WASHINGTON, DC – A white paper released by the Homeownership Alliance explains how the fixed-rate mortgage has made homeownership possible for millions of Americans since the 1930s and continues to hold sway over adjustable rate mortgages. The white paper, Mortgage Finance Innovation and the Achievement of Homeownership: The Role of the Mortgage, was written by Stuart Gabriel, Ph.D., Director of the University of Southern California (USC) Lusk Center for Real Estate.

“The fixed-rate mortgage is a cornerstone of the U.S. housing finance system and has been instrumental to the accrual of wealth on the part of many households. The low interest rates of the past two years have increasingly lured consumers seeking a predictable payment in an uncertain economy,” said Gabriel.

Gabriel is Director and Lusk Chair in Real Estate at the USC Lusk Center for Real Estate. He also serves as Professor of Finance and Business Economics, Policy, Planning, and Development in the Marshall School of Business and the School of Policy, Planning, and Development and as Co-Director of the USC Summer Program in Real Estate. His current research focuses on mortgage prepayment and default risk, urban housing and labor markets, population mobility and the quality-of-life, and rental housing market adjustment mechanisms. Gabriel has published extensively on these and other topics of real estate finance and urban and regional economics.

Gabriel’s white paper describes the introduction of and evolution in fixed-rate mortgage finance, giving particular attention to the federal policy initiatives and consumer benefits associated with the widespread proliferation of the fixed-rate mortgage. Introduced into U.S. mortgage markets by the Federal Housing Administration during the Great Depression, fixed-rate mortgages were designed by the government to increase homeownership.

The prevailing instrument of U.S. mortgage finance prior to the creation of the fixed-rate mortgage was a balloon loan which required the repayment of principal in its entirety at the end of 10 years.

“The fixed-rate mortgage has had a significant impact on the increase in homeownership in the U.S. We’re at an all-time high of 68 percent largely as a result of government policies that produced the fixed rate mortgage and the secondary market,” said Rick Davis, president of the Homeownership Alliance.

The secondary market is a market in which banks and other primary mortgage lenders can sell the mortgages they originate to other investors through a process of mortgage securitization. This resale of residential mortgages allows more investors to finance mortgages and allows banks and other lenders to diversify their credit risk. The secondary market provides liquidity for primary lenders.

The USC Lusk Center for Real Estate seeks to advance real estate knowledge, inform business practice, and address timely issues that affect the real estate industry, the urban economy, and public policy. The Lusk Center produces relevant and timely real estate research, supports educational programs for students and executives, and convenes professional forums that bring together academics, students, business executives, and community leaders. For more information on the Lusk Center for Real Estate, go to www.usc.edu/lusk

Mortgage Finance Innovation and the Achievement of Homeownership: The Role of the Fixed-Rate Mortgage (PDF)

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WASHINGTON, DC – A Homeownership Alliance report by former White House economic adviser and best-selling author Todd Buchholz, demonstrates that the secondary mortgage market has become a vital technological and financial innovation that has helped open the door for millions to achieve the American Dream. The U.S. secondary mortgage market has helped spread risk, dampen economic crises, attract more investors into the housing market and has helped consumers save time and money when purchasing a home.

"The ultimate impact of the secondary market has been enjoyed by American families, who can become homeowners with lower costs, less hassle, more choice, and more peace of mind than ever before," said Buchholz in Home Sweet Loan: How Secondary Mortgage Markets Changed America.

"Over the past three years, the secondary mortgage market proved to be a wide and thick support beam for the U.S. economy, helping the economy maintain its strength and composure despite a global recession, the horrors of September 11 and a severe collapse in capital spending by manufacturers. More than just helping the abstract macro economy during the recent recession, the mortgage market has aided individual American families for the past 20 years."

Among Buchholz’s findings:

    * Prior to the creation of the secondary mortgage market, families were more vulnerable to being denied loans based on rumors, hunches, and stereotypes, instead of a lender looking at an objective analysis of their credit-worthiness. The secondary mortgage market encouraged the use of statistical tools that created a more level playing field for buyers and sellers.
    * The mortgage market has unleashed a fervent competition among lenders that has driven down closing costs, including points and fees. This competition has been aided, of course, by the advent of the Internet.
    * Interest rates have been pushed down by the secondary mortgage market, enabling more American families to buy homes. These rates are no longer so dependent on the ups and downs of the financial services industry, but reflect fundamentals in world capital markets.
    * The secondary mortgage market has smoothed regional disparities in mortgage costs so that families aren’t hindered by the economic strength of the local economy.
    * The secondary mortgage market has fueled innovation so that more mortgage choices are available both to home buyers and to investors in real estate, allowing more families to discover affordable and prudent methods of financing their homes, through different duration and adjustability terms.
    * The secondary mortgage market has attracted foreign capital into the U.S. housing market and into the U.S. economy, providing a more liquid financing climate and reducing interest rates.

"The homeownership rate in the U.S. has reached an all-time high of 68 percent. This monumental achievement would not be possible without the secondary mortgage market," said Rick Davis, president of the Homeownership Alliance.

The secondary market is a market in which banks and other primary mortgage lenders can sell the mortgages they originate to other investors through a process of mortgage securitization. This resale of residential mortgages allows more investors to finance mortgages and allows banks and other lenders to diversify their credit risk. The secondary market provides liquidity for primary lenders.

Buchholz is a leading expert on global economic trends and noted authority on monetary policy. He was a White House advisor under President George H.W. Bush from 1989 to 1992 and is an award-winning economics teacher at Harvard who has written several books in his field. He has written for Forbes, The New York Times and The Wall Street Journal.

In 2002, Buchholz conducted a study, Safe at Home, for the Homeownership Alliance about the effect of housing on the economy. He predicted housing would be a leading driver of economic growth over the next decade as it continues to expand without the dramatic booms and busts of prior cycles.

How The Secondary Mortgage Markets Changed America

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