History of Housing Finance

The economics of Housing & Homelessness

Based Largely  on Chapter Three of Alex F. Schwartz "Housing Policy in the United States"

"Economics has long chafed at its association with “soft” fields such as philosophy and history and thus spent most of the 20th century trying to imitate the hard sciences by becoming more mathematically rigorous. But this attempt didn’t work, because trying to explain the world via mathematical models is still fundamentally interpretive, requiring crucial assumptions about which factors belong in one’s formula at all. The shift instead plunged economics even deeper into esoteric theorizing and insider jargon."

In The News

Incentive

  • "Insurers with the capability to own mortgages directly could save some 35-45 basis points on the cost of securitization itself"
  • "Substantial amount of capital freed up on insurance company balance sheets because of the better risk treatment"
  • "Whole loans get similar treatment as A rated corporate bonds but yield more"
  • "A pool of mortgages in their whole loan form gets better risk treatment on insurers’ balance sheets than that same pool of mortgages when held in the form of a bond"
  •  "Demand is so strong that it’s pulling more mortgages out of the pool available for securitization. The share of all non-qualified mortgages that were securitized into RMBS fell to around 50% in 2023 from about 80% in 2021"

Net Effect

Assets

Libabilities

Bank

Mortgages

Deposits

Liquidity Risk: 

Interest Rate Risk:

Key Risks

Maturity Transformation Problem

1930-

Home Loan Bank System (1932)

  • Increased liquidity in the mortgage market
  • Increased the life of the mortgage
  • Increased the loan-to-value ratio
\textrm{LTV} = \frac{\textrm{Loan Amount}}{\textrm{Value of House}}

Home Owners Loan Corporation (1933)

  • Increased the length of mortgages to 15 years
  • Introduced fixed interest rate, self-amortizing mortgages with uniform payments
  • Increased the loan-to-value ratio

Federal Housing Administration (1934)

  • Offered Insurance to qualified lenders
  • Insured mortgages with terms of 25-30 years
  • Insured mortgages with significantly higher LTVs (up to 93%)
  • Contributed to housing segregation 

The Federal National Mortgage Association (1938)

FHA Insured Mortgages

Fannie Mae

Investors

Mortgages

$

Bonds

$

Loans

Securities

Thrifts

Homeowner

Home Loan Bank

Homeowner

Mortgage Company

FHA

FANNIE MAE

Mortgages Prior to 1980

Community Reinvestment Act (1977)

  • Passed in response to unequal supply of mortgages in minority and low-income communities
  • Required Depository Institutions to lend in their local areas
  • This measure was considered by regulators when deciding to approve: mergers & acquisitions

1980-

Residential Mortgage Backed Securities

RMBS

Senior Tranche

Mezzanine Tranche

Equity Tranche

Lower Tranches

1990-

Subprime Loan

Alt-A Mortgages

Prime Loan

  • Poor Credit History
  • High Loan to Value Ratio
  • Unsteady Income
  • Undocumented assets

2000-

Issuance of mortgage- backed securities, by type, in billions of 2018 dollars

Percent of home mortgages starting foreclosure

\textcolor{orange}{2 \ \textrm{million}}
\textcolor{purple}{5\%}

Bear Stearns

JPMorgan Chase

Lehman Brothers

Bankruptcy

Merril Lynch

Bank of America

Fannie Mae & Freddie Mac

Conservatorship

2010-

Qualified Mortgages (Consumer Financial Protection Bureau)

  • Payments for all types of credit cannot exceed 43%
  • All mortgages must be amortized over 30 years and documented
  • Underwriting must be on current market-rate interest rates

Surprises

"Senior tranches received the highest ratings, mezzanine tranches lower ratings, and the equity tranches were not rated at all"

"While mortgages on second homes and investment properties can be restructured in bankruptcy court, mortgages on one’s primary residence cannot"

History of Housing Finance

By Patrick Power

History of Housing Finance

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