Mortgage Industry
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Mortgage Industry: Past and Present
There are many branches in the Finance Industry and one of those branches is the Mortgage Financing Industry. Even the average person who does not know about the Mortgage Industry has been exposed to it especially with al the press it is receiving right now. The mortgage Industry in the United States has really evolved through out the decades. These changes have not only been technological but also structurally.
Originally Mortgage lending was started with national and state banks. These financial institutions were self-regulated and principally established to create a business relationship between government and private businesses. They were established to meet the publics need but that was not the reality of things unless you had money.
Then came the savings and loans, which originated in response for the growing needs of the middle class. These financial institutions financed to members only and were government backed. They were the leaders in mortgage lending until commercial banks caught a break through government regulations. Commercial banks needed this break because up until then savings and loans were able to maintain their interest rates relatively low in comparison to commercial banks.
Commercial banks have dominated the mortgage financing industry up to the present. With the dominance of the mortgage financing by commercial banks the industry has shaped into what it is today. Commercial banks began transforming into commercial lenders around the 1980’s. This shift in their business focus resulted in the creation of mortgage brokers. Those commercial banks became commercial lenders turning their focus on wholesale lending because this would maximize profits for them. These lenders knew that they could finance these loans through mortgage brokers, which eliminated their need of dealing directly with the borrowers. This way they could finance the loans and then focus on selling the loans in the secondary market profiting in a new way from mortgage financing.
Price and interest rates
Buyers and sellers participating in the housing market have a common focus: the best price. In most industries the interaction of the laws of supply and demand determine prices. The law of demand states: as quantity demanded for a good increases price will decrease, other things constant (Colander, 2004). A number of non-price factors that can shift the demand curve including incomes, prices of alternative goods, tastes and preferences, expectations, and taxes and subsidies (Colander, 2004). The mortgage industry is also subject to the influence of principles of demand. When home prices and or interest rates are low demand for houses and loans to buy them increases as more buyers are induced to enter the market and purchase a home. When more prospective homebuyers attempt to enter the market, mortgage lenders and bankers will give more loans to those buyers to make home ownership possible. When home prices and or interest rates are high demand decreases as the number of prospective buyers drops and consumers leave the market and delay the decision to purchase until prices are more competitive. Either home prices and or mortgage interest rates are among the key factors that can increase or decrease the demand for houses.
Most prospective buyers entering the housing market will lack sufficient funds to purchase a home and will need to obtain a loan from a mortgage lender or banker. One of the first concerns facing consumers interested in obtaining a loan to purchase a home will be determining the interest rate of the loan. Interest is the cost of obtaining a loan from a mortgage lender and is paid by the homebuyer to the lender for the use of the funds to purchase the home. The interest rate offered by the lender is an additional cost added to the purchase price of the house and can exert a powerful influence on the decision to enter the market. In fact, interest rates are one of the prime drivers of home prices. According to Victor Mints, writing in Housing Finance International, “The housing price increase occurs because lowered interest rates reduce the overall cost of housing…and increase the aggregate demand for housing. (Mints, 2007)” Low interest rates might initially act to attract buyers into the housing market but they also act to drive up housing prices and a shift in demand. This dynamic relationship can result in an “inflationary spiral” of growing housing prices and the creation of “housing bubbles. (Mints, 2007)”
To set interest rates mortgage lenders and loan officers receive rate sheets at least once daily from their companies or from secure websites defining the range of available interest rates and the cost to the lender in the form of points (Light, 2002). One point is equal to one percent of the loan. The decision to pass on these lender costs in the form of “points” to the buyer, as an additional cost, is made at the discretion of the lender. The lower the interest rate or the higher the risk associated with the financial history of the buyer, the more points may be passed on to the buyer to cover projected lender costs.
Laws of supply affect the housing market but from a different perspective. The law of supply states: the quantity of a good supplied will increase as the price for the good increases, other things constant (Colander, 2004). Homebuilders are induced to supply more houses as the price for houses increases. Shift factors that can also affect the supply curve include the price of inputs, technology, expectations, and taxes and subsidies (Colander, 2004). As home prices and or interest rates drop more buyers are induced to enter the market. As these demanders purchase existing or new homes and deplete available inventories, builders anticipating rising prices, begin to build more houses to meet expected demand. This dynamic interplay between the expectations and decisions of demanders and suppliers fuels the market for housing and by extension, for mortgages. The increased demand for housing will ultimately result in increased housing prices. This increase in price stimulates an increase in housing construction but builders are limited in how fast they can construct and supply new housing units to meet the new demand. According to Miller, “In the immediate run, when there is no time allowed for any adjustment, the amount of housing offered …is perfectly inelastic. (Miller, 2004)” No matter what the demand is for houses the number of houses that can be built is subject to physical and time constraints. The physical limitations of meeting consumer demand causes a time lag between quantity of housing demanded and quantity supplied