Housing Debt

Housing debt is currently the largest percentage of household debt. As of February 2016, housing debt accounted for $8.25 trillion. That accounts for almost 70% of all household debt.

What is a Mortgage?
A loan that is secured by property or real estate is called a mortgage. In exchange for funds received by the homebuyer to buy property or a home, a lender gets the promise of that buyer to pay back the funds within a certain time frame for a certain cost. As a result of the interest rates, the amount secured is not equal to the amount paid back at the end of the mortgage.
 * Fixed-Rate Mortgage: the interest rate remains the same for the life of the loan
 * Adjustable-Rate Mortgage: the interest is adjusted periodically to reflect market conditions.

History of Mortgages
Mortgages have been around since the early 1900s.

Fannie Mae is the nickname for the Federal National Mortgage Association (FNMA). The FNMA was created in 1938 in order to increase the amount of money available to borrowers using mortgage securitization. An organization like this was necessary, because after the Great Depression, lenders were wary about providing loans of large sums because of the risk that individuals would not pay them back. However, this stunted the economic growth of the United States. Fannie Mae was created to stop that issue.

Fannie Mae revolutionized the market. In order to increase money available, as it was created to do, Fannie Mae packaged multiple, insured-loans together and sold them as securities on the financial market. The thought was, even if one mortgage defaulted, the loan was still a “safe” bet because it was tied to other loans - and at the time it was unimaginable for all of the loans to default. In 1970, Freddie Mac, also known as the Federal Home Loan Mortgage Corporation (FHLMC), was created to facilitate even more money into the mortgage system - as Fannie Mae didn’t have enough capital to keep the mortgages funded.

In 1972, Fannie Mae and Freddie Mac both began to purchase conventional mortgages that were not guaranteed or insured by the FHA or VA. Instead of seeking approval from the FHA or VA, loans could be insured by Private Mortgage Insurance (PMI) companies.

How are mortgages granted?
Mortgages are determined by a few variables. The key determinants are: your salary, your credit score, your current debt to income ratio. Using a formula, a bank or a private mortgage company will determine how much your loan will be.

==== Subprime Mortgage Crisis ==== As shown in the Subprime Mortgage Crisis, there was no one monitoring and policing the system of approval. Therefore, mortgages were provided to people who should have been seen as "untrustworthy," due to their credit score and income, and were technically unqualified for approval. The number of mortgages given to people with "bad" credit (under 700) between the years of 2003-2007, the height of the housing industry, amounted to almost $200 billion per year. When the housing market peaked, buying wasn't a suitable option for individuals anymore.

Public Policy Reform
The government has taken many steps to alleviate the issue, and it has helped us out of the “crisis” but as you saw on the graph, we are only in the beginning of our climb out of the recession. Some ways the federal government has attempted to resolve this issue are:
 * encouraging lenders to accept alternative ways of pay back
 * lower interest rates
 * buying large quantities of long-term Treasury bonds and mortgage-backed securities that funded prime mortgages.