16 May 2008
Mortgage Markets Boost Home Ownership, U.S. Economy
Government helps ensure access to home loans, mitigate crises
This is the sixth and final article in a series on the U.S. financial system and market regulation.
Washington -- Owning a home long has been equated with the realization of the "American Dream.” The encouragement of homeownership in the United States has been a major factor shaping government economic and tax policies, especially in regard to housing loans or mortgages.
In recent months, the housing market has come under intense scrutiny with a credit crisis triggered by the collapse of the subprime mortgage sector. Subprime mortgages are high-rate loans for borrowers who cannot qualify for lower-interest conventional loans.
During the housing boom of recent years, mortgages were sold as securities. When subprime borrowers began defaulting on their loans, the shock wave rippled through the entire housing sector -- lowering median home prices for the first time in decades and doubling the number of foreclosures -- and led to swift government action. (See "U.S. Central Bank Takes Sweeping Action to Avert Financial Crisis.")
DREAMS AND HOMES
For much of American history, owning a home was more dream than reality, with Western settlers who built their own homes swamped, statistically, by vast numbers of urban immigrants and city dwellers who almost all rented their dwellings.
By 1900, according to the U.S. Census Bureau, less than half of Americans owned their homes.
Homeownership soared after World War II as a result of favorable mortgage rates, a rising economy and a housing industry that grew swiftly to meet the new demand for suburban housing. The homeownership rate topped 60 percent in 1960 and peaked at 68 percent to 69 percent in recent years.
HOUSING AND TAXES
"Homeownership is something this country desires," said David Lereah, chief economist for the National Association of Realtors, to the New York Times.
The role of the housing sector in the overall economy is huge. William Poole, former head of the St. Louis Federal Reserve Bank, estimated that America's "net housing wealth" (the combined value of all household real estate and mortgages) totaled almost $11 trillion in 2006 -- equal to about 80 percent of the nation's entire gross domestic product.
Home construction remains one of the nation's largest industries; the monthly number of housing starts and building permits is considered an important indicator of the near-future direction of the economy.
The average American has enjoyed homeownership for another reason: homeowners can deduct from taxes the interest paid on a mortgage loan.
What is a gain to homeowners, however, is a loss to the Treasury. Overall, the mortgage-interest deduction is estimated to represent a loss of about $80 billion annually in potential revenue to the federal government.
FANNIE AND FREDDIE
Housing experts cite the overall availability of mortgage funds, or liquidity, as a significant factor in the relatively high rate of homeownership. The institutions chiefly responsible for maintaining mortgage liquidity are two oddly named companies, Fannie Mae and Freddie Mac.
The Federal National Mortgage Association, or Fannie Mae, was established in 1938 to ensure a consistent supply of mortgage funds at reasonable rates for communities and home buyers. Congress re-chartered Fannie Mae in 1968 as a shareholder-owned company funded solely with private capital.
The Federal Home Loan Mortgage Corporation, or Freddie Mac, was created in 1970 to stabilize and expand the mortgage market as well -- in effect, competing with Fannie Mae.
Previously, a bank would make a mortgage loan and then wait for repayment, usually for years. Now, the lending institution can replace its capital investment by selling the mortgage to Fannie Mae or Freddie Mac -- and use the money to issue a new mortgage.
Fannie Mae and Freddie Mac package these mortgages and sell them as debt securities on U.S. and international financial markets.
By law, moreover, both institutions must buy a certain number of mortgages issued to low- and moderate-income people to encourage lending to the broadest range of potential homebuyers. Both companies have undertaken steps to increase mortgage funding during the current crisis.
OVERSIGHT AND INSURANCE
As public-private hybrids, Fannie Mae and Freddie Mac operate as profit-making companies whose shares are listed on the New York Stock Exchange. At the same time, they are supervised by an office in the Department of Housing and Urban Development (HUD).
The primary mission of another HUD agency, the Federal Housing Administration (FHA), is to provide mortgage insurance for loans made by FHA-approved lenders. The agency has guaranteed more than 34 million home loans since its founding in 1934.
"We're the largest issuer of mortgage insurance in the country," said Brian Montgomery, FHA commissioner and assistant HUD secretary for housing. "Our programs are critical to helping Americans keep their homes."
Recently, the FHA announced a new program to help as many as 500,000 families facing possible foreclosure refinance their high-interest loans with lower-cost, FHA-approved mortgages.
“We want to be able to help families who are in the right house, but [have] the wrong mortgage," said Montgomery.
More information on mortgages is available on the Web sites of the Housing and Urban Development Department, Federal Housing Administration and American Bankers Association.
