F r a c t i o n o f M a r k e t
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By William R. Emmons
he U.S. mortgage market evolved throughseveral distinct phases to reach its cur-rent status as the largest, most innovativeand most complex home-nancing market in theworld. Broadly, there were ve major eras duringthe last century. How the mortgage market evolvesduring the next ew years depends in large part onwhether the private-label mortgage-backed securi-ties (MBS) market recovers and on the extent andnature o any potential ederal government inter-ventions into housing and mortgage markets.
The pregovernment era.
Beore the GreatDepression, the mortgage market was strictly a pri-vate aair. There was no ederal deposit insuranceor ederal regulation o mortgage lending. Thehomeownership rate was below 50 percent. Mort-gage down-payment requirements o 50 percentwere typical. Most mortgage loans were short-term, sometimes as short as ve years, and were setup as balloon mortgages. Homeownership was nota viable option or most households.
The era o the Great Depression.
The GreatDepression damaged the entire nancial system,especially the mortgage sector. By 1934, themortgage-delinquency rate was about 50 percentnationwide, as banks, thrits and mortgage lend-ers ailed. The ederal government respondedby creating a host o regulations and institutions.Included were greater ederal supervision o mort-gage lending and depository institutions; ederaldeposit insurance; the Federal Housing Admin-istration (FHA); the Federal Home Loan BankSystem (FHLBS); the now-deunct Home Owners’Loan Corp. (HOLC); the Reconstruction FinanceCorp. (RFC); and the Federal National MortgageAssociation (Fannie Mae).
The era o ederally insured depository insti-tutions.
Increased ederal supervision and theintroduction o ederal deposit insurance greatlystrengthened banks and thrits. These depositoryinstitutions came to dominate mortgage lendingater World War II, achieving a combined mort-gage-market share o 75 percent by 1973. Thepredominant loan type became the long-term,sel-amortizing, xed-rate mortgage that was cre-ated by the FHLBS. The Veterans Administrationand FHA guaranteed mortgages or a large number o households, contributing to a rising homeown-ership rate, which reached 64 percent by 1970.
The era o the GSEs and secondary markets.
The key vulnerabilities o depository institutionswere exposure to high deault rates in local marketsand an interest-rate mismatch between short-termdeposits and long-term xed-rate mortgages. Animportant policy response to these weaknesses wasthe creation o two government-sponsored
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