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'Back to basics' in Mortgageland |
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Bob Moulton, president of Manhasset, N.Y.-based Americana Mortgage, said that the renewed appreciation for the plain-vanilla fixed-rate comes because they "worked for a hundred years. Then, when the exotics came out, we got creative. The homeowner wanted that house. They probably should have continued to rent."
History of the 30-year fixed
Moulton is three-quarters correct about the fixed-rate mortgage
working for a hundred years. The 30-year fixed has been in widespread
existence since 1934 -- and it was introduced by the federal government as part of a bailout during a foreclosure crisis.
In a research report for the Federal Reserve Bank of America, authors Matthew Chambers, Carlos Garriga and Don E. Schlagenhauf wrote: "Prior to the Great Depression, the typical mortgage contract had a maturity of less than 10 years, a loan-to-value ratio of about 50 percent, repayment of interest only during the life of the contract and a balloon payment at expiration."
Except for the low loan-to-value ratios, mortgages in the early part of the 20th century were similar to the subprime and interest-only loans that were all the rage in the first years of this century. In both eras, interest-only loans were popular. In both eras, the mortgages were time bombs: In the early 1900s, the entire loan amount was due in a lump sum after a few years; in the early 2000s, the initial interest rate on an ARM was due to skyrocket after a few years. In both eras, homeowners were expected to refinance themselves out of peril.
And in both eras, home values plummeted in some parts of the country, trapping people in loans for more than their houses were worth, unable to refinance.
In 1933, the federal government created an agency called the Home Owners Loan Corp., or HOLC, which within three years bought one-fifth of the nation's residential mortgages. The HOLC bailed out the owners by converting their loans to something novel: long-term, fixed-rate, amortizing mortgages. The federal government followed up by creating the Federal Housing Administration in 1934, and the 30-year-fixed with a small down payment quickly became the dominant mortgage for home purchases. The Depression-era government bailout of delinquent homeowners succeeded, and the homeownership rate climbed rapidly for three decades.
Government regulation looming
This time around, the mortgage industry is wary of government intervention, as if it had never worked before. At this MBA convention, whenever bankers discussed the prospect of tighter regulations, they did so in tones of warning and foreboding. "We're going to have legislation, and it's going to be big," said Mike McQuiggan, CEO of Tri-Emerald Financial Group, a Lake Forest, Calif.-based lender. He warned that Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, was poised to introduce legislation.
You can guess what McQuiggan said next: "The future is back to basics."
Sure enough, less than a week after McQuiggan delivered his warning, Frank and a pair of fellow Democrats introduced H.R. 3915, the "Mortgage Reform and Anti-Predatory Lending Act of 2007." The bill would require lenders to make sure that borrowers have a reasonable ability to repay. It would prohibit lenders from pushing mortgages that aren't in the borrowers' interests.
Industry do-it-yourself
The Mortgage Bankers Association's immediate reaction was to hope
that the bill, if passed into law, would pre-empt state and local
laws, so the rules would be the same everywhere. The National Association
of Mortgage Brokers, or NAMB, was more critical. "We need to have confidence
in the market's ability to correct itself," NAMB president George
Hanzimanolis said in a statement. "Further restrictions through
legislation will cripple the industry" and harm consumers.
The industry is convinced that it has pulled back enough from the excesses of recent years. Fear of business failure on one hand and government regulation on the other has reminded lenders to attend to the fundamentals. That's the story that lenders like to tell themselves, anyway.
"When people are scared, they get back to basics," Moulton said. "When there's fear, they go back to basics. We know the basics work -- end of conversation."
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