Residential Mortgage Lending: Principles and Practices, 6e Chapter 1 History of Mortgage Lending
Objectives After completing this chapter, you should be able to: Distinguish between title theory and lien theory. Describe the mortgage lending activities of the early thrifts, mortgage companies and commercial banks. Cite the effects of the Depression on financial institutions and their mortgage lending practices. List and describe the function of the major federal legislation enacted to stabilize real estate values in the 1930s. Identify the reasons for the rapid growth in single-family mortgage lending after World War II. Identify the major consumer protection acts. Cite the impact of deregulation, inflation, and high interest rates and other recent events on the ability of the average American family to afford housing.
Objectives After completing this chapter, you should be able to: Understand the magnitude of the refinancing wave of 2001-03 and how the average age life of loan for a 30-year mortgage was only about three years during this period. Understand the dynamics of the rapid expansion and collapse of the mortgage lending industry and real estate markets since 2000. Be more aware of important regulatory activity in the near future.
Highlights Record years in total annual residential mortgage origination volume of more than $3 trillion in 2003, 2005, and 2006 - $2 trillion 2001. 30-year record lows for fixed-rate mortgages. Home ownership at a historical high of 69 % (2004) Extensive use of Automated Underwriting systems and other technological changes.
Highlights Double the level of mortgage-backed securities (MBSs) outstanding, from $3.2 trillion in 2000 to a peak of $7.6 trillion in 2009, and rapid fall to $3.1 trillion in 2010. Evolution in alternative types of mortgage instruments and nonconforming programs. Ever-increasing dominance of the mortgage banking strategy. Revamping of the entire federal regulatory and examination structure for mortgage lending.
Landmark Federal Legislation Home Owners Loan Act (1933) National Housing Act (1934) Federal Housing Administration (FHA) Federal Savings and Loan Insurance Corporation (FSLIC) Housing Act (1949) Housing and Urban Development Act (1968) Consumer Protection Act (1968)
more Federal Legislation Housing and Urban Development Act (1968) Financial Institutions Reform, Recovery, and Enforcement Act (1989) Home Ownership and Equity Protection Act (1994) The Homeowners Protection Act (1998) Housing Economic and Recovery Act (2008) Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
Need for Additional Funds for Housing The Role of Subprime Lending 2000–2010: THE RISE AND FALL OF THE SECONDARY MORTGAGE MARKET Need for Additional Funds for Housing The Role of Subprime Lending Evolving Mortgage Lending Issues in the New Century
What Do You Think? Examine how the concept of private ownership of land has evolved since the days of the civilizations of Babylonia and Egypt? How has the involvement of the federal government in real estate and mortgage lending allowed for growth in homeownership?
What Do You Think? The Great Depression was the beginning of modern residential mortgage lending. Examine the changes that occurred during this period and their importance to modern mortgage lending. The 1960-1970 period witnessed the enactment of many major consumer protection laws/regulations. How have these federal enactments changed the way in which residential mortgage lending is conducted?
What Do You Think? What is the difference between the Title Theory and Lien Theory of mortgage lending? Which exists in your state? What were two reasons for the stock market crash of 1987 and what was its impact on mortgage lending? What role did subprime lending play in the mortgage industry events during 2000-2010?
Check Your Understanding Prior to the development of English common law, mortgage lending generally favored the mortgagor. Under title theory, the title remains with the mortgagor, and the mortgagee has only a lien against the property. In the U.S., little real estate financing was done on an organized basis until after the Civil War. The first thrift institutions were created as temporary organizations, intended to exist only until each member purchased a home. Early mortgage companies primarily financed farms, and sold the loans to wealthy East coast investors.
Check Your Understanding Commercial banks were originally organized to provide financing for farmland and homes. Amortization of mortgages was nonexistent before the 1930s. Following the stock market crash in 1929, lenders were able to sell foreclosed properties at inflated prices and earn record profits. Many states passed laws in the Depression years suspending foreclosures. The Federal Housing Administration (FHA) was created in the 1930s to purchase or refinance defaulted mortgages.
Check Your Understanding Financial institutions suffered liquidity problems following World War II, due to the tremendous demand for housing by returning veterans. During the Great Depression mortgagors had little difficulty refinancing their home mortgage loans. Technology will continue to make mortgage originations easier for both borrower and lender. The creation of the secondary mortgage market contributed to a boom in housing construction and financing. The unknown impact of RESPA, Truth In Lending, Mortgage Disclosure Improvement Act, and the SAFE Act will have on mortgage origination.