Chapter 5 Postwar Residential Finance

Chapter 5 Learning Objectives Understand the major forces that have changed and shaped the residential mortgage market since the end of World War II Understand the major forces that have changed and shaped the residential mortgage market since the end of World War II Understand how changes in the inflationary environment forced changes in the types of institutions that originated mortgages and in the types of mortgages they offered Understand how changes in the inflationary environment forced changes in the types of institutions that originated mortgages and in the types of mortgages they offered 5-1

History Of Real Estate Finance Con’t 1940s 1940s Preoccupied with World War Two Preoccupied with World War Two Veterans Administration Created Veterans Administration Created 1950s 1950s Decade of S&L Expansion and Stability Decade of S&L Expansion and Stability 1960s 1960s Creeping Inflation Creeping Inflation Disintermediation Disintermediation Maturity Mismatch Maturity Mismatch Expansion of Secondary Mortgage Market Expansion of Secondary Mortgage Market 5-2

History Of Real Estate Finance Con’t 1970’s 1970’s Inflation Increased from 6 Percent to 13 Percent Inflation Increased from 6 Percent to 13 Percent Interest Rate Increases Decreased Housing Affordability Interest Rate Increases Decreased Housing Affordability Development of Adjustable-Rate Loans Development of Adjustable-Rate Loans 1980s 1980s Regulatory and Tax Law Changes Regulatory and Tax Law Changes S&L Debacle S&L Debacle Due-On-Sale and Creative Financing Due-On-Sale and Creative Financing Zombie Theory Zombie Theory FIRREA FIRREA 5-3

History of Real Estate Finance Con’t Era of Creative Financing Era of Creative Financing Late 1970s and early 1980s Late 1970s and early 1980s Advantages of FHA and VA loans Advantages of FHA and VA loans Assumable loans Assumable loans Wraparound financing Wraparound financing Owner financing Owner financing

History Of Real Estate Finance Con’t 1990s AND INTO 2000s 1990s AND INTO 2000s Subsiding Inflation Resulted in Lower Mortgage Rates Subsiding Inflation Resulted in Lower Mortgage Rates Refinancing Craze Refinancing Craze Baby Boomers Trading Up Increasing Demand for Up-scale Housing Baby Boomers Trading Up Increasing Demand for Up-scale Housing Dominance of Secondary Mortgage Market, Primarily Fannie Mae and Freddie Mac Dominance of Secondary Mortgage Market, Primarily Fannie Mae and Freddie Mac 5-4

Important Dates In Real Estate Finance 1932 – Creation of the Federal Home Loan Bank System 1932 – Creation of the Federal Home Loan Bank System 1934 – Creation of Federal Savings and Loan Insurance Corporation (FSLIC) 1934 – Creation of Federal Savings and Loan Insurance Corporation (FSLIC) 1934 – Creation of Federal Housing Administration (FHA) 1934 – Creation of Federal Housing Administration (FHA) 5-5

Important Dates In Real Estate Finance 1938 – Creation of Fannie Mae (Fannie Mae) 1938 – Creation of Fannie Mae (Fannie Mae) 1968 – Creation of Government National Mortgage Association (Ginnie Mae) 1968 – Creation of Government National Mortgage Association (Ginnie Mae) 1970 – Creation of Federal Home Loan Mortgage Corporation (Freddie Mac) 1970 – Creation of Federal Home Loan Mortgage Corporation (Freddie Mac) 5-6

Important Dates In Real Estate Finance FHLBB Approved New Mortgage Designs: VRM, GPM, AND RAM FHLBB Approved New Mortgage Designs: VRM, GPM, AND RAM Economic Recovery Act Produces The Accelerated Cost Recovery System (ACRS) Economic Recovery Act Produces The Accelerated Cost Recovery System (ACRS) Tax Reform Act Created Modified Accelerated Cost Recovery System Tax Reform Act Created Modified Accelerated Cost Recovery System 5-7

Important Dates In Real Estate Finance Financial Institutions Reform, Recovery, And Enforcement Act (FIRREA) Financial Institutions Reform, Recovery, And Enforcement Act (FIRREA) Tax Act of 1993 Eased Passive Loss Rules and Extended Nonresidential Depreciation From 31.5 Years to 39 Years Tax Act of 1993 Eased Passive Loss Rules and Extended Nonresidential Depreciation From 31.5 Years to 39 Years 5-8

Important Dates In Real Estate Finance Taxpayer Relief Act of 1997 Established Maximum Long-Term Capital Gains Tax Rate at 20 Percent and Maximum Depreciation Recovery Rate of 25 Percent Taxpayer Relief Act of 1997 Established Maximum Long-Term Capital Gains Tax Rate at 20 Percent and Maximum Depreciation Recovery Rate of 25 Percent 5-9