EVOLUTION OF MORTGAGE INDUSTRY

Early in the 20th century, if you wanted a residential home loan, you visited a Commercial Bank. As an outgrowth of the depression, the Federal Housing Administration (FHA) was created to offer government insured home loans but with limitations on the amount that could be borrowed. After World War II, the Veterans Administration (VA) began playing a larger role in offering government insured loans, while at the same time, a budding industry began to take hold - the Savings and Loan.

It was the Savings and Loan that quickly became the primary source for residential mortgages, taking in deposits from the local community and loaning out those deposits in the form of mortgages. As long as the cost of funds remained stable (as they had prior to the 1970's), the Savings and Loan prospered by lending out its deposits at rates slightly higher than what it had to pay its depositors. The Savings and Loan held its mortgage loans (referred to as portfolioing) until such time as they were paid off.

When inflation began to play an ominous role in the economy, several things happened! First, the Savings and Loan found itself in the unenviable position of having to pay out more to attract depositors than it earned from interest received on its portfolio of fixed rate mortgages. The Adjustable Rate Mortgage (ARM) was created to solve this imbalance, ensuring that mortgages held in portfolio would always earn the Savings and Loan enough to pay its depositors and net a profit.

But ARM's have not altogether satisfied the needs of the consumer who generally desired long-term fixed rate loans with stable payments. And after the experiences of the late 1970's and early 1980's, when inflation and interest rates grew to staggering levels, many saw their mortgage payments rise to levels they could no longer afford to pay.

At about this time, a new breed of lender entered the marketplace, the Mortgage Banker.

In part because of the development of quasi-governmental agencies created to purchase blocks of residential home loans, Mortgage Bankers began making mortgage loans, generally fixed rate in nature, at very competitive prices. They could do this because the risk in holding the fixed rate loan is removed once the loan is sold to an agency. Mortgage Bankers "recapitalize" by selling all loans funded as quickly as possible, while generally retaining the rights to "service" the loan - collect the payments, prepare the annual statements, and impound taxes and insurance (when required) for the borrower.

Mortgage Banking has grown in tandem with the growth of private investors and quasi-governmental agencies (referred to in total as the Secondary Market). Today, Mortgage Bankers are quickly becoming the primary source for residential mortgage loans. What this means for the consumer is a competitively priced fixed rate loan with a plethora of terms; 5 years, 7 years, 10 years, 15 years, or 30 years.