The American Mortgage
Continuing the conversation…. exploring the history of homeownership, looking for perspectives that offer insight into our current housing crisis. We’ve reached the post-war era of the late 1940s, a watershed date for housing and the only time in history when homeownership would grow at a sustained, double-digit rate.
What was once thought of as a Free Market System was about to be transformed by massive government intervention. And what would emerge over the next two decades was a multi-layered system of subsidies and tax incentives designed to stimulate both the supply and demand sides of the equation.
As the war ended, the challenge became: How to convert the pent-up desire of 15 million returning GIs, into effective demand to help them purchase new homes and start new families? Up until then, most loans required 50% down and borrowers made interest-only payments for five years until a balloon payment was due at the end. Suffice to say, those terms weren’t going to make mortgages more affordable for young GIs.
The Fed decided to dust off and expand on two macro-level programs that had been initiated during the Depression to help influence the market and lessen the number of foreclosures . The first was Government-Backed Mortgage Guarantees which let entities like the Federal Housing Administration (FHA) and the Veterans Administration (VA) insure against defaults on private bank loans.
The second was the Secondary Mortgage Market that was launched by the Federal National Mortgage Association (Fannie Mae) to buy and sell mortgages and deliver extra liquidity to the market. As government-insured mortgages became the norm the Fed was able to revamp traditional loan structures to make them less expensive and more attractive to the average wage earner:
First, FHA down payment requirements dropped to 20% and VA loans dropped even lower (as low as 0% down). Second, since mortgage insurance reduced the risk for private lenders, FHA and VA loans came with significantly lower interest rates (around 4.5%).
Third, term lengths for FHA loans went through a series of extensions, first from 15 to 20 years and then finally in 1948, to 30 years (on new construction). That made monthly payments more manageable for average wage earners. Ultimately, the 30yr fixed rate loan would be known as the “American Mortgage” because it isn’t found anywhere else in the world.
And finally, the new FHA & VA loans came with amortized rather than interest-only payments and that allowed borrowers to pay down small increments of principal over time while they accrued equity in their homes. Suddenly, buying a home could be thought of as a form of investment.
Next Week: Here come the suburbs…