1.2- Start of the Mortgage Industry in United States

People have owned homes since the start of mankind. Therefore one would think that mortgages would have been around for centuries since how could most people pay for their homes outright? However it was only in the 1930's that the modern mortgage industry came into being. Initially, it was not the banks, but the Insurance companies that started lending money to purchase homes. Unlike the current scenario where the banks make their money in fees, services charges and Interest, the Insurance companies lent money in hopes that the owner would default on their payments and they would gain ownership of the property.

The modern Mortgage concept started in 1934 when Federal Housing Authority (FHA) came into being. During the Great Depression, only forty percent (four out of ten) households owned homes in the United States. Most Mortgage loans were limited to fifty percent of the homes market value, the repayment term was between three to seven years that ended with a balloon payment. A huge down payment was required as much as 80 percent in some cases. The monthly mortgage payments were interest only payments that ended with a balloon payment after three to seven years. Most people back then, due to such harsh loan terms, were renters.

In 1934, Congress created the Federal Housing Authority (FHA) that was designed to help the Housing Industry recover from the Great Depression. Originally, FHA was not intended to fund loans but to provide Mortgage Insurance to banks and protect banks against losses incurred by default on home loans. As a result, FHA allowed lenders to commit more funds to home mortgage loans. Today, FHA is the largest insurer of mortgages in the world.

FHA started a program that lowered the down payment requirements for prospective buyers. 80 percent loan to value (LTV) and 90 percent loan to value (LTV) programs were introduced. In order to stay competitive, commercial banks started to do the same that allowed many Americans to buy their own homes.

The FHA started a new trend on qualifying people for loans based on their actually ability to pay back the loan rather than lending money to people based upon only "knowing someone". The loan terms were also stretched from barely three to seven years, for fifteen years and then finally thirty years that we have today.

FHA also set new standards for quality of construction of homes. In order to qualify for an FHA mortgage, the home had to meet certain quality standards rather than lending money for any home. The commercial banks started following the same standards as the lenders wanted the collateral (home) to outlast the term of the loan.

FHA started the Amortization concept where a certain amount of periodic payment went towards the principal and the homeowner started building equity in the home and lowered the number of foreclosures. Before FHA, the periodic payment amount was interest only payment followed by a balloon payment towards the end of the loan term that resulted in many foreclosures.

Following are some key historical events that shaped the modern mortgage industry that we see today.

1900 - early 1930's-
From the early 1900's thru the 1930's, buying a home was a much different process. Back then, the buyer would have to make a huge down payment with a balloon payment due after a a very short term.

The Federal Reserve System (FRS) created in 1913 was the first step taken towards the modern mortgage industry. This step established a framework for the government involvement in mortgage lending. The Federal reserve established a charter for banks allowing them to make real estate loans.

The Federal Home Loan Bank Act of 1932 was created to allow Federal Home Loan banks to lend money to savings and loans, credit unions and savings banks so that they could also finance home mortgages.

The Banking Act of 1933 further assisted in creating the Federal Deposit Insurance Corporation (FDIC) to Insure deposits and to protect consumers against bank default. In addition, FDIC allowed banks to continue to have a source of funds to make more home loans.

The National Housing act was signed by President Franklin D Roosevelt on June 27th, 1934. The Federal Housing Administration (FHA) was created by the Act. The (FHA) was created to help the housing Industry recover from the Great Depression. Originally, FHA was not intended to fund loans but to provide mortgage insurance to banks to protect banks against losses incurred by home loans. As a result, FHA allowed lenders to commit more funds to home mortgage loans.Today, FHA is the largest insurer of mortgages in the world. 

The Federal National Mortgage Association (FNMA or Fannie Mae) was created that increased the liquidity in the market and allowed for more money to become available for lenders.

After WW11, the demand for housing boomed. The US Department of Housing and Urban Development (HUD) was then established to provide financial incentives to renovate and build homes within certain urban areas. Later, HUD expanded its influence over many areas of the housing market.

FNMA was privatized in 1968 and became a government sponsored entity (GSE). Government National Mortgage Association, (GNMA or Ginnie Mae) was created at the same time to secure government issued mortgages (like FHA loans). The two entities allowed loans to be secure and enabled them to be sold in the secondary market for profit.

The Federal Home Loan Mortgage Corporation (Freddie Mac, FHLMC) was created to work hand in hand with Fannie Mae.

The Community Reinvestment Act was enacted by Congress in 1977, which analyzes a bank's success or failure to reach out to the lending communities it serves.

In 2008 and 2009, The Great Recession was caused in large part by the housing market. Due to subprime lending in the United States, a housing bubble was created that lacked liquidity. The housing bubble peaked in July 2006. When the housing bubble burst, home prices across the United States reported record breaking price drops. Subprime lenders had been giving out mortgages to people that did not qualify due to lack of regulation. Predatory techniques were used and home loans were given to unqualified buyers to purchase homes that they could not afford. As a result, many homeowners defaulted on their mortgages across the country.

As a result, the Federal Government passed the Dodd-Frank Wall Street Reform Act of 2010 (Dodd-Frank), which put into place many regulations. It created the Consumer Financial Protection Bureau (CFPB) to begin proposing new federal regulations, supervise the mortgage industry and enforce federal law in hopes that nothing like the Great Recession of 2008 and 2009 would ever happen again.