Lending

Dear Friends and Family,

Fifty years is short enough for some of us to remember, yet far enough in the past that it serves as a useful comparison to the present. While there may be some events in 1974 that we recall fondly—notably the Eurovision song contest that brought ABBA to the masses— the economic climate is certainly not one of them. Interest rates hit 9.19% in 1974 and continued to climb for the next decade. The value of a 30-year mortgage was something to carefully consider, with serious long-term financial implications.

Expansion of Lending

Before the creation of the FHA in 1934—in the midst of the Great Depression—America was a nation of renters, with only 1 in 10 households owning homes. Mortgages were difficult to obtain and often with very limited terms. By insuring the mortgage loans offered by lenders, the FHA provided protection against loss or default. Furthermore, the passage of the Equal Credit Opportunity Act (ECOA) in 1974 prohibited creditors from discriminating against applicants based upon a protected set of classes. As a result, the ensuing decades witnessed remarkable growth in homeownership across the nation, soaring to 65.8% by 2022.

Over the Long Term

Expansion of homeownership encouraged the now standard 30 year fixed-rate mortgage. While adjustable-rate mortgages (ARMs) continue to be offered, fixed-rate mortgages account for a whopping 92% of all mortgages. Offering a stable, consistent monthly cost benefited lower-income households when rates rose. From credit unions to mortgage brokers, lenders operate essentially in an open market, serving different offerings and fees, but all subject to the same federal requirements.

High Value & Mortgage Free

Homeowners have gained handsomely from the rise in property values across the nation, with few exceptions. A record 39.3% of homes are now mortgage-free, comprising a substantial share of households with large amounts of untapped equity. Many of these mortgage-free households took advantage of the fall in interest rates in the previous two decades to refinance and pay off their loans early. However, they now face the difficulty of what to do with a high-value asset in a market of elevated interest rates.

A Turning Point

The equity gained over time in a home is something to be celebrated. Yet, its fixed stability also represents a difficulty when it comes to accessing some or all of the accrued property gains. The importance of the physical home, often emotional and sentimental, is also seen as an asset to be passed-down rather than sold for value. Currently, refinancing is unattractive to existing mortgage-holders, the large majority of whom enjoy exceptionally low rates. Moreover, recently mortgage-free homeowners might be hesitant to acquire fresh debt at higher rates.

Exploring Alternatives

Conventional sources of lending are not appropriate for every client or property. Depending on the circumstances, it may make sense to explore alternative options, something a knowledgeable real estate broker will have experience with. Using existing sources of collateral, such as rental properties, investment credits, stipends, and other assets can be advantageous and provide profitable alternatives. Strong relationships with financial institutions, credit unions, and other associations are valuable resources when seeking to leverage collateral.

With the complexities of lending and finance deeply intertwined with home owning, it is important to have a trusted advisor who values long term gain. I’m here to answer questions, feel free to reach out and schedule a call.

All the best,

Toni Haber

Licensed Associate Real Estate Broker
Founder, Toni Haber Team | Private Client Advisors
TONI@compass.com | 917.543.1999