Wednesday, May 25, 2016

Home Ownership and Mortgages.

As I write this blog, I'm listening to Public Radio.  I don't know the name of the program but they are discussing the history of home ownership and the government.  It was interesting to hear that there was a movement to have people buy their own houses in the 1920's for political reasons.  It was thought that if people owned their homes they were less likely to be a radical. 

Holiday House, Summer House, HomeSo I wondered about home loans and purchasing homes through history.  Apparently only 40 percent of the population purchased homes in the 1920's because the terms were not very favorable.  Lending institutions required a 50% down payment, charged 6% interest for a term of 5 years.  Most people simply refinanced the balloon payment every 5 years. 

Due to the depression, the federal government creates Fannie Mae to buy mortgages from banks so banks have more money available to lend.  At the same time, the government created the Federal Housing Authority which helped banks offer more loans.  By 1936, the down payment was only 20% while the term of the loan extended to 15 years and the loan became self amortizing so they were actually paying the loan off.  In addition, the interest was still 6%.

Between 1940 to 1970, home ownership rose from 40 to 60 % and the federal government began offering V.A. loans to returning military.  At this point, the VA loans required no down payment and only charged 5%.  If you were did not serve, you were required to have a 20% down payment.

In the 1970's and 80's interest rates skyrocketed and new types of loans with variable interest rates because popular because they could start out lower but would be reindexed on a regular basis.  At this point in time, there were groups who would loan money and use the high rates to make money.

By the 1990's, interest rates dropped, people refinanced and the standard term of the loans was 30 years because of house prices.  It was at this same time that sub prime loans began to become popular because people who did not normally qualify for conventional loan and because of the financial risk, lenders could charge more.

From 2000 to the present, loans became more creative with 50 year loans, no interest loans, no down payment, etc but by 2004 loan money flowed with few checks and  in 2006 house prices flattened. People could no longer afford their houses and foreclosure rates increased.   Due to lenders not verifying application information, fraud increased. 

Historically many political leaders felt that owning a home makes the country unconquerable, or they become responsible, or it is the American Dream.  Unfortunately, in some places, it is cheaper to rent than to buy a house due to the cost of houses.  Last time I was in San Diego, the median house cost was around $600,000 which is way more than I could ever consider.

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