Mortgage Market Domain
Isis C. Harvin
Southern New Hampshire University
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August 10, 2016
America is the epitome of diversity. Although the social structure of this country divides the levels of need based on finance and location, most Americans have the same desire or dream of home ownership. “The mortgage market consists of unique and specially trained investors who understand its complex structure. It consists of many professionals, including mortgage brokers, bankers, and correspondents (The History of the American Mortgage, 2016).” The mortgage market has had a direct correlation with the Banking and Finance Industry since the inception of issuing bank notes. “The American mortgage has its roots in the founding of the first legitimate commercial bank in 1781. Once established, a new system of banknotes exchange, governmental interplay, and lessened liability on the behalf of bankers caused the ripple effect in the United States mortgage market (The History of the American Mortgage, 2016).”
The American Mortgage Market During the 19th Century
The industrial period led to the growth of commercial, mutual savings, and property banks. “These lending institutions catered to the unique characteristics of each region they infiltrated. For instance, banks in rural regions issued mortgages to farmers (The History of the American Mortgage, 2016).” Although lending to farmers may appear to be a housing loan it is actually commercial because of the way that the land that is being purchased is to be used; this means that the structure of the loan by whatever ending institution will be structured differently than that of a family attempting to purchase their own piece of the American dream.
The National Bank Act of 1864 established national bank charters and created greater security for the federal treasury. It also led to the development of a nationalized currency to help finance the Civil War. The nationalized currency replaced state and bank bonds the charters allowed for the banking system to expand; however, national banks faced restrictions from directly investing in mortgages and the long-term investment market.
The American Mortgage Market During the 20th Century
The Great Depression and the New Deal in the 1930s forever changed our nation’s housing policies and real estate financing.” “The Federal Home Loan Bank system (FHLB) was established in 1932. The U.S. Housing Act of 1934 created the Federal Housing Administration (FHA), while the U.S. Housing Act of 1937 created a public-housing program that paved the way for the U.S. Department of Housing and Urban Development. In 1944, the Veterans Administration (VA; now the U.S. Department of Veterans Affairs) loan program was created.”
In 1893, small state banks started to issue bonds as acknowledgments of debts based on the credit and trust of the debtor alone. The United States favored these types of mortgages; however, they vastly differed from the loans of today. In fact, the average life of these mortgages only lasted six years and account for less than half of the property’s value.
The United States mortgage market faced disruption during the end of the 19 th century. It became a disorganized network of uneven allocated mortgage loans that impacted western farmers, and the poor negatively. The segmentation of the mortgage market favored the Northeast while charging growing areas in the West with higher rates. The majority of lending institutions desired to urbanize the Northeast by injecting investment funds for city projects and expansion. Lending institutions provided nearly 40 percent of all loans for residential construction. Population numbers doubled in the Western cities, despite higher interest rates than their eastern counterparts. Scholars suspect that the uneven allocation of mortgage funds may have slightly stunted growth in new cities between 1880 and 1890. Western mortgage companies sold their loans to Eastern investors. However, the unsuspecting drought that caused farm foreclosures hurt Eastern investors and caused them to doubt the mortgage investment market. Investors regained their confidence when the West began its recovery and interest rates began to level. This occurred when life insurance companies became successful and funds moved across regional borders.
Mortgages featured variable interest rates, short maturities, and high down payments by the early 1990s. Before the Great Depression, homeowners renegotiated their mortgages every year. The modern mortgage market began to take shape after the federal government intervened during the Great Depression. This intervention resulted in the formation of the Federal Housing Administration, the Federal National Mortgage Association, and the Home Owner’s Loan Corporation. The Great Depression caused property values to plummet, which destabilized the mortgage market. Homeowners defaulted on their loans when holders refused to refinance their mortgage. Roughly 1/10th of all homes faced foreclosure, leading to the constant pressure for holders to resell repossessed property. Lending institutions survived by providing government-sponsored bonds to reinstate mortgages in default. It enabled the extension of terms and fixed rates to create self-amortizing loans. Other efforts were made to increase investing confidence in order to stabilize mortgages in poorer areas.
The Second World War introduced provisions written in the G.I. bill for veterans, including the formation of the VA mortgage insurance program. It provided excellent rates and became part of the compensation package of service members. Lending institutions intended for this to stimulating the housing market. The loan to value ratio increased 95 percent. In addition, the maximum mortgage term extended to thirty years. In 1968, the Government National Mortgage Association emerged to bring uniformity to the American mortgage market by bringing financial instruments to keep it afloat. The birth of the Federal Home Loan Mortgage Corporation occurred in 1970 to help promote home ownership. Adjustable rate mortgages returned to the market during the 1980s under the discretion of the Federal Reserve. In 2003, government mortgage institutions accounted for nearly 43 percent of the total mortgage market.
Buyers need to understand the depth of the mortgage information available to them in order to obtain a risk-free loan for their home, including the implications of adjustable-rate and hybrid mortgages to avoid pitfalls when fixed-rate loans expire. Recent lawsuits against Bank of America and Wells Fargo for allegedly engaging in mortgage fraud stands as a testament and need for stricter regulation. Educating the buyer on important mortgage information and regulating the lender will ensure the stability of the mortgage market over the coming years. (http://www.mortgagecalculator.org/helpful-advice/american-mortgage-history.php)
Currently in the Mortgage Industry
The Great Depression and the New Deal in the 1930s forever changed our nation’s housing policies and real estate financing. The Federal Home Loan Bank system (FHLB) was established in 1932. The U.S. Housing Act of 1934 created the Federal Housing Administration (FHA), while the U.S. Housing Act of 1937 created a public-housing program that paved the way for the U.S. Department of Housing and Urban Development. In 1944, the Veterans Administration (VA; now the U.S. Department of Veterans Affairs) loan program was created. http://www.scotsmanguide.com/Residential/Articles/2006/03/Mortgage-Brokering–A-Short-History/.
With the creation of Fannie Mae and Freddie Mac, both of which are government sponsored mortgage lenders more people were given the opportunity to purchase homes with the help of the government and banks sponsored by the banks. Even commercial real estate flourished in the late 1990’s and early 2000’s. However, this was short lived as a result of tactics that were shady an unethical, coupled with the near collapse of banking institutions across the country again forced a change in the method used to create mortgages and how people were considered for home ownership loans.
In this day and age there are more stringent guidelines attached to the mortgage process and everyone who is seeking a piece of the American dream now must meet the requirements that are set forth, and must be able to show proof that they can in fact pay for their piece of the American dream. It is a long way from how things use to be and that can be considered better or worse depending on who is being asked and who is profiting from the guidelines that are present. One thing that is for certain, the mortgage process has grown a long way from where it started and will continue to flourish as long as people continue to aspire to want to own homes.
The History of the American Mortgage, August 2016, http://bebusinessed.com