The History of the Mortgage Industry in the United States

Since the beginning of times, mankind has had a fundamental need to mark its own territory, its own space and place to call home. Owning a home has always been a basic human need, desire and a requirement for centuries. The mortgage industry in the United States was built on the desire of its citizens to achieve an important aspect of the American dream, "Owning a Home".

Mortgages in the United States were initially started by the Insurance companies rather than the banks. The idea was to take over the property by the Insurance Company in case of a default rather than making money in fees and service charges. The development of the farm mortgage banking in the United States during the late nineteenth century was driven by the growth in agricultural production and population to the South and West.

One of the important factors of "The American Dream" consisted of owning a home in one's own name. In 1934, Congress creates the Federal Housing Authority (FHA), 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 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.

1900 - Early 1930's-

Early 1900's through the 1930's, buying a home was a much different process. The buyer makes a huge down payment with a balloon payment due after a very short term.

1913-

The Federal Reserve System (FRS) is created in 1913, the first step taken towards the modern mortgage industry. This step establishes a framework for the government involvement in mortgage lending. The Federal Reserve establishes a charter for banks allowing them to make Real Estate Loans.

1932-

The Federal Home Loan Bank Act of 1932 is passed 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.

1933-

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

1934-

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

1938-

The Federal National Mortgage Association (FNMA or Fannie Mae) is created which in turn increases the liquidity in the market and allows for more money to become available to lenders.

1965-

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

1968-

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

1970-

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

1977-

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

2010-

In 2008 and 2009, The Great Recession is caused in large part by the housing market. Due to Subprime Lending in the United States, a housing bubble creates that lacks liquidity. The housing bubble peaks in July 2006. When the housing bubble bursts, home prices across the United States report 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 default on their mortgages across the country.

As a result, the Federal Government passes the Dodd-Frank Wall Street Reform Act of 2010 (Dodd-Frank), which puts into place many regulations. It creates 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.

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