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History: Advantages and Disadvantages

The securitization of mortgages in the 1970s had the advantages of providing more capital for housing during a shortage and countering inflation, as mortgage-backed securities (MBSs) were national in scope. However, MBSs may have led to the rise of the risky subprime industry and created hidden systemic risks by disconnecting borrowers and lenders once mortgages were sold. The US government created agencies like Fannie Mae and Freddie Mac in the 1930s-1970s to develop a secondary market for mortgages and facilitate the flow of capital, which helped contribute to the growth of MBSs.

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48 views

History: Advantages and Disadvantages

The securitization of mortgages in the 1970s had the advantages of providing more capital for housing during a shortage and countering inflation, as mortgage-backed securities (MBSs) were national in scope. However, MBSs may have led to the rise of the risky subprime industry and created hidden systemic risks by disconnecting borrowers and lenders once mortgages were sold. The US government created agencies like Fannie Mae and Freddie Mac in the 1930s-1970s to develop a secondary market for mortgages and facilitate the flow of capital, which helped contribute to the growth of MBSs.

Uploaded by

francis dungca
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Advantages and disadvantages[edit]

The securitization of mortgages in the 1970s had the advantage of providing more capital for
housing at a time when the demographic bulge of baby boomers created a housing shortage and
inflation was undermining a traditional source of housing funding, the savings and loan
associations (or thrifts), which were limited to providing uncompetitive 5.75% interest rates on
savings accounts and consequently losing savers' money to money market funds. Unlike the
traditional localized, inefficient mortgage market where there might be a shortage or surplus of funds
at any one time, MBSs were national in scope and regionally diversified. [9] Mortgage backed
securities helped move interest rate out of the banking sector and facilitated greater specialization
among financial institutions.
However, mortgage-backed securities may have "led inexorably to the rise of the subprime industry"
and "created hidden, systemic risks". They also "undid the connection between borrowers and
lenders". Historically, "less than 2% of people lost their homes to foreclosure", but with securitization,
"once a lender sold a mortgage, it no longer had a stake in whether the borrower could make his or
her payments."[10]

History[edit]
Among the early examples of mortgage-backed securities in the United States were the slave
mortgage bonds of the early 18th century[11] and the farm railroad mortgage bonds of the mid-19th
century which may have contributed to the panic of 1857. [12] There was also an extensive commercial
MBS market in the 1920s.[13]

US government[edit]
As part of the New Deal following the Great Depression, the US federal government created
the Federal Housing Administration (FHA) with the National Housing Act of 1934 to assist in the
construction, acquisition, and rehabilitation of residential properties. [14] The FHA helped develop and
standardize the fixed-rate mortgage as an alternative to the balloon payment mortgage by insuring
them, and helped the mortgage design garner usage. [15]
In 1938, the government also created the government-sponsored corporation Fannie Mae to create
a liquid secondary market in these mortgages and thereby free up the loan originators to originate
more loans, primarily by buying FHA-insured mortgages. [16] As part of the Housing and Urban
Development Act of 1968, Fannie Mae was split into the current Fannie Mae and Ginnie Mae to
support the FHA-insured mortgages, as well as Veterans Administration (VA) and Farmers Home
Administration (FmHA) insured mortgages, with the full faith and credit of the US government. [17] In
1970, the federal government authorized Fannie Mae to purchase private mortgages—that is, those
not insured by the FHA, VA, or FmHA, and created Freddie Mac to perform a role similar to that of
Fannie Mae.[17] Ginnie Mae does not invest in private mortgages.

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