Mortgage Credit Availability for Self-Employed Households

Abstract

This article shows that post-crisis underwriting standards are such that the mortgage market is not adequately meeting the lending needs of self-employed households. We look at how self-employed households fared from 2001 to 2016, compared to salaried households in terms of income, homeownership rates, and mortgage usage. Although self-employed households continue to earn higher incomes than salaried households, they were hit harder by the housing crisis and have been slower to recover. Incomes for self-employed households are still below pre-crisis levels, and incomes for salaried households have largely recovered. However, at any income level, both the homeownership rate and mortgage usage have declined more for self-employed households than for salaried households. This suggests that factors beyond income, such as tighter mortgage credit availability and requirements of Appendix Q of the Qualified Mortgage (QM) Rule, are at play. We suggest that the CFPB use the 2021 expiration of the GSE patch as an opportunity to fix this issue by revamping the QM rule and eliminating Appendix Q.

TOPICS: Analysis of individual factors/risk premia, legal and regulatory issues for structured finance

Key Findings

• • The incomes of self-employed households were hit harder by the crisis and have been slower to recover than their salaried counterparts.

• • However, at any income level, both the homeownership rate and mortgage usage have declined more for self-employed households than for salaried households.

• • Tight mortgage credit availability has played a role in this; Appendix Q of the Qualified Mortgage Rule makes it much tougher for self-employed borrowers to document income, contributing to both a fall in mortgage usage and the rise of the non-QM market.