The mortgage market will likely have a difficult time making its business model work around the giant student debt bubble growing in the United States, mortgage and real estate experts say.
The amount of student loan debt issued in the US has nearly tripled from $350 million in 2004 to nearly $1 trillion in 2012, making it very difficult for the mortgage industry to find first-time homebuyers — a critical element of a functioning housing market.
According to the Household Debt and Credit: Student Debt report by the Federal Reserve in February, at the end of 4Q12, there were about 39 million borrowers in the US with outstanding student loan debt, of which 17.5% — or 7 million — were delinquent.
These are the people who will have an exceptionally hard time qualifying for or affording a mortgage, industry professionals explained.
“With delinquent student debt, mortgage origination is very difficult,” according the Federal Reserve report. The share of new mortgages being originated for borrowers with student loan debt dropped from roughly 9% in 2005 to 5% in 2012, while the share of new originations for borrowers who were delinquent on their debt dropped from 2% to nearly zero.
“Rising student loan debt will increase the overall debt obligations of the newest generations of first time home buyers, leaving less for a mortgage payment,” said Mark Fleming, Chief Economist at CoreLogic, a real estate research and analysis group.
Fleming was part of a mortgage industry panel held in February called Supporting Homeownership, in which industry experts debated the most pressing issues facing the future of homeownership. In a press release by Radian Guaranty — the host of the panel and one of the largest US private mortgage insurers — Fleming said, “Based on historical norms, we have a net deficit of homebuyers now, with underwriting standards becoming very tough and student debts serving as a major obstacle.”
Changes in consumers’ debt profile and life events
Fleming added in a separate emailed statement that despite mortgage affordability [low interest rates], debt burdens “will reduce the amount of housing purchased and potentially delay the decision to buy a home.”
The 2012 Annual Profile of Home Buyers and Sellers by the National Association of Realtors reflected that, on average, people are waiting until they are 42 years old to buy their first home, up from 39 years old in 2010. More debt means “significant changes to lifecycle events,” according to Mark Kantrowitz, the creator of FinAid.org, publisher of FastWeb.com, and author of several financial aid and planning publications. This means that there is a low likelihood for borrowers in their 20s and 30s (who make up about 66% of all student loans outstanding) to buy a home anytime soon.
For the roughly seven million borrowers who have already defaulted (90-days or more past due) on their loans, the prospect of buying a home in the near future is even bleaker. According to RealtyPin.com, a home buyers’ website, it could take years before a defaulted student loan clears from a borrower's history.
Little Relief for Student Debt
There could be hope for rising student debt in the US if there were practical relief options for borrowers, but there simply isn't, according to Kantrowitz. When the student loan industry consolidated in 2011, and the Federal government became the “direct” lender of all student loans, competition plummeted, he said. The number of non-bank student lenders dropped from 60 before the financial crisis to six in its aftermath, he mentioned.
Now, the six select government-contracted lenders (who service 85% of all student loans) have little reason to offer serious refinancing or principal forgiveness because they have a great deal of "control and flexibility,” over the market, he added.
Instead, the real fix for the student debt problem would be early financial planning and counseling for borrowers before they take out loans, Kantrowitz said. Although there has been a great deal of improvement in loan disclosures and financial aid education at the college level, he said, there is still room for a great deal of improvement in overall financial planning for younger generations.
Although CoreLogic’s Fleming explained that “the mortgage market is well prepared to address these first time home buyer constraints with existing first time home buyer loan products and counseling programs,” it seems more likely that the mortgage industry may just have to wait until student debtors make room in their lives for a mortgage.
With the cost of college remaining high and the majority of youth still desiring higher education, debt industries may have to come up with more creative ways to achieve both affordable education and homeownership.
Diana Aqra, 719-237-6474; Diana.Aqra@KeyMedia.com