I’m not sure when it happened, but sometime in my lifetime the family home stopped being where you chose to live to raise your family and put down roots and became an investment asset. It seems this transformation began when investment bankers on Wall Street first realized residential mortgage lending represented a potential source of huge profits.
Prior to the Great Depression, a typical mortgage loan was for 50% of the cost of a home, was interest only, was for 5 years with a balloon payment due at maturity, was funded by the same bank or savings & loan where you banked, and was approved by a banker that knew you, your family, and the house personally. In 1934, the federal government passed the National Housing Act and created the Federal Housing Administration (FHA) to help revitalize the economy by jumpstarting the local housing market. Then Congress created the Federal National Mortgage Association (FNMA or Fannie Mae) and approved the Veterans Administration (VA) loan program for veterans and military personnel. This VA program had no down payment requirement so mortgage lending went from 50% of cost to 100% of cost in a very short time. After WWII a housing boom began and both the Government National Mortgage Association (GNMA or Ginnie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) were created to increase liquidity in the market so more and more people could acquire the home of their dreams.
During the post-war period, most borrowers had to put down 20-25% of the purchase price of a home, have a good credit record, and not spend more than 30% of their gross income on their mortgage. Loans were still being approved and funded by neighborhood banks and savings & loans. In the late 1970’s, investment bankers from Salomon Brothers teamed up with Bank of America to create the first residential mortgage-backed security not guaranteed by the federal government. This new product was not successful until years later when investment restrictions on banks, savings & loans, and other institutional investors were relaxed so they could buy these new securities as long as they were deemed investment grade by one of the rating agencies. With this change, the sale of privately issued residential mortgage-backed securities exploded.
Next, other investment banks began to change the private securitization model to create multiple “tranches” of risk. By dividing these pools of loans into tranches, investors willing to accept higher risk could get higher returns by buying the non-rated B pieces and those seeking safety could buy the “AAA” rated piece. With this development, profits from securitization increased dramatically so investment bankers made much, much more than the mortgage broker’s single origination point (1 point = 1% of loan proceeds). Not content to stick to what was working, Wall Street decided to piggy-back Congress’ desire to increase home ownership. Thus began “sub-prime lending”. Wall Street decided sub-prime loans could be divided into tranches and sold the same way as traditional mortgage loans and a new wave of lending began. Mortgage brokers were more than happy to deliver huge quantities of these sub-prime mortgages into Wall Street’s securitization machine. Congress was happy since it could declare “victory” in making home ownership possible for many who could not have qualified for a traditional, fully underwritten home loan.
However, Wall Street and the rating agencies ignored numerous serious issues until the bottom fell out of the market.
1. Historical default statistics did not apply since this was a new sector of lending.
2. Lenders made 100% of cost sub-prime loans and borrowers had no skin in the game.
3. Many sub-prime borrowers never understood the real cost of being a homeowner.
4. Sub-prime loans did not require verification of income or employment.
5. Many sub-prime loans were pay option ARMs with negative amortization.
From this, it seems this transformation from home to investment asset began in the late 1970’s and grew until early 2007 when the housing market imploded. Many people who were 25 in 1985 and are 55 now have never been told a home is for raising a family. Two generations of current homeowners believe buying a home is no different than buying stock in AT&T. This group of close to 130,000,000 people watches home price indices instead of knowing their neighborhood and neighbors. They will move across the street for a few dollars of profit and chase interest rates like a dog after a postman, often re-financing once a year to reduce their mortgage payment by $20 a month. These homeowners will never know the sense of community or pride that comes from raising children in the same home from birth through college graduation. They will never put their grandchildren onto the same tire swing their children used 30 years ago or pick apples from the seedling they planted with their children.
It’s not just this group of homeowners that miss out on the traditional experience of buying and owning a family home; it’s also all of those involved in providing services – realtors, appraisers, title agents, home inspectors, etc. With the family home becoming just another investment asset, major changes swept through these professions like a tidal wave. Wall Street demands speed because time is money and Wall Street is all about money. Gone are the days when a buyer made an offer and gave the seller a couple of days to respond. Inspections need to be done tomorrow and reports delivered immediately on site. Appraisers have 48 hours to finish appraisal reports. Closing has to be within 10 days of an accepted offer instead of 30 days after loan approval. Title work is done with the click of a mouse. Interest rate quotes change hourly and are always “subject to” this or that. The faster a mortgage loan is funded and sold, the faster the investment banker gets paid. Once the loan is pooled, securitized, split into tranches, and sold, there is almost no chance the investment banker has any risk of loss if the market hiccups and the music stops again.
Is the current system progress or is it just another scheme created by capitalists to generate huge profits without much risk? I can’t see us returning to those good old days of my youth, but what harm would come from slowing the process down a little so homeowners could appreciate they are buying a home where children will take their first steps, where family will pose for photos in front of the fireplace, and where one knows the names of neighbors and not just which car goes with which house. Thank you, Wall Street, for killing off my Hallmark moments and replacing them with the organized chaos of a modern residential real estate transaction. Your mothers must be very proud of you.