The American dream — to some, it means white picket fences, a TV in every room, and the freedom to pursue one’s personal goals, among many other things. But for many people, that freedom, those fences, and those goals wouldn’t mean anything if there wasn’t a house to put them in. However, for most of the middle class, buying a home is impossible without applying for a mortgage.
The mortgage market has become an integral part of American culture. There are many different types of home loans, resulting from various social and economic factors and circumstances.
The rise of the American mortgage market occurred between 1949 and the turn of the 21st century. During this time, the mortgage debt to income ratio rose from 20 to 73%. Since the federal government intervened in mortgage based lending, rapid growth occurred in the market. This is one of the defining features of the American market as opposed to other places in the world.
Fannie Mae, which is the nickname for the Federal National Mortgage Association (FNMA), was created in 1938 in order to increase the amount of money available to borrowers for mortgage securitization.
Fannie Mae purchased FHA home loans, and sold then as securities on financial markets — and so was born secondary mortgagee market, and a new source of capital for lenders. The theory was that if loans were packaged and sold together, they carried less risk.
Later, after WWII, soldiers returning from war were looking to settle down and pursue their American dream. To help veterans, the Veterans Administration created a special mortgage insurance programs to protect their lenders against default. This made many mortgage loans from private lenders possible for veterans, with no down payment.
As these Baby Boomers grew, their housing demands followed suit. Freddie Mac, the nickname for the Federal Home Loan Mortgage Corporation (FHLMC), was created by the U.S. Congress in 1970. Freddie Mac operated very similarly to Fannie Mae and was well known for offering 30 year fixed rate mortgages.
New types of home loans became popular — ARM (adjustable rate mortgages) came out of the 1980s, and allowed interest rates to fluctuate for the life of the loan, and the 90s produced Federal House Enterprises Financial Safety and Soundness Act, designed to increase government oversight of the industry.
In 2008, the U.S. fell into a period now known as the “Great Recession.” Caused by many different factors, like bad credit home loans, subprime mortgage lenders, and a U.S. housing bubble, the recession was the worst of our time.
Now, Fannie Mac and Freddie Mac are under government receivership — basically, they were bailed out by the government.
Many types of home loans are harder to get than ever before — if you are planning to get one, lock in on a rate as soon as you are comfortable with the numbers. On average, you’ll need at least 3.5% down, and often a minimum credit s core of 680.
The U.S. mortgage market has a long history, but it is still in place to allow you to pursue your American dream and become a homeowner!