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© 2012 Cengage Learning
Residential Mortgage Lending:
Principles and Practices, 6e
Chapter 3
Role of Residential Mortgage Lending
in the Economy
© 2012 Cengage Learning
Objectives
• After completing this chapter, you should be able to:
– Explain how changes in the business cycle affect real estate sales activity and
mortgage lending.
– Explain the economic stimulus that housing and home sales have on the
economy
– Understand how demographics influence housing demand and
homeownership rates
– Understand how consumer savings impacts the ability for lenders to provide
funds for mortgage loans
– Cite the impact of the government’s deficit spending on interest rates and the
supply of capital.
– Identify three ways the Federal Reserve exercises monetary control
– Compare and contrast the functions of financial intermediaries, mortgage
lenders, and mortgage investors.
– Explain why Money Market Certificates (MMCs) failed to correct the problem
brought about by inflation and excessive credit demand.
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RESIDENTIAL MORTGAGE DEBT
• 2002, outstanding single-family residential
debt in the United States exceeded $6.4
trillion.
• This figure almost doubled in five years,
peaking at more than $11.1 trillion in 2007.
• At the end of 2009, after a significant
recession and “correction” (decrease) in
housing values, more than $10.7million
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• Lower Interest Rates Make Housing More
Affordable: Monthly Principal and Interest
Payment on a 30-Year Mortgage
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ECONOMIC STIMULUS OF HOUSING
• Housing and mortgage-lending activity
stimulates the economy directly through the
home sale transaction and indirectly through
related purchases and expenditures that
ripple through the economy after the sale.
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ECONOMIC STIMULUS OF HOUSING
• Economic commentators contend that from
the time of the Great Depression the housing,
construction, and related sectors (e.g., real
estate sales, financing, home furnishing, taxes)
are among the most important integrals of the
engine that powers the United States
economy.
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ECONOMIC STIMULUS OF HOUSING
• Economists conclude that housing and related
sectors account for, on average, between 15
and 20 percent of the gross domestic product
(GDP).
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Average Existing Home Price 2007–2010
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Economic and Social Value of Housing
• According to the Federal Reserve, the market
value of all homes owned by U.S. households
grew to a record $10 trillion in 2000, and
doubled to more than $22.6 trillion by 2006.
• The market value of housing on a national
basis plummeted 27 percent or more in just
two years, to $16.4 trillion in 1Q2009, and
rebounded slightly to more than $17 trillion as
of 2Q2010.
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U.S. Homeownership Rate
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1900 – 1930 45% – 48%
1960 low 60% level for next 30 years
1990’s exceeded 64%
2004 Historic High of 69.2%
2010 dropped to 66.9%
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• Demographic forces in the long term will
increase or lower housing demand.
• Couples reaching their home-buying years,
new immigrants, and certain minority groups
increase demand for housing.
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• These groups are expected to form new
households at a rate of more than one million
per year for the next decade.
• Financing this demand for housing will
challenge the housing finance system, but will
also provide an opportunity for growth in
residential mortgage lending.
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IMPORTANCE OF SAVINGS TO HOUSING
• Funds required for capital formation are
derived primarily from the savings of
individuals and businesses.
• Savings Rates
• Decline in the Savings Rate
• Capital markets and the money market
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Users of Credit
• Business demand
• Consumer demand
• Government demand
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Interest Rates
Competition for Funds
Public Debt versus Private Debt
Monetary Policy and Interest Rates
The Federal Reserve Bank System
Countercyclical Nature of Real Estate
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FINANCIAL INTERMEDIARIES
● Commercial banks
● Savings and loan institutions
● Mortgage companies
● Credit unions
● Mutual savings banks
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FINANCIAL INTERMEDIARIES
● Life insurance companies
● Finance companies
● Investment companies
● Pension funds
● Money market funds
● Stockbrokers
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MORTGAGE LENDERS AND THE
PRIMARY MORTGAGE MARKET
● Mortgage bankers
● Mortgage brokers
● Commercial banks
● Savings and loan institutions
● Savings banks
● Credit unions
● Housing finance agencies
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Recent Trends
● Who the lenders are in the primary market
● How residential loans are originated
● How technology is used to enhance profits
● How funds for mortgages are generated
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Recent Trends
● How interest rates are calculated
● How mortgages are sold and securitized
● How mortgages are serviced and by whom
● How borrowers are qualified
● Who the mortgage investors are in the
secondary markets
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• Mortgage Revenue Bonds (MRBs)
• Mortgage Credit Certificates (MCCs)
• Builder Bonds
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What Do You Think?
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Real estate and mortgage lending are a major part
of the American economy. Examine and explain the
magnitude of their involvement in the economy.
•
Real estate and mortgage lending are significantly
impacted by changes in the economy, especially
interest rates. What was the impact on mortgage
lending of the dramatic drop in interest rates in
2001–2002? Why did interest rates drop so much?
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What Do You Think?
• What is the difference between financial
intermediaries, mortgage lenders, and
mortgage investors?
• How does “the Fed” attempt to manage the
economy? What tools are most important?
• As a general rule, where does the money for
residential mortgage lending come from?
• How do demographic forces impact real estate
and the mortgage markets?
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Check Your Understanding
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Savings of individuals make up an insignificant part
of the funds required by the financial market.
Mortgage lending is part of the capital market.
As a general rule, financial intermediaries can earn
higher yields on investments than individuals can.
Money market certificates (MMCs) have increased
savings inflows to banks and thrifts.
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Check Your Understanding
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The Federal Reserve is responsible for fiscal and monetary
control.
Low interest rates usually do not stimulate the housing
market because too many people are out of work.
The primary risk to portfolio lenders is interest rate risk.
The term financial intermediary refers to the person who is a
middle man between financial institutions.
The value of all homes in the U.S. is approximately $17
trillion.
© 2012 Cengage Learning