- January 22, 2018
- Posted by: admin
- Category: Real Estate Post
What lead to the creation of MERS (Mortgage Electronic Registration System)?
A bit of background:
The roaring 20s was a great time for top 1% of wealthy Americans. The federal income tax rate was slashed and investors relished in an incredibly profitable bull market fueled by the advent of factories run by electricity and an assembly lines. Unfortunately, only 1% of Americans owned stock so the rich got a lot richer. Still, working and middle class Americans enjoyed the benefit of higher wages after Herbert Hoover, who was the Commerce Secretary at the time, convinced owners to increase wages in order to help the economy out of its post World Ward 1 recession. While the rich got richer, working and middle class Americans also benefited and enjoyed affordable, factory-produced luxuries like cars and household appliances. Unfortunately, rural America was left out. In order to meet the world’s demand for food during WW1, American farmers stepped up to produce. However, when the war ended so did consumer demand and American farmers were left in the dust during the roaring twenties.
When the stock market crash began in 1929, the rich lost billions, banks closed (at that time there were no laws prohibiting banks from investing customer deposits) and the rest of America suffered the rippling effects. The stock market, which had morphed into an “asset bubble” fell nearly 25% in one day. What caused the asset bubble? Owners focused on profit, minimizes wages and raw material costs, which then resulted in a decline in purchasing power by the masses. Once the decline began, investors panicked and started selling their stock all at once. But since much of the stock had been purchased on credit (margin) banks were simply unable to come up with the money. Meanwhile, a real estate bubble had formed as a result of overextended banks and home buyers. When things went south, homeowners could no longer pay their mortgages and a wave of foreclosures ensued. In establishing economic policy, the federal government had unfortunately focused on the benefits to the financiers and the bankers rather than Americans at large. The combination of the stock market crash, risky bank structure and faulty monetary policy resulted in a national economic disaster. By 1933, the American economy shrunk nearly one third, unemployment was nearly 25%, wages were nearly cut in half and world trade plummeted.
In 1932, the American government passed the Glass-Stegall Act which separated commercial and investment banking. President Franklin D. Roosevelt was elected to office and signed the “New Deal” into law to create jobs, establish a social security system, give relief to Americans and establish new economic rules. The Home Owners Loan Act (HOLA), which among other things provided emergency relief for owners, was passed in 1933 and the Home Owners Loan Corporation (HOLC) was established to buy defaulted mortgages from the banks and sell them back to the owners. In 1934, the FHA (Federal Housing Administration) was created to provide mortgage insurance on HOLC loans. Later the Federal National Housing Administration (Fannie Mae) allowed the FHA to offer protection to private loans too (with 20% down payable over 15+ years) by buying the insured loans and thereby stimulating the economy with additional capital available for more mortgage loans. HOLA and FHA successfully transformed the mortgage market in America by creating long-term mortgages, interest rate caps and mortgage insurance. By the end of WWII, nearly 70% of Americans owned their own homes. Eventually, the FHA lowered the required down payment to 5% and it became even easier for Americans to be a homeowner.
It was 1970-something
In the later 70s, the mortgage bond was born. A new Fannie Mae (Government National Mortgage Company aka Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) became government-sponsored entities which could buy uninsured mortgages if they met the guildelines (conservatively underwritten 30 year fixed-rate mortgages). Those mortgages were then pooled into bonds (the process of “securitazation”). The mortgage payments then created more money for more loans and for a small fee, the GSEs (government-sponsored entities) insured the mortgages. . . which of course attracted more investors . . . which created more revenue for continued mortgage loans. By the 1980s, standards loosened. . . to be continued.