History of the American Mortgage
The mortgage as we know it today seems like an institution that just is. Very few people ever question the buying and lending processes involved in mortgage loans and refinances, let alone how they arose. Why are mortgage lending companies and FHA streamline refinancing processes the way that they are? Recent American history actually has a lot to do with it. The mortgage as we know it today is largely the product of the Great Depression of the 30s, a slew of different legislation between the 1940s and the early 1990s, and the housing bubble of the mid-2000s. This week, we’re going to uncover what changes occurred during those time periods and how those events helped shape the American 30-year mortgage as we know it today!
Mortgages change during the 1930s
One of the biggest contributions to the modern mortgage was involved the National Housing Act of 1934. This piece of legislation, which was part of FDR’s New Deal, marked the beginning of the Federal Housing Administration (FHA). The stock market crash spooked a lot of lenders badly enough that they were afraid of mortgage loans. The high price ticket on them, paired with the realization that the housing market did not guarantee a return on investment, meant that they needed incentives to lend large sums again. Therefore, the FHA was formed to insure lenders in cases where borrowers defaulted on their loans. This boosted the economy greatly by providing new mortgage services including the creation of a home appraisal system and the introduction of the 30-year mortgage repayment plan. Two of the most effective changes to mortgage lending were the introductions of low down payments and amortization periods. When the FHA made down payments substantially lower than other mortgage lenders, they were forced to lower their rates to compete with government prices. Amortization periods meant that instead of paying off interest before paying off the principal on a new home, borrowers could pay off interest whilepaying off their principal. This made defaults much less likely.
New legislation makes home ownership more possible
Throughout the decades that followed the New Deal and the creation of the FHA, many new pieces of legislation were created to stave off another economic crash like that of the 30s. Many of these were designed to help Americans stay in their homes during financial crisis. One example is the set of VA loans, such as VA IRRRL, purchase, and cash-out loans, which Congress created through the Serviceman’s Readjustment Act of 1944. It was used as a way to incentivize veterans to stimulate the economy after their return from war by making it easier and more affordable to buy homes. Another example, the Tax Reform Act of 1986, helped make home refinancing a more attractive way to open new lines of credit for Americans by eliminating tax deductions on credit card interest. It was one part of many in the Reagan administration’s plan to boost the economy. Each piece of legislation had its own purpose, but Congressional actions like the Equal Credit Opportunity Act and Freddie Mac helped many Americans purchase a home and increase their assets once they had one.
The housing bubble causes concern for mortgages and refinancing
The last major shift for the mortgage and refinancing process came in the form of the housing bubble. Going into the 2008 election, most Americans were concerned about the state of the housing market. Foreclosure rates were high, so one of the biggest initiatives of the Obama administration was to counteract the global recession and housing bubble, both of which had taken hold since 2000 and had been steadily hurting the U.S. economy. 2009 and 2010 saw some hardships, but the pendulum swung back around in 2011 when foreclosure notices dropped an astounding 34% from the previous 2 years. Much of this was due to the Housing and Economic Recovery Act of 2008 which sought to put capital back into programs like Freddie Mac and Fannie Mae to strengthen the housing market. Since 2011, the foreclosure rates have dropped significantly due to the Housing and Economic Recovery Act
These were some of the most important pieces of legislative history regarding mortgages and refinance loans in American history. Did you learn anything you didn’t know previously? Have a question? Let us know by dropping a line!