Mortgage Analysis, Pt. 1

Part
01
of four
Part
01

Mortgage Industry: Overview

The mortgage industry of the United States is a significant financial sector, accounting for $9.4 trillion of the total debt in 2019. This value has increased year-on-year, apart from the four years (2009 to 2012) connected to the global financial crisis. Mortgage aggregators make it easier for consumers to compare financial product offerings. However, almost 50% of consumers only look into one mortgage option.

Overview

  • Mortgage debt has increased year-on-year, outside of the four years (2009 to 2012) associated with the Lehman Brothers collapse and global financial crisis.
  • Mortgage interest rates have been trending downwards, falling from 7.68% in 1992 to 3.19% in 2019 (15-year fixed-rate mortgage).
  • Mortgage aggregators provide consumers with the opportunity to contrast differing mortgage products, with the aggregator receiving a commission.
  • The Consumer Financial Protection Bureau revealed that almost 50% of mortgage purchasers only look at one mortgage product. Mortgage aggregators have the opportunity to aid consumers in comparisons.
  • Financial product providers are generally satisfied with the business received by mortgage aggregators, particularly those that are continuously innovating.
  • The federal government's monetary policy is one of the most influential interest rate influencers.

History

  • Mortgages are debt securities issued by finance lenders to facilitate home ownership.
  • In addition to banks and other commercial providers, the federal government established associations to promote home ownership, specifically the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
  • The Government National Mortgage Association (aka Ginnie Mae) was created in 1968 with a mission of expanding affordable housing finance. It allows mortgage lenders to obtain a better price for their loans, and in turn, enabling lenders to make new mortgage loans available to consumers.
  • The Federal National Mortgage Association (aka Fannie Mae) was founded in 1938 during the Great Depression to expand the secondary mortgage market, allowing lenders to reinvest assets into more lending, and thus, increasing the number of lenders by reducing reliance on locally-based savings and loans associations.
  • The Federal Home Loan Mortgage Corporation (aka Freddie Mac) was created in 1970 to expand the secondary mortgage market, like the FNMA, but sells them as a mortgage-backed security to investors in the open market. This action increases the supply of money available for lending, increasing the money available for new home purchases.
  • The mortgage industry has increased in value year-on-year, except for a four-year decline from 2009 to 2012.
  • The decline was precipitated by the subprime mortgage crisis that led to the global financial crisis and the collapse of Lehman Brothers. The causes are numerous and complex but ultimately relate to banks selling too many mortgages, home prices dropping, and borrowers defaulting on loans. Banks were unwilling to lend to each other because they could not price the value of mortgage-backed securities.

Industry size

  • Mortgages in the United States represent a multi-trillion dollar industry. The Mortgage Bankers Association of America stated that the total value across both refinancing and new purchases was $3.675 trillion in 2003. As of September 2019, the total mortgage debt by consumers across the United States was $9.44 trillion, representing the largest proportion of total consumer debt ($13.95 trillion).
  • Total mortgage debt has increased annually, more than doubling since 2001 to 2018, except for the four-year period (2009 to 2012) where mortgage debt decreased. The decrease was precipitated by the depreciation in the subprime mortgage market in 2007, which subsequently developed into an international banking crisis when the investment bank Lehman Brothers collapsed on September 15, 2008.
  • Conversely, interest rates have steadily trended downwards, with a 7.68% rate (15-year fixed-rate mortgage) in 1992 falling to 3.19% in 2019.

Mortgage aggregators

  • Aggregators provide superior choice and information to purchasers. Research finds that lending providers and brokers are mostly satisfied with the results they receive from aggregators, particularly those that are continually innovating.

Influencing factors

  • Despite the benefits aggregators bring to consumers and lenders, there is evidence that the mortgage aggregator industry has materially affected the adoption of mortgages within the United States. The overall mortgage debt has been rising year-on-year since the financial crisis, and without a perceivable anomaly that could be attributed to a disrupting influence.
  • The most notable factor influencing the economy generally and mortgage rates is the monetary policy pursued by the Federal Reserve Bank, along with external events such as coronavirus concerns.

Part
02
of four
Part
02

Mortgages: Financial Wellness

Research concerning financial wellness indicates that having a mortgage can result in positive and negative effects that consumers may want to consider. Positive effects include tax benefits, credit score increases, and the use of a reverse mortgage loan for other expenses. Negative effects include the need to sacrifice other critical expenses for a mortgage, a decrease in the ability to save, and the increase in unexpected costs.

Indicators of Consumer Financial Wellness

  • According to the Financial Health Network, there are 8 primary indicators of consumer financial wellness. The first four indicators have to do with spending and saving. First, consumers should spend less than they make. Second, consumers should pay their bills on time. Third, consumers must have enough savings in liquid form and fourth, consumers should have "sufficient long-term savings."
  • The remaining four indicators of financial wellness are centered on borrowing and planning. The fifth indicator relates to debt— if consumers have debt, it should be "manageable." Sixth, consumers need to have a prime credit score. Seventh, consumers must have "appropriate insurance" and finally, consumers need to plan ahead with their finances.
  • Notably, Nerdwallet surveyed Americans' financial health and found that only 10.5% could be considered financially healthy.

Impacts of Having a Mortgage

  • Becoming a homeowner has tax benefits that are produced by acquiring a mortgage. Taxpayers are able to deduct mortgage interest from their taxes on the first $750,000 of debt.
  • Though having a mortgage initially negatively impacts a consumer's credit score by decreasing it, the credit score will increase over a longer period. This may make it difficult to receive other loans in the six months directly following a new mortgage. According to a study by Lending Tree, the average credit score drop after a mortgage is 15 points, but a score may drop as much as 40 points. Eventually, however, a mortgage builds a consumer credit score by adding to credit history over a long period of time and diversifying the type of credit a consumer utilizes.
  • Buying a home means making financial sacrifices for more than half (55%) of Americans taking out a mortgage, particularly for younger generations of homeowners, such as Millennials and Gen Zers (71%). An example of a potentially harmful sacrifice is the choice that many are making to forego health insurance or other insurance coverage. As mentioned above, having appropriate insurance indicates financial wellness.
  • The ability to save, another key indicator for financial wellness, is also affected by having a mortgage. According to a 2017 Bankrate survey, 1 in 3 mortgages harms consumers' ability to save. The number is even higher in cases when the mortgage belongs to people with children— 51% of parents struggle to save enough money.
  • Taking out a mortgage has other effects that may be considered peripheral, but are still significant. Once taking out a mortgage and thus becoming a homeowner, financial planning is necessary because it is likely that there will be an increase in other expenses. This is because there are costs associated with owning a home, such as repairs. According to a survey by Bankrate, homeowners in the United States spend an average of $2,000 per year for home maintenance, which does not even include large emergency home repair expenses.
  • Many people who have a mortgage adopt a "get-out-of-debt" mentality, according to the National Bureau of Economic Research. This has tangible effects on the ability to increase wealth or save for retirement because people will try to pay their debt more quickly rather than put money into retirement savings accounts. As many as 38% of homeowners could save more money for retirement if they chose to put money in tax-deferred retirement savings rather than pay their mortgage more quickly.
  • Some older Americans (35%) use their mortgage to take out a reverse mortgage loan to enhance their lifestyle, manage other debt, or pay for expenses incurred after retiring.

Research Strategy

In order to understand what is considered by experts to constitute financial wellness, we first carried out research in order to accurately define financial wellness. These results have been included in the first section of the research findings. After gaining a clear understanding of the eight indicators determining financial wellness, we detailed several impacts that taking out a mortgage can have on consumer financial wellness.
Part
03
of four
Part
03

Consumer Motivations: Mortgage Aggregators

Mortgage aggregators only continue to grow as the internet becomes more populated, and their users have a host of different reasons for using their respective websites/platforms. In the United States, however, consumers tend to consider overall mortgage cost, interest/APR, and reliability of the lending company as some of the most prominent considerations for using these aggregators.

Cost

  • As with any large purchase, users of mortgage aggregators are very concerned with the knowledge of overall price/cost. Since there are so many different factors that determine the final cost of a mortgage, it is exceptionally difficult to compare and contrast all those fees and prices without the help of an aggregator. According to LendingTree, one of the most prominent aggregators in this space, 58% of home buyers see price as the most important consideration when comparing mortgages.

Annual Percentage Rate

  • APR is one of the most important variables consumers look at when comparing different mortgages, as it condenses the interest rate, lender fees, and discount points into a single number that can be compared across different providers. The importance of APR consideration is stressed by aggregators just as much as consumers; companies like NerdWallet enable their users to compare various lenders' APRs to the national average, and to get personalized mortgage quotes that are sorted and filtered by APR.

Company/lender reliability

  • Since mortgages are such long-term investments, another important consideration that drives consumers to the use of aggregators is the reliability of prospective lenders, particularly as they compare to their competitors. Reliability isn't an easy thing to measure, since it's ultimately dependent on a company's diligence, business model, and approach to customer service, among other factors. However, some mortgage aggregators are advanced enough that they have done just that; they've quantified lender reliability, thereby saving consumers a great deal of time on tedious comparisons that they'd otherwise have to do themselves. NerdWallet categorizes lenders through a five-star reliability rating, a scoring formula that determines a lender's reliability based on the types of loans and products they offer, the strength of their online platform, their availability of interest/APR information, customer service feedback, and any possible complaints filed against them with the Consumer Financial Protection Bureau.

Part
04
of four
Part
04

Mortgage Aggregators: Demographics

Upon conducting research into the demographic profile of U.S. consumers who use mortgage aggregators, it became clear that it can be reasonably assumed that the use of mortgage aggregators appeals most to first-time home buyers. Though data shows us that demographic data on first-time home buyers is continuing to shift, currently the majority are white, married couples, around 34 years of age, with at least one child living in their home, and a median salary around $100,000. See below for additional details.

Gender

  • According to survey data from the National Association of Realtors, 18% of home purchases were made by single females, compared to just 7% by single males.
  • Just over half of home buyers are married couples, with couples coming from heterosexual relationships being the largest segment represented within this grouping.

Age

  • The current average age of first-time home buyers is 34 years old.
  • As recently as 2019, buyers age 29 to 38 make up the greatest share of the first-time home buyer market with 26% of home buyers falling into this category.
  • The second greatest share of the home buying market goes to buyers age 39 to 53 with 24% of the market and a median age of 45.

Household Income

  • The overall median income for buyers across all age groupings is $91,600.
  • The median household income for buyers in the 29 to 38 year old age group, the largest share of the home buying market, is $101,200.
  • The median household income for buyers in the 39 to 53 year old age group, the second greatest share of the home buying market, is $111,100.

Marital Status

  • One of the largest changes that can be seen when examining home buying demographic changes in the last 20 years is in the marital status of new homeowners.
  • In 2017, married buyers made up just over half of all home buyers, compared to 61% in 1997.
  • One of the fastest growing demographics in the housing market is single women.

Household Composition

  • Across all buyer demographics, 37% of home buyers have children under the age of 18 living at home.
  • 58% of home buyers age 29 to 38 have at least one child under the age of 18 residing in the home.


Research Process

Finding a direct answer to the question of demographics for those currently utilizing mortgage aggregators did not seem to be available. Therefore, research was done to identify which markets mortgage aggregators are typically trying to target through their advertising and offered services. The reasonable assumption made based on those results was that first-time home buyers requiring extra guidance through the home buying process make up the largest target group of mortgage aggregators. The research was then focused on demographics relating to first-time home buyers across the areas of gender, age, household income, marital status, and family composition.
Sources
Sources

From Part 01
From Part 02
Quotes
  • "Eight indicators of financial health."
Quotes
  • "If you file 1040 and itemize your deductions, you can deduct the interest paid on your mortgage. The higher your tax bracket, the more lucrative this deduction has the potential to become. For example, if you’re in the 35% tax bracket, then every thousand dollars you spend on mortgage interest nets a tax savings of $350. Plus, you’ll also get a tidy deduction from your state tax obligation. Not too shabby!"
From Part 03
Quotes
  • "58% of homebuyers stated that price is most important when considering a mortgage."
Quotes
  • "APR is a tool that lets you compare mortgage offers that have different combinations of interest rates, discount points and fees."