DALLAS — There are many ways to mark the economic progress since the Great Recession: over 100 months of job gains, record low unemployment and a long bull run on Wall Street.
But don't overlook the improvement in the mortgage market, where a housing bust that started over a decade ago resulted in almost 8 million home foreclosures in the U.S. and over 500,000 foreclosures statewide.
That troubled past has been followed by a steady decline in past-due mortgages — in the U.S., Texas and Dallas County.
The share of mortgages that are three months late or in foreclosure is the lowest in years. For Fannie Mae, which provided more than $135 billion in single-family home loans in the first half of the year, the so-called "serious delinquency rate" topped 5.5% in early 2010.
The rate had declined to 0.67% in July and August, the most recent period available. That's the lowest serious delinquency rate for Fannie since early 2007, just before the housing bust.
By other measures, the mortgage market hasn't been this strong since 1995, said Frank Nothaft, chief economist for CoreLogic, a real estate information company.
"We learned — or maybe we relearned — the lessons on how to underwrite mortgages correctly," Nothaft said.
The housing bust and Great Recession led to many reforms and consumer protections, largely through the Dodd-Frank Act. The law sought to protect borrowers from predatory lenders and curb certain practices, such as so-called liar's loans and no-doc loans.
The new rules and tighter underwriting added costs and delays, and locked out some potential borrowers, Nothaft acknowledged. But he believes the tradeoff was worthwhile.
"Regulation can throw some sand in the gears," Nothaft said. "In some sense, that's the price you pay in order to have a more stable financial system."
The biggest impact has been on subprime loans, which are higher-priced debt products usually sold to borrowers with lower credit scores. Those loans accounted for 20% of all mortgage originations in 2006, four times higher than in 1994, and they later contributed to double-digit delinquency rates.
Dodd-Frank required lenders to make a "reasonable and good faith determination" of whether a borrower could repay the new mortgage. The law also set limits on points and fees, required verification of assets and income, and generally set a 43% cap on the borrowers' debt-to-income ratio.
"A key challenge," Federal Reserve economists wrote last year, "has been balancing the goal of protecting mortgage borrowers from predatory lending practices with the goal of maintaining broad access to mortgage credit."
While homeownership rates have declined, the quality of home loans has improved in a major way, at least when measured by the share of borrowers who are late on payments.
Fannie Mae loans that originated from 2005 to 2008, the peak of the subprime housing boom, had a serious delinquency rate of 4.2% in August. That compares with 0.3% for Fannie single-home mortgages originating from 2009 to 2019, which was after the recession and Dodd-Frank.
The improvement in mortgage quality isn't all due to tougher underwriting. The long economic expansion, which has been marked by steady job growth and record-low unemployment, has made it easier for borrowers to stay current on payments.
Over the same time, home values have climbed steadily, enabling owners to build up home equity and lower the risk of foreclosure. From 2011 to 2019, the average equity per borrower grew from $75,000 to $176,000, including a $5,000 increase in the past year, according to CoreLogic.
"These are all the necessary ingredients for the lowest delinquency rates in a long, long time," Nothaft said.
A recent report from the Federal Reserve Bank of Dallas documented credit trends in the state and major metros. Serious delinquencies in mortgages fell steadily in every market, and Dallas County's rate was lower than that of the pre-recession years, the report said.
Researchers pointed to the improvement in credit quality, reflected in the growth of prime loans and the decline in subprime in Texas.
From 2006 to 2018, mortgage loans in the state surged by almost $134 billion, after adjusting for inflation. Despite a 33% increase in loan volume, the number of subprime borrowers fell by 340,000, the Dallas Fed report said. Over the same time, the state added about 1 million prime borrowers, who took out even larger home loans.
"The market has shifted dramatically," said Emily Ryder Perlmeter, a community development adviser for the Dallas Fed and one of the report's authors. "There's been a tightening of credit standards because we don't want to see another" housing bust.
The key is to strike the right balance, she said: Give loans to those who can afford it, "and make sure we're not over-extending credit to borrowers who can't pay the debt back."
Has the pendulum shifted too far?
For decades, homeownership rates climbed steadily in the U.S. and Texas, pulling in many new customers. From the late 1980s to the mid-2000s, the number of low-income first-time homebuyers increased by over 40% — with black and Hispanic first-time buyers growing even more, according to a report by researchers at Texas A&M University.
Subprime mortgages were part of that expansion. But with subprime originations down sharply and home prices rising, that's changed.
"Low-income and minority households are finding it difficult to purchase homes and build wealth," the A&M researchers wrote.