There are many benefits to acquiring a mortgage loan. Mortgages have been around for a long time, with a thriving market spanning back to the 1930s. In the past, Congress has encouraged home ownership through various laws and government-backed programs. These laws helped people obtain mortgage loans and purchase a home. Read on to learn about some of the key changes that took place. Here is a brief history of mortgage loans.
Home Owners’ Loan Corporation
The brief history of the Home Owners’ Loan Corporation (HOLC) illustrates a lesson in wise use of government power. The government can conduct broad social benefit programs without wasting public funds. This example of a successful program demonstrates how government can help thousands of low-income Americans become homeowners and secure their property. HOLC has achieved its goal while reducing the cost of homeownership. However, HOLC’s legacy may remain unintended consequences.
While HOLC had many objectives, one of them was indirectly recapitalizing mortgage lenders. It was not without controversy, but its history is well-documented. The infamous “redlining” maps have led to many lawsuits. In addition, HOLC has also struggled with the issue of racial equity. While the HOLC was successful in providing mortgage loans to low-income borrowers, its redlining program has a darker history.
During the Great Depression, millions of Americans faced the prospect of losing their homes. Foreclosures were rampant. The government responded by creating the Home Owners’ Loan Corporation, which offered mortgage relief to struggling homeowners. The HOLC was created by the Federal Home Loan Bank Board to assist homeowners in lowering their mortgages. Although the program only helped small homeowners, it has created a massive amount of credit for Americans in need.
HOLC’s role in reviving the U.S. housing market was far from a myth. As a result, it commissioned a series of city maps that took race into account when rating neighborhoods. Eventually, Kenneth Jackson rediscovered these once-confidential “redlining” maps. Historians debate whether the maps were widely distributed and how widely used they were. But this controversy has continued throughout the 1970s and beyond.
Federal Housing Administration
The Federal Housing Administration (FHA) has a long and storied history of helping people purchase homes. The organization was founded in 1934, and has served nearly 44 million homeowners since then. It has also financed over 50,000 multifamily mortgages – about 4.8 million units of modestly priced rental housing. The organization’s policies have led to reductions in mortgage payments and reduced foreclosures, making home ownership more affordable than renting. Because these loans are government backed, the interest rates have fallen, as a result of reduced risk for the lenders.
The FHA began by helping borrowers who were at risk of foreclosure by insuring their mortgage loans. The organization helps to ease lenders’ concerns about risky borrowers and makes it easier for them to extend loans to people who might otherwise not qualify. It was also established to protect lenders from the risks of nonpayment by paying claims for the unpaid principal balance on the loans. Today, there are over 34 million FHA-insured loans in the United States alone.
The FHA is responsible for stabilizing credit and construction markets in times of economic instability. It has done this in multiple instances throughout its eight-decade history. In four consecutive years from 1948 to 1970, the FHA increased its national market share. During these years, the market share of FHA mortgage loans increased by more than five percent. Despite the downturn, the FHA has helped stabilize the housing market.
Although the FHA has experienced large losses from loans, its tighter underwriting standards and improved oversight procedures have already shown signs of improvement. In 2009, one out of every 40 FHA-insured mortgages experienced early period delinquency, meaning the borrower missed three consecutive payments within six months of the loan’s origination. This type of delinquency is a warning sign of a bad loan.
The Federal Housing Agency is responsible for the supervision of government-sponsored enterprises. While the mortgage loan market has been shaky, the FHA continues to support the housing industry with its loan guarantee programs. In fact, the FHA was responsible for insuring more than $1 trillion in mortgage loans during the housing crisis. This is a record of the FHA’s efforts to make homeownership more affordable for people who otherwise couldn’t afford to buy a home.
The federal government created Fannie Mae as a way to solve the country’s housing crisis during the Great Depression. Title III of the Federal Housing Act provided for the creation of private national mortgage associations to purchase and sell mortgages. In 1938, the federal government chartered the National Mortgage Association of Washington. The purpose of this association was to encourage banks to make more mortgage loans by purchasing them from struggling lenders. In doing so, the government wanted to encourage more lending during the recession.
In 1979, the company went through its most critical period. Purchasing mortgages through short-term notes and debentures meant Fannie Mae was losing millions of dollars. After a reorganization in 1980, a new president took the helm and began several programs to transfer interest-rate risk to the private sector. Fannie Mae also purchased mortgages with adjustable interest rates, which helped to decrease the amount of paperwork for homeowners.
The purpose of a government-sponsored corporation is to guarantee mortgage payments. These mortgage loans are backed by government-guaranteed bonds. Fannie Mae buys them from lenders and reinvests the funds into mortgage-backed securities. The mortgage-backed securities are sold to individual and institutional investors. A brief history of mortgage loans explains how Fannie Mae works. The government-sponsored enterprise buys mortgages from lending institutions in order to increase lending activity at these institutions. In this way, Fannie Mae ensures that mortgages remain affordable.
subprime mortgage crisis, Fannie
In the aftermath of the subprime mortgage crisis, Fannie Mae’s ability to buy new mortgages was impaired. The company lost its competitive edge. The housing bubble burst and many powerful government figures expressed their concerns about the GSE’s influence. As a result, Fannie Mae was delisted from the New York Stock Exchange. But, a brief history of mortgage loans shows that this government-sponsored enterprise was a necessary part of the housing industry.
The government-sponsored enterprise was first created by the federal government and was subsequently converted into a private corporation. In 1968, the Federal National Mortgage Association created a separate company, the government’s preferred stock, and private investors held the common stock. Its primary purpose was to make home loans more affordable to low-to-moderate-income Americans. As a result, it brought more families into the housing market.
In the early 2000s, banks and other lenders began offering high-risk mortgages, repackaging them into pools and selling them to investors. Subprime mortgages were funded with private-label mortgage-backed securities. In a period of financial instability, these less-vulnerable securities were viewed as relatively safe because they were insured and other securities would absorb losses on the underlying mortgages. In short, this allowed more first-time homebuyers to obtain mortgages.
The housing market started to tank during the housing bubble in 2007, and subprime borrowers, many of whom had ARMs, found it difficult to qualify for a new loan. Foreclosure rates spiked and home prices fell sharply. In response, lenders made refinancing and selling homes increasingly difficult, making these mortgages more expensive. In addition, the resulting housing market collapse made it difficult for the unprepared to find new housing, fueling expectations of further declines.
The slowdown in mortgage originations caused many lenders to slack on their underwriting standards. The result was an explosion of early payment defaults, which triggered a nationwide recession. This was the first time that a housing bubble has ever caused so many foreclosures and other problems. It was the result of low interest rates encouraging lenders to lend to borrowers with poor credit histories. This caused a wave of foreclosures, which spread across the country.
Great Recession and the financial crisis
Before subprime mortgages became common, it was nearly impossible for people with bad credit histories or other financial barriers to purchase a home. The mortgages were repackaged and sold to investors around the world, where they were subsequently sold many times over to global financial institutions, and eventually ruined the housing market. And this was only the beginning of the subprime mortgages crisis. As the housing market crashed, so did the risk of defaults, which led to the Great Recession and the financial crisis.
While the subprime mortgage crisis is largely the fault of the mortgage finance companies, the reality is that they made a lot of money before the market crash. As a result, many subprime mortgage executives cashed out. For example, Angelo Mozilo, the CEO of Countrywide Financial, a major subprime lender, made $270 million in profits from 2004 to 2007. Founders of New Century Financial made $40 million from stock sales in the same period.