How a Millennial Fought Her Way to a Post-Recession Home Loan
Ruth Paloma Rivera just bought her first home, battling her way through the paperwork obstacle course that is the post-crisis American banking system.
In her initial attempt at obtaining a mortgage, the bank wanted a copy of her diploma from Rutgers University, where she earned a bachelor’s degree in political science. It asked for years of telephone bills and a letter from her credit unions to ensure she was in “good standing,” she said. Because of a mistake on her application, the bank also requested verification of her permanent residency status. Rivera, 28, was born in Puerto Rico, which makes her a U.S. citizen.
“It has been a really long, daunting, hard process,” she said.
Rivera’s financial background would make many banks nervous. She had multiple jobs after graduation. She temporarily stopped paying on some of her student loans because her wages were so low. She was turned down for a credit card. And the house she wanted to buy — a three-story walk-up on the risky streets of North Philadelphia — needs major repairs. But she also spent almost two years rebuilding her credit record, including moving in with her mother to cut expenses, so she could qualify for a mortgage.
Her experience, and that of millions of other Americans, exemplifies what Federal Reserve Chair Janet Yellen calls a “headwind” for the economy: It’s hard to get a loan. Bad mortgages were at the epicenter of the financial crisis in 2008-2009, the worst since the Great Depression. Since then, regulators have swarmed over the financial system, imposing tougher rules while levying billions in fines.
The credit constraints have big implications in an election year that’s seen Donald Trump and Bernie Sanders become the protest candidates of Americans who feel excluded from economic growth. In a globalized world where companies can move some service and production jobs across borders, wages are constantly under pressure, and financial security is increasingly about asset ownership.
Housing — the traditional way Americans became stakeholders — has become more elusive. The national home-ownership rate fell 5.1 percentage points, to 63.8 percent at the end of 2015, from the final quarter of 2006. The decline cuts hard across racial lines, dropping 3.8 percentage points for white owners and 6.3 percentage points for those who are black. The rate for Hispanics declined 2.8 percentage points.
There are multiple causes of tight credit, which has lasted far longer than economists expected. The 2010 Dodd-Frank Act directed the Consumer Financial Protection Bureau to establish a minimum standard for mortgage underwriting, requiring banks to verify a borrower’s ability to repay. It also established a minimum of eight criteria, including employment status, current debt obligations and credit history.
Given the risk of litigation or costly management of defaulted loans, many banks simply are stepping away from riskier borrowers. JPMorgan Chase & Co. recently told investors its total mortgage originations fell in 2015 to $106 billion, from $166 billion in 2013; only 16 percent had a loan-to-value ratio of 80 percent or higher, compared with 39 percent. Spokeswoman Elizabeth Seymour declined to comment on the decline.
“Banks are so scared right now, they are triple-checking every single thing,” said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute in Washington.
Borrowers also were deeply scarred by the recession.
“While people are back to work, they are not at the income level they were seeing before the crisis,” said Patricia Hasson, president of Clarifi, a nonprofit credit-counseling service in Philadelphia. Many are underemployed, “making less money and carrying more of a debt load.”
Rivera accumulated $27,000 in debt to get her degree and graduated in August 2010, when the U.S. unemployment rate was 9.5 percent.
“You couldn’t even get a job at McDonalds,” she says. She found work as a substitute teacher and eventually stopped paying on her student loans because she wasn’t earning enough to cover them and her other expenses. Her credit score cratered. Just how penalizing all this could be hit her hard one day when she applied for a credit card to buy a new Apple computer.
“I got denied,” she said. “That summer I started my credit journey.”
Her goal was bigger than buying a new Mac: After scraping by with low-paying employment, she had a revelation while watching money move in and boost property values in Philadelphia’s hipster Fishtown neighborhood. Rivera says she decided her “career” wouldn’t depend on a particular job: It would be based on owning something, building its value and then owning something more.
She would start with a bet that gentrification would spread beyond Fishtown — with its craft-beer pubs, art studios and coffee shops — into Kensington, a nearby neighborhood with a reputation for heroin dealing and crime. But Kensington also has colorful street murals and corner bodegas, a testament to its Puerto Rican, black and Dominican population. And development money now is flowing into its southern borders from millennials and first-time home buyers priced out of more expensive neighborhoods to the southeast, according to Chris Somers, an owner of a Re/Max Access real-estate brokerage who also develops local properties.
“People feel more and more comfortable going into these fringe areas because they see their friends going there and development happening every week,” he said.
Rivera began looking at homes and also began exploring mortgage options. Any bank assessing the risk of loaning her money would ask two basic questions: Will she pay it back, and will the property at least cover the debt if she doesn’t? Two metrics would help determine the answers: an appraisal and a credit score based in part on how she’d repaid past debts.
She was already working on cleaning up her score, the benchmark ranking for borrowers that credit-reporting companies calculate. The range is from 300 to 850. Hers had been in the 500s — considered risky — and she was obsessive about raising it.
She scrimped, she saved, she moved in with her mom. There were no trips and no shopping sprees. She opened an account without a debit card at a credit union, making it more difficult to withdraw money.
“I sacrificed,” she said.
With some tough-love urging from advisers at Clarifi, she paid off one $1,000 college loan and began making the others current.
After about 18 months, she says her credit score crossed into the 700s, a level lenders consider a good risk, and she decided to make her move.
She had already decided on the house in North Philadelphia, which she knew intuitively was “the one” when she found it, she said. But as collateral for a mortgage, it would look risky to some lenders: The property is more than seven decades old. Its stairs are dangerous and the basement is damp. The doors, floors and walls all needed fixing. So she’d have to use part of her mortgage loan for home improvements.
Rivera also had a record of frequent job changes; in addition to working as a substitute teacher, she’d also been a youth counselor, cashier for a ferry-boat company and a security-company dispatcher.
She started with a bank that offered grants for first-time home buyers, then the loan officers moved to Meridian Bank in Plymouth Meeting, Pennsylvania. In addition to requests for her diploma and telephone bills, Meridian asked for the contractor doing her renovations to “add what permit costs are involved,” according to an e-mail she provided. It also wanted itemized “labor and material costs” and the information about her citizenship.
Tom Campbell, a Meridian senior vice president in charge of residential lending, said specifics on labor, materials and permit costs are required by government guidelines for the type of purchase-and-renovation loan Rivera wanted.
The bank also had to establish her residency status because of government guarantees on the loan, he said: Boxes in the citizenship section of her application were mis-marked, and the underwriter asked about it. Campbell added that also it’s common for lenders to ask for proof of college attainment from borrowers who have held multiple jobs.
Campbell says Rivera’s application ultimately was considered incomplete because the bank’s questions weren’t sufficiently answered.
“We sit here and constantly complain that we have to put people through the wringer,” he said. His bank provides loans to many low-income borrowers, and there should be a balance between too little and too much regulation, he added.
Rivera switched banks on the advice of her real-estate agent. Fearing she would lose the house, she offered to pay the seller rent, even though she wouldn’t be living there. The seller agreed. Rivera kept a radio playing in the kitchen and the lights on for about two months to ward off thieves who might steal copper piping and wire.
Her persistence paid off. On March 18, her odyssey ended when she finally got a loan from Quaint Oak Bancorp. based in Southampton, Pennsylvania, and closed on the house. Owning property is “empowering,” Rivera said, and she’s encouraged about her financial future for the first time since she left college.
“I really want it all,” she said. And by all, she means all: the empty lot next door, several more empty lots one house over and, most of all, a foothold in American capitalism.