Americans are in debt, and a huge percentage of that debt is in mortgages. According to data from the Federal Reserve, U.S. mortgage debt is a whopping $15 trillion. For comparison, the 2017 gross domestic product (GDP) of the United States was $19.3 trillion.

To say this is a big pile of debt is an understatement. But for all its significance to the U.S. economy - 2008’s housing market correction nearly crashed the global economy — we know surprisingly little about it. A new study by Clever Real Estate, drawing on data from the Housing Mortgage Disclosure Act database and the Consumer Financial Protection Bureau, drilled down into the actual cost of mortgages in different U.S. states, and uncovered some puzzling national variations, as well as some ominous trends.

The first part of the study looked primarily at the interest rates and fees that borrowers pay in various states, and the second part scrutinized the amount of risk lenders have been willing to take on in those states. Let’s cover the state costs first.

Bad News for Borrowers in Maine, Ohio, and West Virginia

There’s a common belief out there that the Federal Reserve sets interest rates, but that’s not exactly true. The Fed sets the Fed Fund rate; lenders take that rate into account when they set mortgage rates, but they have wide authority to set their own rates. And it turns out that they exercise that authority to a degree that, to outside observers, can seem almost exploitative.

The average interest rate for mortgages in 2018 was 5.04%. The lowest state rate (4.24%) was found in Hawaii, while Maine (7.71%), West Virginia (7.39%), and Ohio (7.07%) had the highest interest rates in the nation.

Why do those three states pay interest rates that are nearly 1.5X higher than the national average? Well, it’s hard to say. One factor could be foreclosure rates. Foreclosures drive costs up for lenders, which leads to higher interest rates. Hawaii has a foreclosure rate of only 0.28%, which is much lower than the national average, and is likely a factor in their lower-than-average interest rates, while Ohio has a foreclosure rate 130% of the national average.

But this isn’t the whole story. West Virginia has a foreclosure rate that’s a third of the national average, but offers forbiddingly high interest rates. One major factor is likely the number of lenders available to borrowers in West Virginia. With only 40 loan officers per 100,000 citizens, the state has fewer lenders than most states, which means there’s much less competition to bring down rates. Why do West Virginia lenders charge such high rates? Because they can.

Small Increases Have Huge Impacts

Anyone who’s ever applied for a mortgage and done some quick back-of-the-envelope math on various rates, understands how much of a difference even small differences in interest rates make over the long term. Someone in Maine who buys a $183,900 home in 2018 will end up paying almost $290,000 just in interest over the term of a 30-year mortgage; the very same home loan in Hawaii will accrue less than half that much interest.

The effects are magnified when you put them into the context of average state incomes. Maine home buyers have an average yearly income of $110,000, but would be spending 14% of their monthly income on their mortgage payments. If they could get an interest rate closer to the national average, that percentage would drop to a much healthier 10%, or lower.

But interest rates are only part of the story. Fees make up a significant part of the buyer’s financial burden, especially in the beginning. Since these fees cover standard costs like underwriting, application process, and document preparation, it seems reasonable to assume that these fees would be more or less standard across various markets. But like interest rates, the study found wild and seemingly arbitrary variations from state to state.

Nationally, the average borrower paid just under $2,000 in mortgage fees. In states like South Carolina and Pennsylvania, borrowers paid less than $600, while in Hawaii, borrowers paid 3.5X more than the national average. Why? As in West Virginia’s sky-high interest rates, it’s anybody’s guess.

Is a Perfect Storm Brewing?

Mortgages aren’t just getting more expensive; they’re also getting riskier.

It starts at the top. The Washington Post recently outlined how the federal government has encouraged lenders to issue high-risk loans that “many borrowers might not be able to repay.”

After 2008, we all know what can happen if a lot of people start defaulting on their mortgages.

Traditionally, lenders have strongly preferred issuing mortgages to borrowers with a debt-to-income (DTI) ratio of around 43% or less, which translates to spending 43% or less of their monthly income on debt expenses like credit cards, student loans, and car payments. The logic here is clear; the more of your income eaten up by debt, the riskier it is to take on more debt.

But in recent years, lenders have been issuing mortgages to borrowers with DTIs far above that 43% threshold. In 2018, more than 15% of mortgages were issued to borrowers with DTIs above 43%, and in 2019, Fannie Mae increased their allowed DTI to 50%.

While some of this can be chalked up to simple cost of living, since many of these high DTI borrowers live in high cost-of-living states like California and Hawaii, high DTI borrowers were also receiving loans with the highest interest rates and the highest fees. Giving the riskiest, debt-strapped borrowers the most expensive, riskiest loans is a recipe for disaster. Even with real estate commission in the hands of the seller, buying a home with such a high DTI can be a dangerous proposition.

Looking at a test case shows that the numbers just don’t work for most households. In the high cost-of-living state of California, the new maximum mortgage amount is $679,650, and the average interest rate is 4.79%. In order to make their monthly mortgage payment of $3,600 to $4,300 without exceeding the recommended 28% of their income, this “average” borrower would have to make at least $185,000 a year. Considering that the median household income in 2018 was only $61,000, it’s reasonable to assume that a lot of these risky, expensive mortgages are being issued to debt-strapped borrowers with very little financial wiggle room.

What happens if the housing market experiences a downturn? As we learned in 2008, we’re all going to feel the pain.

Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.