08 Sep

The Evolution of the US Mortgage Industry

Evolution of the US Mortgage Industry

The US Mortgage industry is one of the world’s largest. The total value of mortgage debt outstanding in the year 2015 was estimated to be around $ 13.8 trillion. The fact that most of the citizens cannot afford to buy their dream home outright, has given this industry its mammoth size and stature.

As buying a home is one of the most prominent goals in everybody’s life, applying for mortgage becomes an integral part of the process. To ensure that every citizen’s endeavor of owning a house is successful, the government has taken several steps to abridge the process.

However, over the course of its evolution, the industry has not just grown in size but also in complexity. Here are some of the vital turning points in its history.

The Beginning

It all began in the year, 1929 when the nation was hit by a severe economic depression. As the financial sector of the country turned into a chaos, very few citizens could afford to own a home. As the depression reached its peak, most financial institutions began to wind up from the market.

While mortgage industry existed even before the depression, only short term loans were available. The duration was not more than 5 years and the loans offered were on ‘interest-only’ basis. The principal remained due on the borrower and had to be paid at the end. In case, the borrower was unable to repay the total amount, the property was foreclosed. As the economy lay in dire straits and with the financial condition of the citizens deteriorating, the number of foreclosures surged to new heights.

To bring an end to the situation, the government intervened by inventing the long-term mortgage, which was conceptually modern. This was the beginning of self-amortizing mortgage. In order to counter the effect of the depression on the housing industry, Federal Housing Administration (FHA) was also instituted by the Federal Government. It was a prominent step in the initiation of the mortgage industry. FHA started offering guarantees to Banks and financial institutions and minimized their risks against the defaults from the borrowers. The financial protection ensured a new optimism among the lending institutions and the industry began to grow slowly.

Year on Year Sale in US

The Period of Consolidation

In 1938, the economy was still finding it difficult to come to terms with the financial crisis. Many financial institutions did not feel totally secure to offer long-term mortgage as they believed it wasn’t safe to commit huge funds into an asset that lasted for so long. This situation demanded an institution that could buy mortgages from the banks in order to free their capital. This money could again be available for banks to grant new mortgages. The government responded by creating the Federal National Mortgage Association (aka Fannie Mae), which ensured liquidity in the mortgage market. This paved the way for the majority of citizens with limited income to realize their dream of buying a home.

The incorporation of Fannie Mae allowed lending institutions to charge low interest from the borrowers. Moreover, it also balanced the demand and supply of mortgage across the country.

In the year 1968, the Vietnam War caused a huge drain on various types of resources. This also led to a huge liquidity, as well as credibility crisis in the mortgage market, which impacted the Government’s balance sheet. Fannie Mae was called upon to reduce the lack of liquidity, for which it had to borrow funds at a high rate. It increased both the Government’s and Fannie Mae’s debt. President Lyndon Johnson’s administration had to re-charter the institution into a private company that allowed its stock to be traded to private stockholders and capital investors. As Fannie Mae still maintained a public mission issued by the government, it became the first “Government Sponsored Enterprise” (GSE). Simultaneously, a new corporation known as the Government National Mortgage Association (Ginnie Mae) was also established.  It started to insure FHA loans, apart from initiating other government lending programs. Furthermore, Fannie Mae’s monopoly was compensated by a second GSE, known as the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

The Present Situation

In the year 2008, the sub-prime mortgage crisis in the US triggered a global recession. Few of the most prominent financial institutions in the country filed for bankruptcy and the mortgage industry faced one of the biggest crises in its history. Owing to these unwarranted events, the federal government has initiated a massive restructuring process. Various regulatory practices have already been initiated to avoid predatory lending, which led to the crisis. Citizens are being educated on the implications of hybrid and adjustable-rate mortgages so that they can evade the pitfall when fixed-rate loans expire. The industry has now been brought under control through stringent regulations, which are being strictly followed by all the parties involved. As better practices become the norm, the US mortgage industry is slowly regaining its stability and is bound to get much more robust over the coming years.

Key Takeaways
  • As buying a home is one of the most prominent goals in everybody’s life, applying for mortgage becomes an integral part of the process.
  • The mortgage industry has faced many ups and downs since its evolution, and many best practices have been initiated following the crisis.