The Mortgage Market Is Safer—and a Generation Is Locked Out

WASHINGTON — Mortgage defaults have fallen to historic lows since the Great Recession, but the reforms that created that stability have also built a formidable “credit wall” for many qualified, moderate-income Americans seeking to buy homes.

The Pew Charitable Trusts found that only 4% to 5% of delinquent borrowers now go on to default, compared with the 55% default rate recorded during the subprime crisis of the early 2000s. A robust set of loss-mitigation programs, including loan modifications, payment deferrals, and forbearance, helped produce that change after becoming widespread during the financial crisis and expanding during the COVID-19 pandemic.

Yet the share of mortgage originations going to borrowers with moderate FICO scores between 600 and 699 fell by 13.3 percentage points from 2005 to 2024, reaching just 22.3%. During the same period, mortgages secured by borrowers with credit scores of 700 or higher rose by 24.9 percentage points.

“Although borrowers now take on more debt as a share of their income than ever before, they must have a pristine credit history to be approved for a loan,” said Adam Staveski, a principal associate with Pew’s housing policy initiative. He said post-crisis regulatory changes reduced delinquencies but “also made it more difficult for many Americans to qualify for a mortgage.”

The lending shift followed the sweeping overhaul of the U.S. financial system after the 2008 crash. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Consumer Financial Protection Bureau (CFPB), which introduced the “Ability-to-Repay” and “Qualified Mortgage” (QM) rules in 2014.

Under the QM framework, lenders face strict legal liabilities unless they rigorously verify a borrower’s assets, employment status, and debt-to-income ratio. The regulations also eliminated high-risk practices such as “liar loans,” which required no documentation of income, and interest-only mortgages.

Credit scoring systems favor people with established, long-term credit histories and substantial financial reserves. FICO scores are therefore highly correlated with age, accumulated wealth, and household income, while standardized lending has frequently excluded non-traditional and moderate-income borrowers.

The Pew study said tighter federal credit standards disproportionately affect first-time buyers, lower-income families, rural populations, and Black and Hispanic households. “Although some of these potential borrowers might not be financially prepared to take out a mortgage, others are excluded because of a thin or nontraditional credit history, or because the federal government’s credit standards are historically high,” Staveski added. “While tighter standards have made the mortgage market safer, they have also made it harder for some qualified individuals to achieve homeownership.”

Those credit barriers are arriving as borrowing costs and home prices remain elevated. Freddie Mac reported Thursday that the benchmark 30-year fixed-rate mortgage rose to 6.76% from 6.71% the previous week. The rate was 6.35% a year earlier and is now at its highest average borrowing cost since mid-2024.

mortgage rates have risen alongside the 10-year Treasury yield as the Federal Reserve maintains a cautious approach to adjusting its benchmark interest rate. The National Association of Realtors (NAR) said Thursday that sales of previously occupied homes dropped 2% last month from the prior month, reaching a seasonally adjusted annual rate of 3.98 million units.

The decline was the third consecutive monthly drop and was 1.2% below the same period last year. Thomas Ryan, senior North America economist at Capital Economics, said mortgage rates are on track to move back above 7% as Treasury yields continue upward.

Capital Economics subsequently downgraded its housing outlook. “The upshot is that, while we have been more bearish on housing activity than the consensus for some time, our projection that existing sales will average 4.1 million over this year as a whole now looks slightly optimistic,” Ryan said. He added that annual transactions are more likely to average close to 4 million, which would be the weakest annual performance for the U.S. housing market since 1995.

existing home sales last hovered around 4 million in 1995, when the U.S. population was roughly 266 million, compared with more than 335 million today. The median home price was then approximately $114,000, producing a far more affordable price-to-income ratio than today’s record-high market.