INTRODUCTION TO CONVENTIONAL LOANS

From Wikopedia

"A mortgage is a method of using property (real or personal) as security for the payment of a debt.

The term mortgage (from Law French, lit. death vow) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage.

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.

In many countries it is normal for home purchase to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Great Britain, Spain and the United States"


OVERVIEW

Conventional mortgage loans

Many of the programs that we observe today in housing finance markets in the U.S. have evolved from public policy programs established during the Great Depression. During this time, much focus was placed on ensuring that every American had the possibility of home ownership.

The National Housing Act of 1934 (and its 1938 amendments) states that the Congress affirms the national goal that every American amily be able to afford a decent home in a suitable environment.

An enabling factor was the incentive provided in the tax code in 1913. The code stipulated that mortgage interest would be a deduction against income taxes for all tax-paying Americans that chose to itemize deductions.

This deduction remains one of the largest for the majority of homeowners today.

The Depression programs followed the tradition of the Federal Farm Loan Act of 1916. That act focused exclusively on providing credit for farm mortgages, but it established the practice of using credit support to affect public policy agendas in mortgage markets. This is clearly not the only means available to support policy. Housing policy in the United States has been comprehensive in its objectives for decades.

Its statement is found in 42 U.S.C. §12702 a small part of that statement is extracted here:     "The objective of national housing policy shall be to reaffirm the long-established national commitment to decent, safe, and sanitary housing for every American by strengthening a nationwide partnership of public and private institutions able ….(6) to provide every American community with a reliable, readily available supply of mortgage finance at the lowest possible interest rates….."

Clearly housing matters. This statement of policy includes aspects of mortgage finance (including rate determination), of federal assistance, of social policy and of income re-distribution.

Where did this comprehensive emphasis on housing policy come from? When the National Housing Act was passed in 1934, mortgage markets were troubled in many respects. Over two million construction workers became unemployed. Mortgage loan terms were difficult, often requiring fifty percent LTVs with terms of only 3 – 5 years, followed by balloon payments. Only 4 in 10 households owned homes.

After the Federal Farm Loan Act of 1916, further assistance for farm lending came from the establishment of the Federal Home Loan Bank System (FHLBank System) through the Federal Home Loan Banks Act (FHLBAct) in 1932. The FHLBank System was established by Congress to increase liquidity in mortgage markets by providing a source of short-term funds (“advances”) to approved primary mortgage lending institutions (savings and loan associations). Originally, only thrift institutions (savings and loan associations and savings banks)

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