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Scott K. Stucky is the chief strategy officer of DocuTech, a vendor of compliance services and technology in Idaho Falls, Idaho.
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Burden of Student Loans Stifles the Housing Market

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Editor's Note: An edited version of this post previously appeared on National Mortgage News.

As origination costs continue to climb due to regulations and the sheer cost of compliance, lenders are finding fewer borrowers knocking on their doors. According to the Mortgage Bankers Association's weekly survey, loan application volume fell nearly 20% in the past four months compared to the same period in 2012.

Unemployment rates are shrinking and the housing prices are slowly, but surely, recovering. So why are fewer would-be borrowers applying for loans? Part of the answer has nothing to do with the state of the housing supply or the mortgage industry: the growing burden of student loan debt.

According to the Consumer Financial Protection Bureau, student loan debt has surpassed the $1 trillion mark. Seven out of 10 college graduates in 2012 have an average of $29,400 in student loan debt, compared to $26,600 for 2011 graduates, according to the Project on Student Debt at the Institute for College Access and Success.

The high student debt burden is stifling the willingness to enter into a mortgage from both the lender’s and the consumer’s perspective.

From the lender’s side, the Qualified Mortgage rule has codified tightened standards for lenders wanting to close QM-eligible loans by requiring a debt-to-income ratio of less than 43%. With more young adults making large student loan payments instead of saving up for a down payment, combined with car payments and possibly credit card debt, the 43% DTI becomes a very difficult barrier for lenders working within the QM standards.

The issue is already coming to a head. According to David Stevens, president of the MBA, first-time homebuyers usually make up 40% to 45% of the mortgage market, but today that percentage sits around 35%. The QM rule is subliminally regulating a whole new generation of Americans out of homeownership—the American dream halts after education, job and family.

If lenders are reluctant to make loans to young consumers, the student debt load is making consumers reluctant to seek them. Young adults are unwilling to add additional debt to their already hefty monthly payments. Add the experience of watching their parents suffer through a down cycle in home prices, and they do not have the confidence that a home is as strong of an investment as previous generations.

So what's the solution, knowing that QM is a fact of life? For starters, applicants for student loans should be presented with disclosures like the bureau's Know Before You Owe forms for mortgages, highlighting loan terms to prevent confusion and showcase their best options. Key findings from the CFPB’s 2013 mid-year summary of customer complaints highlight common pain points specific to student lending, including, "problems getting information, receiving conflicting information and payment processing of loans," according to a summary by the customer analytics firm Beyond the Arc.

Taking on additional debt makes prioritizing a complicated feat, one that requires guidance and explicit terms that not only encourage purchasing a home, but ensure borrowers can make monthly loan payments for both student and mortgage obligations.

Lenders are keen to offer college students—some without much of a credit score or a credit score at all—loans to pursue their education, believing they will find jobs after graduation and make substantial monthly payments to pay off the debt. The cost of education is now taking a toll on the housing market. Major life decisions—such as buying a home—are being temporarily or permanently delayed because regulations deem them "unqualified" for a mortgage loan, even though these would-be homebuyers were qualified for a student loan a few years prior.

Specific disclosures for borrowers considering student loan debt would highlight the most important information to borrowers and help them understand the long-term implications of taking on large student loans. An unintended consequence of the QM rule is regulating an entire generation out of homeownership. Young consumers may not know now what the QM rule means now, but they will soon find out when they choose to pursue a mortgage and discover stiff barriers to entry. Transparency of student loan terms and conditions would help future homebuyers plan to afford student loan payments and purchase homes.

Scott K. Stucky is the chief strategy officer of DocuTech, a vendor of compliance services and technology in Idaho Falls, Idaho.

Correction: An earlier version of this article misstated the name of an initiative at the Institute for College Access and Success. It is called the Project on Student Debt.

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Comments (3)
Often overlooked in Student Loan Crisis articles is data around Parent loans. In the heyday prior to the mortgage debacle, many of my parent clients were taking out Parent Plus loans (against banker advice) to get their child a higher education. Junior only got saddled with $29,000 but mom and dad are on the hook for far, far more. With no underwritting criteria around repayment capacity, mom and dad took on way more debt and have far fewer options to work out the burden. It's not just students who can't move, Mom and Dadcan't afford to move either.
Posted by M Johnson | Monday, March 24 2014 at 1:55PM ET
Why is the massive debt overhang in any way the fault of QM? Apparently, the writer thinks people should pile up as much debt as they want to. That doesn't work, as all non-bankers learned in the Great Crash.

But it worked out just fine for the lenders, what with the bailouts, the get-out-of-jail free cards from the Obama Administration, and the IBGYBG mentality of bankers. So maybe there is no reason not to do it again.
Posted by masaccio | Monday, March 24 2014 at 2:02PM ET
Funny how perspectives change. I know I am started to sound like an "oldtimer"... But when I started in this game 30 years ago, to qualify for a home, the rations were 28/36% on gross income. And the crisis of the '80's showed us why we should not go above. ARMS and buydowns were the source of many defaults because of liberal first year rate qualifying.

When I hear how hard it is to qualify someone now, well that is laughable. First time buyers should be focused on first time homes. If we continue to encourage young borrowers to stretch their incomes using a 43 back end, we are most likely creating another problem.

As for student debt, where was the student's mind when he signed that note? Was there no concept that the note(s) would soon come due? If financial providers don't do a better job of making that point, this cycle will continue. As a manager, I most likely would not hire a college grad with extreme college debt. To me, it shows an incredible lack of judgment. Harsh yes, but do I as a banker, really want that type of judgment on my lending or ops team?

We as an industry need to address this issue rather than complain that the debt is restricting home ownership. Perhaps we should encourage those would be buyer to scale back their wants and get control of their "gots". I do know many young people that got that rude graduation gift. But, they realized they are responsible for their decisions and most of them have worked through their loans and have become great and responsible credits. And qualifying at 28/36% becomes no problem.
Posted by ufcxl | Monday, March 24 2014 at 2:52PM ET
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