgage has risen substantially.6 As a result, borrowers who would have qualified for a mortgage in the early 2000s — that is, before the gross loosening of underwriting standards — no longer do. These tighter credit standards have particularly affected minority borrowers; the Urban Institute reports that lending to African-American borrowers was 50 percent less in 2013 than in 2001 and 38 percent less for Hispanic borrowers during the same period.7

Meanwhile, a rising percentage of older homeowners are carrying mortgage debt even as they approach and enter the traditional retirement age. According to the Joint Center for Housing Studies of Harvard University, 40 percent of owners aged 65 and older had mortgages in 2014.8 This trend appears likely to continue as the cohort aged 55 through 64 nears and enters retirement. Approximately 46 percent of owners in this age group had mortgages in 2013.9 Older homeowners carrying significant mortgage debt may have to postpone retirement or make difficult decisions regarding spending on food, medical care, and other expenses. They also are less able to draw on equity to supplement their income as they age.10 The causes, consequences, and policy responses to this trend are discussed in greater detail later in the article.

Is Credit Too Tight?

Because lenders have tightened their credit standards, they are not serving a significant number of low-risk potential borrowers. Borrowers with less-than-pristine credit and documentation are struggling to get mortgages. Researchers at the Urban Institute estimate that if lenders had applied the same credit standards that were used in 2001 — before the loosening of standards associated with the housing crisis — they would have issued an additional 5.2 million mortgages between 2009 and 2014.11 They find that between 2001 and 2014, the number of borrowers with FICO scores above 700 decreased by 7.5 percent, the number with scores between 660 and 700 declined by 30 percent, and the number with scores lower than 660 decreased by 77 percent.12

This gap between the projected and actual number of mortgages issued between 2009 and 2014 may be explained in part by declining demand for homeownership. Richard Green, senior advisor on housing finance in HUD’s Office of Policy Development and Research and director and chair of the University of Southern California Lusk Center for Real Estate, notes that many of the more than 7 million households who were temporarily locked out of homeownership after losing their homes during the foreclosure crisis may choose to remain renters even after they become eligible to qualify for another loan.13 Rachel Drew and Christopher Herbert of the Joint Center for Housing Studies of Harvard University find that borrowers who were underwater are particularly likely to prefer renting over homeownership, but they conclude that otherwise homeownership preferences have not fundamentally shifted in the aftermath of the housing crisis.14 Green, however, points out that demographics are working against demand for homeownership — people are marrying later, and household growth is strongest among minority groups who traditionally have had lower homeownership rates. Even after accounting for these demographic trends, Green finds that the homeownership rate is still about 3 percent lower than it should be, suggesting that inadequate credit access remains a critical issue.15

One factor contributing to tightened credit standards is lenders’ reluctance to originate loans sold to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Lenders say they are worried about the repurchase risk attached to such loans. Also called buybacks or putbacks, these repurchases occur when a GSE finds that a loan it has bought does not meet all of its underwriting requirements, qualifications, or regulations despite the lender’s representations and warranties to the contrary. Because GSE purchases make up such a large share of the mortgage market, lenders’ fears about the risk of repurchases can significantly affect access to credit. These concerns have emerged in the context of new mortgage origination and disclosure rules established in the wake of the housing crisis. The Consumer Financial Protection Bureau (CFPB), for example, has implemented new rules about the responsibility of lenders to assess borrowers’ ability to repay a loan and about the disclosures borrowers receive outlining the terms of mortgage loans.16 Some lenders may scale back their lending out of concern that even their best-intentioned efforts in underwriting and documentation will not satisfy the requirements of the new regulations.17

The Housing and Economic Recovery Act of 2008 established a new federal agency in response to the housing crisis, the Federal Housing Finance Agency (FHFA). FHFA oversees the GSEs and determines whether lenders have complied with seller and servicer requirements. FHFA may require noncompliant lenders to repurchase loans and assume their associated credit risks and costs. Because the kind of loan-level FHFA scrutiny that might result in a repurchase typically begins when a loan becomes delinquent, lenders may be especially reluctant to lend to borrowers with lower credit scores. To avoid the risk of repurchases, lenders may impose overlays — additional criteria, such as stricter debt-to-income ratios, higher minimum credit scores, or additional required documentation — that further restrict credit access. A 2015 Fannie Mae survey of senior mortgage executives found that credit overlays were used by approximately 40 percent of lenders who sell loans to GSEs or Ginnie Mae and approximately 60 percent of wholesale lenders. The most common overlays reported in the survey were higher minimum credit scores and additional documentation requirements.18 At an Urban Institute/Core Logic symposium in 2015, Larry Platt, then a partner at K&L Gates, suggested that overlays were a reasonable response to alternately ambiguous or overly prescriptive legal requirements for lending and what he considered to be disproportionate remedies.19 HUD’s Green disagrees, saying that lenders are unnecessarily concerned about repurchases.20 The Urban Institute reports that although repurchases are more likely for nontraditional loan products, Fannie Mae and Freddie Mac have repurchased less than 0.5 percent of fixed-rate, full documentation, amortizing 30-year loans (the predominant type in the current lending environment) issued from 1999 through 2014, excluding loans originated from 2006 through 2008, indicating that lenders have little justification for fearing the repurchase of new originations.21

Nevertheless, FHFA has taken steps to reassure lenders. Since 2012, the agency has revised its Representations and Warranty Framework — the rules governing a lender’s certification that a loan complies with GSE selling and servicing requirements — to clarify for lenders when a mortgage might be subject to repurchase. FHFA has also provided repurchase relief for loans that meet stated criteria, such as 36 consecutive, on-time monthly payments.22 In 2016, FHFA announced an independent dispute resolution process for repurchase disputes in which a neutral third-party arbitrator intervenes after the initial resolution processes fail. This process promises to prevent disputes from continuing indefinitely. FHFA Director Melvin Watt writes that the independent dispute resolution process, along with the Representation and Warranty Framework, “will increase clarity for lenders and will ultimately increase access to mortgages for creditworthy borrowers.”23

Similarly, lenders may restrict Federal Housing Administration (FHA) lending because of concern over federal enforcement of the False Claims Act and associated litigation expenses. Lenders must annually certify that their loans meet all applicable rules and regulations; if they certify a loan that is later found to violate these rules, the lender has violated the False Claims Act. The Urban Institute’s Laurie Goodman argues that the uncertainty and risk of large penalties surrounding federal enforcement has caused lenders to curtail FHA lending.24 In March 2016, FHA clarified that lenders will be held responsible “only for those mistakes that would have altered the decision to approve the loan,” and not for minor mistakes or for fraud committed by a third party. Ed Golding, principal deputy assistant secretary for the Office of Housing and head of FHA, writes that with these changes, “lenders will be able to more confidently participate in [FHA’s] program and offer access to a wider number of FHA-eligible borrowers.”25

Finally, lenders may also impose overlays to avoid the risk associated with the uncertain costs of servicing delinquent loans.26 Delinquent loans generally are more expensive to service than nondelinquent loans. Although lenders can charge higher prices to account for some of those increased costs, a number of other factors are more difficult to anticipate, such as the timeline for foreclosure and property liabilities after a property is conveyed to the lender. Lenders respond to this uncertainty by tightening credit standards to avoid the risk of delinquency, which limits access to credit for borrowers with below-average credit scores.27

Lenders can and should manage their risk, but policymakers want to ensure that lenders do not overestimate their risk of repurchases, legal liability, and borrower default. As discussed above, the fear of repurchases and legal liability is largely unwarranted, and federal regulators have taken steps to clarify how lenders can extend credit while avoiding penalties. Research suggests that lenders may also be overestimating credit risk.28 A larger group of borrowers with lower incomes and credit scores can sustain homeownership than are now being served, particularly with new regulations that eliminate many of the riskiest loan products and characteristics. A study comparing borrowers who received subprime loans with risky features (such as high interest rates, points, and fees; balloon payments; and negative amortization) with borrowers who had similarly low incomes and credit scores who received loans without risky features finds that the latter group had much lower rates of default, suggesting that lenders could safely manage risk and profitably lend to a broader set of borrowers.29 The success and sustainability of state and local programs targeting lower-income borrowers further supports the case that credit can be extended to these borrowers without undue risk to lenders (see “Increasing Access to Sustainable Mortgages for Low-Income Borrowers”).

(Re) Expanding Credit Access

Allaying lenders’ concerns about repurchases and litigation and convincing them to remove overlays could open up credit access to a significant portion of potential borrowers without exposing lenders to substantial credit risk. Additional tools that hold promise for responsibly expanding credit access include new credit scoring models, new products and policies that target creditworthy low-income borrowers, and manual underwriting.

A man and woman stand on different sides of a kitchen island unpacking boxes in their home.
New loan products such as Fannie Mae’s HomeReady Mortgage respond to changing demographics, including the rise of Millennials.

New Credit Scoring Models. Reforms to credit scoring models offer the potential to assess risk in a way that makes credit accessible to more people without exposing lenders to greater losses. Refining how scoring models account for different types of debt, or what they might count as evidence of an individual’s ability to make regular loan payments, may lead to an expanded pool of eligible borrowers. FICO, the country’s most influential credit scorer, has reformed its most recent model, FICO Score 9, to differentiate between medical and other debts. FICO’s proprietary scoring model is not transparent, but the company claims that the model better assesses individuals with limited credit histories, known as “thin files.”30 Experian, Equifax, and TransUnion, the three national credit bureaus, have developed Vantage Score 3.0, which they claim better scores those with thin credit files.31 This model incorporates rent, utilities, and telephone payment histories that have been reported to a consumer’s credit file.32 Landlords are more likely to report missed payments than a history of timely payments, but Experian is now collecting positive rental data.33 These proposals all promise to incorporate “credit invisibles,” those with no credit records, and the “unscorable,” those with insufficient or dated credit records.34 People who have not recently used credit or who have used credit only from nontraditional sources (such as payday lenders) do not produce enough collectable information about their spending to generate a credit score under common models.35 By the standards of more traditional credit scoring models, an estimated 26 million consumers were credit invisible in 2010, and an additional 19 million were considered unscorable. Low-income and minority individuals are disproportionately represented in these groups. African Americans make up 16 percent and Hispanics 21 percent of the credit invisible population and only 13 percent and 17 percent, respectively, of the U.S. population.36

The impact of these more inclusive models, however, is limited by the willingness of lenders to adopt them. Lenders that sell mortgages to Fannie Mae and Freddie Mac are bound by the requirements of the GSEs. Fannie Mae currently accepts only the classic FICO score, but in its “2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions,” FHFA directed the GSEs to conclude their ongoing “assessment of leveraging alternate or updated credit scores for underwriting, pricing, and investor disclosures and, as appropriate, plan for implementation.”37 Fannie Mae does currently allow manual underwriting for borrowers who have a nontraditional credit history, but in those cases other criteria are stricter, such as the imposition of a maximum 36 percent debt-to-income ratio and the exclusion of income from self-employment.38 Sources of information to establish a nontraditional credit report include rental payments, utilities, insurance payments (medical, auto, life, or renter’s insurance, not to include payroll deductions), and payment of certain types of bills.39

While FHFA continues to study alternative credit scoring models, two bills currently before Congress would alter the credit reporting and scoring status quo. The Credit Access and Inclusion Act of 2015 (H.R. 3035) would ensure that positive information about rent and utility payments are reportable to the three national credit bureaus.40 The Credit Score Competition Act of 2015 (H.R. 4211) would allow Fannie Mae and Freddie Mac to use any credit scoring model that meets criteria set by FHFA.41

Targeted Products and Programs. Fannie Mae and Freddie Mac have each recently launched new programs aimed at serving creditworthy low- and moderate-income borrowers. Fannie Mae’s HomeReady mortgage responds to shifting demographics “characterized by the rise of Millennials; increased diversity; and a growing elderly population [with] new household growth… driven by traditionally underserved segments.” The program’s underwriting standards allow lenders to consider income from nonborrower household members or boarders. HomeReady requires a downpayment of as little as 3 percent and allows borrowers some flexibility on the source of funds used for downpayment and closing costs, including gifts and grants. Borrowers’ mortgage insurance payments can be reduced once the loan-to-value ratio reaches 90 percent and canceled when it reaches 80 percent. The program also targets low-income, minority, and disaster-impacted areas, placing no income maximum for borrowers purchasing properties in low-income census tracts and allowing eligibility for borrowers earning up to 100 percent of the area median income (AMI) who are buying properties in high-minority and disaster-impacted tracts. Borrowers earning less than 80 percent of AMI are eligible to use the program in any area. Online homeownership education courses are required, and postpurchase support is available to borrowers throughout the life of the loan.42 Freddie Mac offers substantially similar benefits through its Home Possible mortgage program.43

Extended family households that pool resources have more income than traditional underwriting methods reflect. These programs attempt to account for the actual resources available to repay a loan, offering extended households greater access to credit. An analysis by Fannie Mae finds evidence that nonborrower household members indeed contribute to repayment; during the collapse of the housing market, borrowers who lived in extended households and had negative equity were more likely to remain in their homes than were comparable nonextended households.44 Demographic trends indicate that extended family households may become more prevalent in the future.

Bar graph shows FHA’s share of mortgage purchase loans from 2003 to 2014.
Source: U.S. Department of Housing and Urban Development, Office of Policy Development and Research. “Finance and Investment Data — FHA Mortgage Market Share by Loan Count” (www.huduser.gov/portal/ushmc/fi_FHAShareLnCnt.html). Accessed 11 May 2016.

For its part, HUD has stimulated lending through FHA. Historically, FHA has been a countercyclical force, enlarging its share of the market during economic downturns, and that was again the case during and after the Great Recession. According to Moody’s Analytics, FHA activity prevented a second housing crash as well as the wider economic impacts that would have followed.45 From fiscal year 2008 to fiscal year 2015, FHA guaranteed approximately 6.3 million purchase loans and 3.9 million refinance loans.46 FHA has been especially important for minority borrowers. In 2014, FHA guaranteed the loans of 43 percent of all African-American borrowers and 44 percent of all Hispanic borrowers.47

FHA balances the need to expand access to credit with the need to limit taxpayer risk, so FHA borrowers with credit scores below 580 must compensate with higher downpayments than those with higher credit scores. Any FHA borrower with a credit score lower than 620 and a debt-to-income ratio of more than 43 percent goes through a manual underwriting process to determine whether other compensating factors sufficiently mitigate risk. These policies allow FHA to serve borrowers with low credit scores without taking on excessive risk.48 In 2015, FHA guaranteed a larger share of loans issued to borrowers with credit scores below 640 than it did in 2013.49 FHA’s efforts to expand credit access were boosted by the agency’s decision to lower its annual mortgage insurance premium, which funds the agency’s Mutual Mortgage Insurance Fund, by 50 basis points to 0.85 percent beginning in January 2015. HUD reports that the cut led to increased volume and had a neutral to slightly positive impact on the insurance fund’s capital ratio.50 The change appears to have benefited first-time homebuyers and minority borrowers. In fiscal year 2015, 82 percent of FHA purchase originations, totaling 614,148 loans, went to first-time homebuyers, and approximately one-third of all FHA originations were to minority borrowers.51

Manual Underwriting. Manual underwriting offers a potential avenue to expand credit in a responsible manner to borrowers excluded by automated underwriting. Manual underwriting allows a more nuanced assessment of a potential borrower’s credit history and possibly a more accurate projection of their ability and likelihood to repay. For example, for a borrower who struggled to pay off medical debt related to a one-time emergency but paid other debts, rent, and utilities on time, manual underwriting would allow the lender to consider the income of multiple earners in the borrower’s household or dig deeper into the borrower’s credit history. HUD’s Richard Green notes that although automated underwriting was supposed to create more time for lenders to do manual underwriting, very little manual underwriting is currently being done — both because it is time intensive and because manual underwriting lacks the same safe harbors from regulatory scrutiny as some automatically underwritten loans have.52 Manual underwriting can be an effective way to responsibly extend credit to borrowers with no or low credit scores and who have sufficient but highly variable income (see “Increasing Access to Sustainable Mortgages for Low-Income Borrowers”).

Older Homeowners and Mortgage Debt

Photo shows an elderly couple standing in front of their home.
The share of homeowners at or near retirement age who are carrying mortgage debt has increased significantly in the past two decades.

The housing crisis also had a significant impact on many older homeowners — 1.5 million lost their homes between 2007 and 2011 — and the home equity that many older homeowners consider their most valuable asset remains at risk if home prices decline. In December 2011, AARP reported that among people aged 50 and older, 16 percent had negative equity in their homes and 6 percent were in foreclosure or were 90 or more days delinquent in their mortgage payments.53 The CFPB notes that affected older consumers may have had greater difficulty recovering from the foreclosure crisis than their younger counterparts due to “increased incidences of health problems, cognitive impairment, and difficulties returning to the work force.”54

A trend that predated the crisis is the increasing percentage of older homeowners with mortgage debt and the increasing amount of that debt (figures 2 and 3).55 These percentages show a dramatic increase compared with a generation ago, almost doubling for the 65 to 74 age group and tripling for those older than 75 since 1989.56 The factors contributing to this rise are varied, and although the trend is cause for concern, not everyone with mortgage debt is in financial trouble; some portion of the increase could be explained by households simply choosing to tap into their homes’ equity — often their biggest asset — in their later years.57 The CFPB, however, estimated that in 2014, approximately 4.4 million retired homeowners had mortgage debt other than reverse mortgages or home equity lines of credit, indicating that a substantial number of these homeowners were in debt for reasons other than drawing on the equity in their home.58 In addition, older homeowners who take on mortgages to access their equity may be doing so because of financial pressures such as health expenses and a lack of pensions, 401(k) balances, or other sources of retirement income.59Stephanie Moulton of the John Glenn College of Public Affairs at Ohio State University points out that more research is needed to better understand why more older homeowners have mortgages and why some are drawing down their equity.60

Factors contributing to the rise in older homeowners carrying mortgage debt include the increase in refinancing in the 2000s and trends that delay equity building, such as buying one’s first home at a later age and making smaller downpayments.61 When home values increased in the 2000s, many households took out home equity loans or refinanced as the loans became easier and cheaper to obtain, sometimes taking cash out.62 Using data from Freddie Mac, Barry Bosworth and Sarah Anders calculate that average closing costs as a percentage of a 30-year mortgage fell from 2.5 percent in 1985 to 0.6 percent in 2006, which, along with low interest rates, made refinancing more attractive.63 From 1995 to 2007, baby boomers (those born between 1946 and 1964) were most likely to refinance, and older homeowners were more likely than those in other age groups to cash out equity when refinancing. Among those who took out cash, the average amount exceeded $50,000. The tax deductibility of mortgage debt increased the appeal of using home equity for various purposes.64 Moulton notes that recent retirees may also be less averse to debt than previous generations.65

Line graph shows percentage of families with mortgage debt by age of household head.
Note: Chart shows percent of families with mortgages or home-equity loans by age of the household head.
Source: Board of Governors of the Federal Reserve System. 2013. “Survey of Consumer Finances Chartbook.”

Whether an older homeowner’s mortgage debt is cause for concern depends on the individual’s circumstances, says Lori Trawinski of the AARP Public Policy Institute. Older homeowners might draw on their home’s equity to fund modifications that allow them to age in place, help pay for their children’s or grandchildren’s education, or pay medical expenses — and as long as they have the resources to make loan payments, they can reasonably carry mortgage debt. But drawing on equity could be a problem if the mortgage debt prevents households from being able to pay for other necessities or if the equity homeowners are tapping is their only resource. Mortgage debt may also be a problem if the older homeowner faces an unforeseen event that leads to a decrease in income, such as job loss or the death of a spouse.66 In these cases, mortgage debt can undermine financial security, reduce retirement readiness, strain monthly budgets, limit homeowners’ ability to withstand financial shocks such as health emergencies, and ultimately put homeowners in danger of losing their homes.67

Research indicates that a substantial portion of older homeowners with mortgage debt face financial hardships. The Joint Center for Housing Studies of Harvard University reports that half of owners with a mortgage aged 65 and older pay more than 30 percent of their income for housing, and 23 percent pay more than 50 percent of their income for housing.68 On average, owners aged 65 and older with a mortgage pay monthly housing costs approximately three times higher than owners in that age group who have paid off their mortgage.69 To cope with debt, and housing costs generally, many older adults make tradeoffs that may compromise their long-term fiscal and physical health, according to the National Council on Aging.70 Health problems, and associated costs, may in turn make it more difficult for homeowners to pay their housing costs. The current mortgage status of 50-64 year olds suggests that in the absence of interventions, this is a problem that might get worse. Local programs that provide property tax relief or help with maintenance costs can ease overall housing costs and help older homeowners manage mortgage debt. Many of these programs, such as the U.S. Department of Energy’s Weatherization Assistance for Low-Income Persons program, have income eligibility limits.71 The National Community Reinvestment Coalition’s National Neighbors Silver program addresses the financial vulnerability of older adults, including housing counseling and banking access, and the National Council on Aging’s Economic Security Initiative includes components to help older adults use home equity wisely. For older homeowners at risk of foreclosure, federal and state initiatives such as the Home Affordable Modification Program, Home Affordable Refinance Program, Emergency Homeowner Loan Program, and the Hardest Hit Fund assisted some older homeowners who might otherwise have lost their homes or faced even greater hardships (see “Programs for Older Homeowners”).

Line graph shows mean value of mortgage debt for families by age of household head.
Note: Chart shows mean value of mortgages or home-equity loans for families with holdings by age of the household head.
Source: Board of Governors of the Federal Reserve System. 2013. “Survey of Consumer Finances Chartbook.”

Older homeowners with mortgage debt may be able to improve their financial situations through financing options. HUD’s Richard Green says that as long as mortgage rates remain low, older, still-working homeowners should be encouraged to refinance into 15-year mortgages so that they can hasten repayment and equity building, ideally paying mortgages off before they retire.72 For other older homeowners, reverse mortgages, which allow homeowners to access the equity of their home without having to sell or leave it, may be beneficial. HUD’s Home Equity Conversion Mortgage (HECM) program, launched in 1989, insures reverse mortgages made by private lenders. HECM borrowers convert their home’s equity into income that can help pay for medical costs and other living expenses — even pay off an existing mortgage.73 Moulton notes that about half of HECM borrowers have existing mortgage debt, which they pay off with their reverse mortgage.74 Recent reforms to the HECM program have made it safer for both borrowers and taxpayers, says Moulton, particularly limits on the upfront draw of equity and requirements to ensure that borrowers can pay their property taxes, insurance, and other ongoing expenses.75 The HECM program currently serves a relatively small number of older homeowners, but many more households could potentially benefit from the program. Although FHA endorsed fewer than 1 million HECM loans between 1989 and 2015, HECM may be an effective option for some seniors looking to access their home equity.76

Housing Finance for the Future

The state of the mortgage market has improved markedly since the housing crisis, but the challenges of responsibly expanding access to credit and helping seniors who carry mortgage debt, among others, persist. With minority populations making up an increasing share of new households, the future of homeownership depends in large part on the ability of the mortgage market to better serve populations that it does not currently reach. Clarity on regulations and possible penalties from the federal agencies, alternate credit scoring models and flexible underwriting, and good-faith efforts by lenders to make sound, profitable loans to underserved populations could responsibly extend credit access and create opportunities for prospective homeowners. Meanwhile, the aging of the baby boom generation at a time when increasing numbers of older homeowners have mortgage debt threatens many seniors’ financial well-being and retirement readiness. Access to refinancing programs may offer some relief to the increasing percentage of older homeowners with mortgage debt, protecting their ability to age in their own homes without making tradeoffs that reduce their quality of life. Effectively addressing these housing finance challenges will not only improve individual households’ financial health and wealth-building opportunities but also will strengthen the housing market overall.



  1. Laurie Goodman, Jun Zhu, and Taz George. 2014. “Where Have All the Loans Gone? The Impact of Credit Availability on Mortgage Volume,” Housing Finance Policy Center Commentary, Urban Institute, 13 March.
  2. U.S. Department of Housing and Urban Development, Office of Policy Development and Research. 2015. HUD PD&R National Housing Market Summary: 3rd Quarter 2015 (December), 1; U.S. Department of Housing and Urban Development. 2016. “The Obama Administration’s Efforts To Stabilize the Housing Market and Help American Homeowners,” National Scorecard (February), 1–8.
  3. Urban Institute. 2016. “Housing Finance at a Glance: A Monthly Chartbook,” (February), 6.
  4. U.S. Department of Housing and Urban Development, Office of Policy Development and Research, 3.
  5. Ibid., 5.
  6. Urban Institute, 14.
  7. Laurie Goodman, Jun Zhu, and Taz George. 2015. “The Impact of Tight Credit Standards on 2009–13 Lending,” Housing Finance Policy Center Brief, Urban Institute.
  8. Joint Center for Housing Studies of Harvard University. 2014. “Housing America’s Older Adults: Meeting the Needs of an Aging Population,” 15.
  9. Board of Governors of the Federal Reserve System. 2014. “2013 Survey of Consumer Finances Chartbook.”
  10. George Masnick. 2014. “Why Does Mortgage Debt Continue to Rise Among Older Homeowners?” Housing perspectives: Research, trends, and perspectives from The Harvard Joint Center for Housing Studies, 4 November (housingperspectives.blogspot.com/2014/11/why-does-mortgage-debt-continue-to-rise.html). Accessed 30 April 2016.
  11. Bing Bai, Laurie Goodman, and Jun Zhu. 2016. “Tight credit standards prevented 5.2 million mortgages between 2009 and 2014,” UrbanWire, 28 January (www.urban.org/urban-wire/tight-credit-standards-prevent­ed-52-million-mortgages-between-2009-and-2014). Accessed 24 February 2016.
  12. Ibid.
  13. Richard Green. 2016. “The State of Housing,” PD&R Edge (www.huduser.gov/portal/pdredge/pdr-edge-frm-asst-sec-020816.html). Accessed 30 April 2016.
  14. Rachel Bogardus Drew and Christopher Herbert. 2012. “Post-Recession Drivers of Preferences for Homeownership,” Joint Center for Housing Studies of Harvard University, 19.
  15. Interview with Richard Green, 7 March 2016.
  16. Consumer Financial Protection Bureau. 2013. “Ability-to-Repay Rule: Protecting Homebuyers from Debt Traps”; Consumer Financial Protection Bureau. “Know Before You Owe: Mortgages” (www.consumer­finance.gov/know-before-you-owe). Accessed 2 March 2016.
  17. Jim Parrott and Mark Zandi. 2013. “Opening the Credit Box,” Moody’s Analytics and Urban Institute, 6–7.
  18. Fannie Mae. 2015. “Mortgage Lender Sentiment Survey: Survey Shows Lenders’ Limited Credit Overlay Practices.”
  19. Larry Platt. 2015. “Data, Demand, and Demographics: A Symposium on Housing Finance,” Urban Institute and Core Logic. Washington, DC, 20 November 2015.
  20. Interview with Richard Green.
  21. Urban Institute, 39.
  22. Federal Housing Finance Agency. “Representation and Warranty Framework” (www.fhfa.gov/PolicyPro­gramsResearch/Policy/Pages/Representation-and-Warranty-Framework.aspx). Accessed 10 March 2016.
  23. Federal Housing Finance Agency. 2016. “FHFA, Fannie Mae and Freddie Mac Announce Independent Dispute Resolution Program,” press release, 2 February.
  24. Laurie Goodman. 2015. “Wielding a Heavy Enforcement Hammer Has Unintended Consequences for the FHA Mortgage Market,” Housing Finance Policy Center Brief, Urban Institute.
  25. Ed Golding. 2016. “Providing Clarity for Loan and Lender Level Certifications,” 15 March.
  26. Christopher E. Herbert, Eric S. Belsky, and William C. Apgar. 2012. “Critical Housing Finance Challenges for Policymakers: Defining a Research Agenda,” What Works Collaborative, 7; Laurie Goodman. 2014. “Servicing Is an Underappreciated Constraint on Credit Access,” Urban Institute, 9.
  27. Goodman 2014, 9.
  28. Herbert et al., 7.
  29. Lei Ding, Roberto G. Quercia, Wei Li, and Janneke Ratcliffe. 2011. “Risky Borrowers or Risky Mortgages: Disaggregating Effects Using Propensity Score Models,” Journal of Real Estate Research 33:2, 245.
  30. FICO. 2015. “FICO® Score 9.”
  31. VantageScore Solutions. 2015. “VantageScore 3.0: A credit score built for predictiveness.”
  32. “Bankcard Industry,” VantageScore website (www.van­tagescore.com/industry/bankcard). Accessed 30 April 2016; “VantageScore 3.0 model increases scoreable U.S. Population,” VantageScore website (thescore.van­tagescore.com/article/38). Accessed 30 April 2016.
  33. Experian. “Build Credit History by Paying Your Rent on Time” (www.experian.com/rentbureau/rental-payment.html). Accessed 30 April 2016.
  34. Kenneth P. Brevoort, Philipp Grimm, and Michelle Kambara. 2015. "Data Point: Credit Invisibles,” Consumer Financial Protection Bureau.
  35. Consumer Financial Protection Bureau. 2014. “Report on the use of remittance histories in credit scoring,” 3.
  36. Brevoort et al., 33; U.S. Census Bureau, 2010–2014 American Community Survey 5-Year Estimates.
  37. Fannie Mae accepts the Equifax Beacon® 5.0, Experian®/Fair Isaac Risk Model V2SM, and TransUnion FICO® Risk Score, Classic 04, as the “classic FICO” score. See also Federal Housing Finance Agency. 2015. “2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions,” 4; Fannie Mae. 2015. “Selling Guide: Fannie Mae Single Family,” 485.
  38. Fannie Mae, 485–7.
  39. Ibid., 530.
  40. H.R. 3035. “Credit Access and Inclusion Act of 2015.”
  41. H.R. 4211. “Credit Score Competition Act of 2015.”
  42. Fannie Mae. 2015. “HomeReadyTM Mortgage: Lender Fact Sheet.”
  43. Freddie Mac. 2015. “Home Possible At-a-Glance.”
  44. Walter Scott. 2015. “Mortgage Lending and Non-Borrower Household Income,” Fannie Mae Housing Working Paper, 24.
  45. Julia Gordon. 2015. “The Importance of the Federal Housing Administration in the Housing Market,” Center for American Progress, 8.
  46. U.S. Department of Housing and Urban Develop­ment. 2015. “Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund,” 10.
  47. Ibid., 14.
  48. Gordon, 4.
  49. U.S. Department of Housing and Urban Development 2015, 40.
  50. U.S. Department of Housing and Urban Development 2015, 36; Edward L. Golding. 2016. “Written Testimony: Hearing before the House of Representatives Committee on Financial Services, Subcommittee on Housing and Insurance,” 6.
  51. Edward L. Golding. 2016. “Written Testimony: Hearing before the House of Representatives Committee on Financial Services, Subcommittee on Housing and Insurance,” 11 February.
  52. Interview with Richard Green.
  53. Lori A. Trawinski. 2012. “Nightmare on Main Street: Older Americans and the Mortgage Market Crisis.” AARP Public Policy Institute, 1.
  54. Consumer Financial Protection Bureau. 2014. “Snapshot of older consumers and mortgage debt,” Office for Older Americans, Consumer Financial Protection Bureau, 12.
  55. Ibid., 6.
  56. Board of Governors of the Federal Reserve System.
  57. Interview with Stephanie Moulton, 11 March 2016.
  58. Consumer Financial Protection Bureau 2014, 3.
  59. Interview with Lori Trawinski, 14 March 2016.
  60. Interview with Stephanie Moulton.
  61. Consumer Financial Protection Bureau 2014, 8; Emily Rosenbaum. 2013. “Cohort Trends in Housing and Household Formation Since 1990,” US 2010: Discover America in a New Century, Russell Sage; Annamaria Lu­sardi and Olivia S. Mitchell. 2013. “Older Adult Debt and Financial Frailty,” Working Paper No. 2013-291, Michigan Retirement Research Center.
  62. Lusardi and Mitchell, 2013.
  63. Barry P. Bosworth and Sarah Anders. 2008. “Saving and Wealth Accumulation in the PSID, 1984–2005,” Working Paper No. 2008-2, Center for Retirement Research at Boston College.
  64. John R. Gist, Carlos Figueiredo, and Satyendra K. Verma. 2012. “Boom and Bust: Housing Equity Withdrawal and Consumption Decisions and Their Impacts on Household Wealth,” Journal of Aging & Social Policy 24:1, 5–6, 23.
  65. Interview with Stephanie Moulton.
  66. Interview with Lori Trawinski.
  67. Gist et al., 24.
  68. Joint Center for Housing Studies of Harvard Univer­sity, 3.
  69. Ibid., 14.
  70. National Council on Aging. 2015. “Older Adults and Debt: Trends, Trade-offs, and Tools to Help.”
  71. Joint Center for Housing Studies of Harvard University, 17–8.
  72. Interview with Richard Green.
  73. Joint Center for Housing Studies of Harvard University, 17–8.
  74. Interview with Stephanie Moulton.
  75. Ibid.
  76. U.S. Department of Housing and Urban Development. 2016. “FY 2017 Congressional Justifications: Housing, FHA–Mutual Mortgage Insurance Fund,” 25–6.

 

Evidence Matters Home              Next Article