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Unformatted text preview: The American Mortgage in Historical and International Context Richard K. Green and Susan M. Wachter H ome mortgages have loomed continually larger in the financial situation of American households. In 1949, mortgage debt was equal to 20 per- cent of total household income; by 1979, it had risen to 46 percent of income; by 2001, 73 percent of income (Bernstein, Boushey and Mishel, 2003). Similarly, mortgage debt was 15 percent of household assets in 1949, but rose to 28 percent of household assets by 1979 and 41 percent of household assets by 2001. This enormous growth of American home mortgages, as shown in Figure 1 (as a percentage of GDP), has been accompanied by a transformation in their form such that American mortgages are now distinctively different from mortgages in the rest of the world. In addition, the growth in mortgage debt outstanding in the United States has closely tracked the mortgage market’s increased reliance on securitiza- tion (Cho, 2004). The structure of the modern American mortgage has evolved over time. We begin by describing this historical evolution. The U.S. mortgage before the 1930s would be nearly unrecognizable today: it featured variable interest rates, high down payments and short maturities. Before the Great Depression, homeowners typically renegotiated their loans every year. We next compare the form of U.S. home mortgages today with those in other countries. The U.S. mortgage provides many more options to borrowers than are commonly provided elsewhere: American homebuyers can choose whether to pay a fixed or floating rate of interest; they can lock in their interest rate in between the time they apply for the mortgage and the time they purchase their house; they can y Richard K. Green is Oliver T. Carr Professor of Real Estate Finance, George Washington University, Washington, D.C. Susan M. Wachter is Richard B. Worley Professor of Financial Management, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania. Their e-mail addresses are ^ [email protected] & and ^ [email protected] & , respectively. Journal of Economic Perspectives—Volume 19, Number 4—Fall 2005—Pages 93–114 choose the time at which the mortgage rate resets; they can choose the term and the amortization period; they can prepay freely; and they can generally borrow against home equity freely. They can also obtain home mortgages at attractive terms with very low down payments. We discuss the nature of the U.S. government intervention in home mortgage markets that has led to the specific choices avail- able to American homebuyers. We believe that the unique characteristics of the U.S. mortgage provide substantial benefits for American homeowners and the overall stability of the economy....
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- The American, Mortgage loan