Home ownership is part of the American Dream; a large portion of the national economy is drive by the real estate, construction, and mortgage lending industries.
In order to understand today’s mortgage lending practices, it is necessary to look back through American history and at the social and economic forces that shaped our industry. In the 1920.s, home purchases could be financed by a” building and loan association” or an insurance company.
Lending was very restrictive, even during the “Roaring Twenties”, when speculation in the Stock market was rampant, and the nation was relatively prosperous. Mortgage loans were typically of 5-6 years’ duration, but did not amortize.
That means, the borrowers made interest payments for 5-6 years, but the principal balance did not reduce. (Unless home owner made specific payments to principal).
After the term was up, the finance company would typically “renew” the note for the same period. In addition, the down payment was 25-30% of the purchase price.
The limitations of this system are obvious. Not only was it different for the borrowers to obtain and payoff their mortgages, but it is clear that funds of finance real-estate purchases were limited.
However, there’s practices suited the lender, in other words in a small town, the borrower was known to the lender, and the house was too. The borrower’s employment was at the local factory, school, or city hall, and it required only the borrower signature on the note and a handshake to obtain financing.
Because lending was localized and not regulated, discrimination was widespread. Just as in other areas of American society, discrimination against minorities and women was common. It took decades of struggle and reform before full access to the economy was granted to all citizens.
The catastrophic event that changed the American economy and mortgage lending forever was the Great Depression. Many Citizens lost their fortunes and their properties, the common man lost his job. Money was tight and public confidence was low.
The Hoover Administration created the Federal Home Loan Bank Board (FHLLBB) in 1932, which was modeled after the existing Federal Reserve Bank (FRB) The FHLLBB consisted of 12 Federal Home Loan Banks located throughout the country.
Membership was mandatory for building & loan associations (but not insurance companies or savings banks). Building &loan companies (and others) could borrower from the FHLBB, using their existing portfolios as collateral.
By the end of 1933, the FHLBB had written $94 million in loans. Also in 1933, the Home Owner’s Loan Corporation (HOLC) was created to rewrite or refinance loans in default.
The HOLC was financed by the sale of government bonds. In this way, the government began its involvement in private sector lending, and in effect, started the secondary loan market.
The impact of Roosevelt’s New Deal on sagging mortgage industry, and hence the entire economy, was immense. The Federal Housing Administration (FHA), created in 1934, provided 30 – year amortizing loans with loan to value (LTV) ratios of up to 90%.
Many bankers and business men did not like the government’s intrusion into real estate lending, but the federal programs introduced during the 1930’s culmination with the creation of the Federal national mortgage Association (Fannie Mae) in1938, helped to pull the country out of the Depression, and to make home ownership more accessible to all citizens.
Finally, the Second World War brought about the creation of the Veteran’s Administration guaranty home loan programs, which provided thousands of returning veterans with their first home mortgage financing at 100% LTV (no down payment)! In 1942, congress passed the Serviceman’s Readjustment Act.
This Act, among others things, established the requirements for these home loan programs for veterans who had served country honorably.
During the 1950’s the United States experienced the largest growth spurt in its history – the population grew, employments was stable, inflation was low, and the building industry was booming.
Suburbs were created, and millions of people were able to purchase homes through the private sector (commercial bank and savings banks), as well as through the government FHA and VA programs.
When Fannie Mae was created in 1938, its purpose was to purchase FHA loans from banks (and later, VA loans), and it operated that way for many years. In 1954, Fannie Mae was reorganized as a mixed ownership entity, owned partly by the government, and partly by user institutions.
Finally, in 1968, Congress required Fannie Mae to become an entirely self sufficient private corporation (with certain government controls and safeguards). It is financed through the capital markets, and its common stock is traded on the New York Stock Exchange. At that Time, the Government National mortgage corporation (Ginnie Mae) was spun off from Fannie Mae.
Unlike Fannie Mae, Ginnie Mae is a government corporation and part of the Department of Housing and Urban Development (HUD). Its operation capital come from money borrowed from the U.S treasury, and proceeds from the sale of mortgages acquired from FHA.
Ginnie Mae’s most significant role today is to provide a federal government guarantee of mortgage-backed securities (MBS). The Federal Home Loan Mortgage Corporation (Freddie Mac) was created by Congress in1970 to provide a source of financing for loans made by savings and loan institutions.
Today, Fannie Mae and Freddie Mac compete with each other in the secondary market, which has resulted in a standardization of Lending procedures.
As we have seen, in 1925 the process of buying a house was relatively simple, if you had a down payment, a means of making your payments, and were a white male. Middle class and working-classes women in and minorities were not given equal access to credit, and “redlining” was used as a means to control the racial make-up of certain neighborhoods and cities.
As the civil rights and women’s rights movements grew in the 1950’s and 1960’s, the federal government was compelled to make discrimination in lending and housing illegal.
The Civil Rights Act of 1964 and the Fair Housing Act Of 1968 laid the foundation of equality in the eyes of the law, and equal access to housing. In to other words, all Americans now had the opportunity to own a piece of the American Dream.
The Equal Credit Opportunity Act (ECOA –Regulation B) was passed in 1974 and it prohibits discrimination in the granting of any credit to certain protected classes. Many other laws have been passed to protect consumers and to legislate fairness and reform.
With The creation of the Secondary market, credit requirements became uniform throughout the country. As a result, the basic process of obtaining mortgage financing is now the same in South Carolina as it is in Wyoming as it is in Maine, Standardization of PROFESSIONAL MORTGAGE PRACTICES was a logical consequence of the steady growth of both Fannie Mae and Freddie Mac.
Mortgages must be secure in order to have value to an Investor. Fannie Mae and Freddie Mac Attempt to guarantee the soundness of their mortgages by requiring that all loans delivered to them be uniform.
That is, all loans files must be documented using approved forms, with standardized practices and procedures. For instance, the URLA (Uniformed Residential Loan Application ) Fannie Mae 1003/Freddie Mac 65 was developed, and has become the standard mortgage loan application from fro any type of conventional mortgage, FHA/VA, jumbo, etc.
Other Fannie Mae and Freddie Mac procedures and practices developed over the years are as followed by mortgage lenders around the country, even those who might not be selling their loans on the secondary market.
Kirt Eure - Your Mortgage Coach
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