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PPT : Emergence of the U.S. Mortgage Market and its Impact on Economic Growth
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*From 1960s to 90s, exports stimulated economic development in Japan, Korea, Singapore, Hong Kong and Taiwan. Same for China in recent years. * While those countries or regions have to export due to lack of domestic demand, some other countries must have demand surplus. * Then, why is the US domestic demand been so high?The importance of simple financial instruments, e.g., mortgage loans
Yale School of Management
What does the Residential Mortgage tell us?
China’s Total Outstanding Amount of Residential Mortgage (RMB 100MM)“Securitizing one’s future income flow”
The U. S. Experience
* Prior to the 19th century, the United States was mostly an agricultural society.* After WWII, the United States became the No.1 Super Power * One of the primary reasons:Part of the growth power came from financial innovations, Social Security Innovation, starting from 1934.Figure 3: The US individual savings RateDevelopment of the Mortgage Market
* Residential Mortgage had been one of the standard services since the beginning of banks. * However, before 1930s, the term of Residential Mortgage was capped by 5 years. * The mortgage payment structure was also flawed. For example, prior to maturity, the borrower only needed to pay the incurring interest. At maturity, the borrower would pay the total principle. “Balloon loans” * With such a structure, banks would take on huge risks, hence less willing to make loans. The borrower faced too much lump-sum payment pressure.Stock Market Crash in October 1929
* During the stock market boom in 1920’s, many individuals bought big houses with large mortgages. * But, after the 1929 crash, companies went bankrupt, and unemployment reached historical high (25%). * Many households could not repay the “balloon” at mortgage maturity. * Then many banks and lending institutions went bankrupt. * Therefore, the “balloon” structure of mortgage loans exaggerated the economic / financial crisis. * Crisis: not many banks willing to lend mortgagesThe Crisis led to “New Deal” Legislations
* Including:o Securities Act of 1933o Securities Exchange Act of 1934o Banking Act of 1933 (Glass-Steagall Act)o Social Security Act of 1935. * Revitalizing the housing market: the “Federal Housing Act of 1934”Federal Housing Act of 1934 led to the Federal Housing Administration (FHA)
* FHA provided mortgage insurance to low and mid income families.o Max mortgage term increased from 5 years to 30 years;o Low and mid income families could buy houses when starting a family
Generally, the longer the mortgage, the less payment pressure, and the more beneficial for consumption demand and hence for economic growth. Starting a Secondary Mortgage Loan Market
* In 1938, the Federal National Mortgage Association (Fannie Mae) was created to increase the liquidity of mortgage loans. Its role was to make a secondary market: buy mortgages from banks and other financial institutions who make loans. * Very important: banks then don’t have to worry about outstanding mortgages or their liquidity, after lending the mortgages.* This encourages banks to make more loans.
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Category : MortgageSource : www.som.yale.edu
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