The American mortgage is a mortgage debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the bank can foreclose.
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One of the factors underlining the American Dream consists of purchasing and officially owning a house. Only a slim margin of the middle class can outwardly afford to purchase a home without applying for a mortgage to achieve what many pursue to make a reality. The mortgage market has evolved with ever-changing face of real estate. The mortgage history in the United States has been fraught with booms and busts that have enriched and devastated families affected by recessions and depressions. Nevertheless, mortgages remain as the primary form of lending when it comes to property transactions. The mortgage process entails the granting of monies to obtain a home with good faith that the debtor will repay the loan with interest attached to life of it.
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 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.
The rise of the United States mortgage market occurred between 1949 and the turn of the 21 st century. In fact, the mortgage debt to income ratio rose from 20 to 73 percent during this time. In addition, mortgage debt to household assets ratio rose from 15 to 41 percent. The American federal government's intervention in mortgage-based lending caused this rapid growth, thus setting it apart from the rest of the world. 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.
Commercial, mutual savings, and property banks expanded into the early 19 th century. These lending institutions catered to the unique characteristics of each region they infiltrated. For instance, banks in rural regions issued mortgages to farmers. The number of banks increased between 1820 and 1860, which also led to an uptick in the volume of loans. During this period, money-lending institutions issued between 55 and 700 million dollars in mortgage loans. 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. 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 idea of a mortgage started in England and moved throughout the western world from 1190 onward. In the late 1800s and early 1900s, America’s waves of immigrants increased the need for mortgages and affordable property.
Unfortunately, mortgages at the turn of the century were different from mortgages today. In the early 1900s, homebuyers typically had to pay a 50% down payment with a 5 year amortization period. This meant that those who bought a house or property typically already had a lot of money. If you were buying a $100,000 house, you would have to pay $50,000 and pay off the remaining $50,000 within 5 years.
Increasing the likelihood of default was the fact that mortgages were structured completely differently than modern mortgages. On a 5 year mortgage, homebuyers would pay interest-only payments for the 5 year term. At the end of the 5 years, they would face a balloon payment with the entire principal of the loan.
This system wasn’t perfect, but it did provide homes and properties to millions of Americans. However, once the Great Depression hit, mortgages would never be the same again. During the Great Depression, lenders had no money to lend – of course, borrowers didn’t have any money to pay for the hard-to-find loans either.
The Federal Housing Administration (FHA) was created in 1934 and was built to protect lenders and reduce lending risk. Since lenders had become extremely cautious about lending since the Great Depression, this was severely hindering economic growth. The FHA solved this by protecting lenders and substantially reducing the risk of a borrower defaulting on a loan.
To do that, the FHA created a number of valuable mortgage services. They created the 30-year mortgage, for example, and reduced the down payment required on new home sales. The FHA also created an appraisal system that helped lenders assess the risk in a certain property. The 8-part appraisal system included indicators like “protection from adverse influences” and “relative economic stability.”
Loans that met the FHA’s standards of approval were known as FHA-insured loans. There were also a number of neighborhoods built across the country known as FHA-insured neighborhoods which facilitated the mortgage process for new homebuyers and encouraged lending activity.
Ultimately, the FHA created the modern American mortgage by adding the following systems:
- Quality standards: In order to qualify for an FHA-insured loan, a home had to meet certain quality standards. These standards measured the home’s likeliness to hold its value over time. Homes which were more likely to hold their value were more likely to receive an FHA-insured loan.
- Lowered down payment requirements: The FHA started a program that offered 80% to 90% loan-to-value (LTV). Private lenders had to offer similar rates in order to compete. This successfully lowered down payment requirements.
- 15 year to 30 year loans: A typical mortgage before 1930 only had a 3 to 5 year period. The FHA began offering 15 year to 30 year loans, stretching out payments and making it more affordable for medium-income individuals to buy a home.
- Amortization periods: Prior to the FHA, mortgages did not have an amortization period. Instead, mortgages involved paying a series of interest-only payments with one large balloon payment at the end of the term which was the entire principal of the loan. This made defaults a common occurrence and discouraged lending, which is why the FHA created the idea of amortization. Amortization involves paying off both interest and principal amounts with each payment.
The FHA continues to exist to this day and play a critical role in the U.S. mortgage market. It regulates mortgage loan insurance, promotes an efficient home financing system, and improves housing standards and conditions across the country.
Fannie Mae Home Loan
The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—that is, Fannie Mae and Freddie Mac—play a central role in the U.S. mortgage market by raising funds to issue securitized mortgages and by playing an active role in the secondary market for mortgage-backed securities. This institutional framework for the U.S. mortgage market raises several questions. First, just how do Fannie and Freddie distribute the risk from mortgages with fixed interest rates and easy prepayment options across the economy? Second, even if Fannie and Freddie were useful in developing the U.S. market for securitized mortgages, could their functions now be replaced by fully private agents? Third, a number of analysts have pointed out that Fannie Mae and Freddie Mac have an anomalous status of being nominally private firms that nonetheless are perceived by capital market to have ties with the federal government that allow them access to funds more cheaply than any potential competitors. Does the existence of such government-sponsored enterprises, as they are sometimes called, create potential risks that may offset any benefits they provide?
Freddie Mac Home Loan
Federal Home Loan Mortgage Corp (FHLMC) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle-income Americans. The FHLMC, also known as Freddie Mac, purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.
Freddie Mac was created when Congress passed the Emergency Home Finance Act in 1970. This was done in an attempt to expand the secondary mortgage market while reducing interest rate risk for banks. In 1989, Freddie Mac underwent a reorganization and was turned into a shareholder-owned company, now under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).