Reclaiming Equity For Everyone

American families need equality of equity

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CMO

Homeownership (and the financial independence it can provide) has been a staple of the American Dream for decades. On average, American homeowners experienced a doubling of home equity over the last seven years, resulting in unprecedented wealth. So shouldn’t buying a new home be easy for these families? It isn’t. Even though many families have more wealth on the books, getting a mortgage is still an onerous process because they aren’t able to tap into that equity.

Let’s take a closer look at the problem. Homeowners who want to move have three main options for affording a new home. They can sell their current home and move into a short-term rental so they have cash to purchase their new home. They can use contingent financing, which means that the mortgage they are getting approved for won’t work unless their current home sells in time. Or they can try to qualify for a mortgage on their new home while their current home is still included in their debt-to-income ratio. None of these options are good: temporary housing is a huge hassle, sellers tend to discount contingent bids because the deal has a risk of falling through, and most Americans can’t meet DTI requirements when two homes are included.

The journey to a new home is needlessly stressful and complex because borrowers have to qualify for a mortgage without being able to tap into their current home equity (often a family’s biggest source of wealth). This problem is compounded when borrowers are bidding against investors who can easily win with simple all-cash offers. The investors aren’t paying any more for the homes; in fact, they are often paying less because their bids aren’t contingent. In fact, mortgaged buyers must pay an 11% premium over all-cash buyers to compensate home sellers for mortgage transaction frictions. We’ve got nothing against winning bids or simple transactions; rather we want them to be available to everyone.

Homeowners’ inability to tap into their own home equity doesn’t just hurt them — it impacts the entire market. In recent years, institutional investors have targeted the lower end of the housing market for rental opportunities, snapping up inventory that traditionally went to first-time homebuyers. Recent statistics show that inventory is still down 35% since the pandemic; when current homeowners can’t access their equity to move up easily, they stay in homes, which further boxes out first-time buyers.

Economic Shifts Exacerbate The Problem

Even if we all are riding the same waves, we aren’t in the same boat. Not only is the gap between investors and retail buyers significant, but that gap is widening.

Right now, the Fed is walking a tightrope regarding the nation’s economy as it seeks to balance the risks of a slowing labor market while ensuring continued disinflation. Higher interest rates are tied to higher mortgage rates, and higher mortgage rates disproportionately impact borrowers who are able to finance less debt as rates rise. As the gap between retail buyers and investors grows, how can credit unions level the playing field for their members?

Mend The Gap

Here’s where product innovation and new lending solutions can help. To right the market, we need to empower everyday homebuyers to compete — safely, securely, and at scale. That means new tools and new approaches are needed to solve issues from helping members access their equity to qualifying for their first home outright.

We’ve already seen some innovative solutions chip away at the problem.

Institutional investors have targeted the lower end of the housing market for rental opportunities, snapping up inventory that traditionally went to first-time homebuyers.

For example, Calque pioneered a new ‘buy before you sell’ business model where we partner with community-first lenders to ensure that borrowers who should qualify do qualify for an affordable fee. Calque provides a binding backup contract on a borrower’s departing home, which removes compliance and risk barriers so credit unions can offer their members a bridge-like program that is easier to qualify for, has lower costs, and is less risky than a traditional bridge loan.

This is only one example of the possibilities that innovative lenders have for making the American Dream within reach again. More innovation can and should come from community lenders who truly have members’ interests at heart.

Everyone’s dollar is equally valid. Right now, the problem is that accessing those dollars is much easier for major players than it is for mom-and-pop homebuyers. As the market continues to evolve, credit unions have unique opportunities to make sure their members can compete on equal footing with investors and other cash-rich entities. One easy way to start is by helping members access all their sources of wealth to achieve their dreams with equality of equity.