Economists' Commentary: Going Back to Plain Vanilla Financing

July 2, 2009

By Danielle Hale, Research Economist

 A recent article in the Wall Street Journal on mortgage finance and the new consumer protection agency envisioned by the administration suggests that the new agency will bring a return to plain vanilla financial products. In the mortgage market, this will mean a return to fixed-rate products on which the mortgagor pays down the principal and interest with periodic (typically monthly) payments.

The same article cites data from the Mortgage Bankers Association that indicates that we’ve already seen a return to these types of products in the mortgage industry—“Some 95% of mortgage applications today are fixed-rate,” according to the article.

Data from the Home Buyer Seller Survey conducted by the National Association of REALTORS® show a similar trend. The share of buyers in fixed-rate products in 2006 was only 71 percent. That share grew in 2007 to 81 percent and grew further to 91 percent in 2008, the year of the most recent survey. Over the same period, the share in adjustable-rate mortgages shrank from 8 to 5 to 2 percent. Those in fixed- then adjustable-rate products shrank from 15 to 10 to 4 percent.

Changes in the Recent History of Other Finance Indicators

Other indicators, such as the percent of buyers financing a home and the percent of home financed in a transaction are little changed over the period at the median. From 2005 to 2008, 92 to 93 percent of buyers financed their home purchase each year. Among first time buyers, 96 to 98 percent financed their home purchase. Among repeat buyers, the share was lower but mostly constant with 89 to 90 percent financing their home purchase.

The median percent financed was also unchanged over the period. Since 2006, the median has remained at 91 percent. Within categories, 2008 saw a decrease in the share of homes with 100 percent financing. A greater share of buyers put at least some money down to fall into the 95 to 99 percent financed category. These shifts in the distribution did not affect the median.

What Does this Mean for the Market?

These figures suggest that the market is already well on its way to correcting any problems of excess that existed in mortgage finance. It does not tell us whether consumers or mortgage brokers are leading the charge, but a greater share of home buyers in 2008 used fixed-rate mortgage products. Is it possible that the market will overcorrect and not offer adjustable products to buyers who could benefit from them? This is certainly a possibility, but responses to the 2008 survey indicate that some non-traditional financing is available. When it is constituted, the new consumer protection agency will have to balance its role of looking out for the interests of consumers who may not be financially savvy with making sure that it does not cut-off alternative financing vehicles for consumers who are in need of such products. Fortunately, after the recent episode, consumers and lenders both seem to be aware of two truths that were overlooked during the boom: 1) while home prices increase on average, they will not always do so and 2) it is in everyone’s interest to make sure a borrower can repay a loan.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >