|
Volume 3 Number 9
October 2006
In this Issue
Funding for Recovery in the Hurricanes' Wake, Part I
Neighborhoods in Bloom: Targeted Community Investment Works
Homeownership Voucher Programs: Benefits Are Worth the Challenges
The Maturing of America's Housing Finance System
In the next issue of ResearchWorks
The Maturing of America's Housing Finance System
Our nation's housing finance system is rooted in informal building societies that emerged in late-1700s England. Members of these early mutual societies pooled their savings to help one another build homes. Similar communal solutions to financing homes were prevalent in the United States in the first half of the 19th century. Today, the U.S. housing finance system receives high marks around the world for bringing
borrowers together with investors and savers to deliver affordable loans, competitive mortgage securities, and sound risk control practices.
Evolution of the U.S. Housing Finance System: A Historical Survey and Lessons for Emerging Mortgage Markets, released by HUD in April 2006, says that to understand the growth and development of housing finance in the United States, we must review 180 years of market-shaping events and innovations.
The March of History
The early building societies eventually gave way to formal lending institutions that included the formation of savings and loan associations (S&Ls). Initially, most loans matured within 6 to 10 years with biannual payments,
interest rates were variable, and the acceptable loan-to-value ratio was 50 percent. The late 19th Century saw two innovations that helped shape the future of housing finance: the certificate of deposit, which stimulated savings and gave lenders greater liquidity, and the formation of mortgage banks, which sold mortgage-backed bonds to raise funds for originating
and servicing loans. However, many of these bonds defaulted during the recession of the 1890s because of inadequate risk evaluation procedures.
|
|
Banks and S&Ls form the basis of America's housing finance system.
|
The stock market crash of 1929, the Great Depression, and the resulting spike in unemployment sparked loan defaults and an unprecedented deflation of home values. To resolve these crises, the federal government organized the Home Owners' Loan Corporation and the Reconstruction Finance Corporation, which bought both loans in default and the stock of bankrupt savings institutions. The government also established Federal Home Loan Banks to charter and regulate federal S&Ls.
The Roosevelt administration infused housing finance with new participants by creating the Federal Housing Authority (FHA). FHA insured lenders against mortgage defaults; introduced the fixed-rate, self-amortizing mortgage with a low downpayment and longer-term maturity; and established private mortgage associations
that issued bonds and bought mortgages from primary lenders. In addition, the federal government created deposit insurance companies: the Federal Deposit Insurance Corporation for commercial banks and the Federal Savings and Loan Insurance Corporation for S&Ls.
|
|
The U.S. housing finance system brings borrowers together with investors and savers to deliver affordable loans.
|
During the 1970s and 1980s, the housing finance system experienced a series of macroeconomic shocks, including spikes in the inflation rate, interest rates, federal budget deficits, and energy prices, as well as changes in monetary policy. S&Ls felt the tremors on several fronts. Their profit margins shrank, demand for housing fell, mortgage originations dwindled, prepayments on existing loans slowed, and money market mutual funds created an alternative for small investors. In response to these challenges, the federal government lifted ceilings on the interest rates that banks and thrifts paid on time deposits, made S&Ls more competitive with adjustable rate mortgages and money market deposit accounts, and realigned and strengthened liquidity-enhancing institutions.
Today, automated underwriting tools increasingly shape housing finance. These tools enable greater thoroughness and accuracy, allow faster and less expensive transactions, and ease the entry of new competitors into the mortgage industry. For example, computerized scoring techniques permit comprehensive
and objective assessments of credit risk.
|
|
Automated underwriting tools allow faster and less expensive transactions, while still assessing credit risk.
|
The report suggests that the present U.S. housing finance system has more liquidity and security than in previous eras because of its diverse institutions, products, players, and competitors. Once revealed, its history can be useful for emerging mortgage markets around the world, especially by demonstrating how governments in other countries might support these developing institutions. The report further suggests that multiple options exist for achieving particular policy objectives, particularly in the areas of wholesale funding, risk sharing and management, and affordable lending products.
Evolution of the U.S. Housing Finance System: A Historical Survey and Lessons for Emerging Mortgage Markets, can be downloaded free of charge at www.huduser.org/publications/hsgfin/US_evolution.html.
|
| 
