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)
Despite regulators’ warnings that some popular types of mortgages are risky, lenders are still making them, and mortgage insurance companies have begun pleading with federal banking agencies to act quickly to restrict them.
