Urban Institute: QM Rule May Penalize Self-Employed

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Households headed by self-employed
persons make up about one-tenth of all households and have a median income
higher than those headed by salaried persons. But, while both self-employed and
salaried households were hit hard by the Great Recession, the self-employed
were hit harder
and have not yet fully recovered from those effects.  Those households also find it more difficult
to obtain a mortgage
than salaried individuals because they are harder to
underwrite.  They experience greater
income volatility and lack pay stubs or W-2s that make it easy for lenders to
verify and document income.

Three Urban Institute researchers,
Karan Kaul, Laurie Goodman, and Jun Zhu used American Community Survey (ACS) data
from 2001 to 2016 to determine the size of the self-employed population, their
incomes, homeownership rates and mortgage use compared to salaried households.

The three found
about 8.5 percent of households were headed by a self-employed person in 2016, and
another 3.4 percent were salaried but had some self-employment income. This
number is down from the pre-recession years when the self-employment number was
increasing – from 8.9 percent in 2001 to 9.6 percent in 2006.  It bottomed out at 8.3 percent in 2013,
declining in every age group. By 2016, the largest share was among household
heads aged 40 to 59, 10.6 percent.

 

 

The
incomes of both self-employed and salaried households took a hit during the
recession, but the former was hit harder. In 2007 the median annuHal income
among self-employed was roughly $16,500 higher than salaried households at
$71,800.  By 2011 the differential had
fallen to $9,200.  By 2016 median
salaried income had almost recovered to pre-crisis levels at $56,100 while self-employed
households earned a median $66,900, the gap shrinking to $10,800.

 

 

Even though the self-employed have higher
median incomes, they are much more likely to report month-to-month income
variation.  Table 1 shows the number of earners,
both renters and homeowners, who reported substantial variability, even if
occasional, in their income across the year. The variability is the greatest
among the younger age groups and those with the lowest incomes

 

 

With their higher incomes, self-employed
households have had higher homeownership rates than salaried households since
at least 2001.  Between then and 2007 the
self-employed homeownership rate averaged 13.4-points higher than the salaried
rate.  Then it fell for both groups (and
for all demographic groups – to the lowest on record in 2016.)  But homeownership among the self-employed went
from 79.2 percent to 72.9 percent while the salaried homeownership rate went declined
less, from 65.8 percent to 62.7 percent, despite the higher incomes of the self-employed.

Mortgage use also declined more among the
self-employed households.
 The authors
measured this by looking at the share of new homebuyers in each year who had a
mortgage. Before 2007, self-employed households who purchased a home were
almost as likely to carry a mortgage as salaried household homebuyers- about 80
percent in each category. Mortgage use declined for both groups after 2007, but
67 percent of self-employed households that purchased a home in 2016 had a
mortgage while 74 percent of salaried home purchasers used one.  Self-employed mortgage use declined 13
percentage points compared with 6 percentage points for salaried households
over the same period.  

 

 

Dividing the two
types of households by age buckets (20 to 39, 40 to 59, and 60 and older) shows
declines of mortgage use among all six groups with households ages 60 and older
being the least affected.
In the other two age groups it was the self-employed with
the larger declines.  Before 2007, mortgage
use for 20-to-39-year-old self-employed households was only marginally less
than for salaried households (both close to 90 percent). By 2016, however,
mortgage use for self-employed households had fallen to 80.6 percent, while
mortgage use for salaried households had fallen to 87.7 percent. Thus, the self-employed
in the prime homebuying ages (20 to 59) are those whose likelihood of having a
mortgage has fallen the most.

 

 

The authors say
that the larger declines in the homeownership rate and mortgage use for the self-employed
partly reflects the fact that their incomes fell more during the recession
which, all else being equal, would make it more difficult to qualify for a
mortgage.  But they say a “more nuanced
picture emerges” when income is held constant.  Putting income into buckets rather than
looking at discrete numbers shows that median incomes within the buckets have been
either flat or modestly higher over time. This reflects the changing
composition of households in each bucket. That is, as incomes fell during the
recession, many households dropped out of a higher income bucket and fell into
a lower one.   

But for households
in the highest bucket, $70,000+ per year, median incomes did not decline
materially or at all. Self-employed households in this bucket earned a median
annual income of $133,000 in 2007 versus $134,000 while salaried households
earned $111,700 in 2007 and $118,000 in 2016.

 

 

The authors then
used the same income buckets to show the homeownership rates and mortgage use
between of the two types of earners.  Both
variables declined for both types of households post-crisis despite the fact
the median incomes did not fall in any income bucket.

 

 

 

In addition, the
declines were bigger for self-employed households. Among the largest earners,
those most likely to have the resources to obtain and sustain homeownership, mortgage
use for salaried households fell from 89 percent to 84 percent, between 2007
and 2016; for self-employed households, it fell from 85 percent to 76 percent,
declines of 5 points and 9 points respectively. The homeownership rate for salaried
households decreased to 79 percent from 84 percent and for self-employed
households from 90 percent to 85 percent, 5 points in both cases. Similar
trends are visible in the other two income buckets.

In sum, the larger
decline in each income bucket of mortgage use and the homeownership rate for
self-employed households in the face of stable median incomes suggests that
other factors such as credit access are at play and have affected the self-employed
more adversely.

The Bureau of
Consumer Financial Protection (BCFP) is required by its enabling legislation to
assess and report on the effectiveness of its qualified mortgage rule by
January 2019.  The authors say their
study adds further support to the growing recognition that the mortgage market
is not adequately meeting the lending needs of self-employed households.

Although those households
continue to earn higher incomes than salaried ones the results of the analysis reflect
that, at any income level, both mortgage use and the homeownership rate for
self-employed households have declined more than they have for salaried
households. This suggests that factors beyond income, such as tougher mortgage
availability
or requirements of appendix Q to the BCFP’s qualified mortgage
rule are likely at play. 

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