This chapter has focused on one of the most important markets in the financial system—the market for residential home mortgage credit.

• Home ownership has grown in importance in recent years with a record number of households in the United States today (about two-thirds) owning their own homes. The value of homes as a tax-reducing investment and as a hedge against inflation has played a major role in this home ownership trend as has the drive toward more lenient borrowing terms, encouraged by government support of the home mortgage market.



• Among the leading home mortgage lending institutions today are commercial banks, savings banks and savings and loan associations, life insurance companies, and mortgage banking firms.



• U.S. federal government intervention in the home mortgage market began in earnest during the 1930s and 1940s with the creation of several major federal agencies, including the Federal Housing Administration (FHA), the Federal National Mortgage Association (FNMA), the Veterans Administration (VA), and the Government National Mortgage Association (GNMA). These agencies were directed to expand the supply of mortgage credit available and to make mortgages more affordable for a greater proportion of the U.S. population. This was accomplished through such devices as guaranteeing the repayment of selected home mortgages (through FHA and VA) and creating an active resale market for existing home loans (through FNMA and GNMA).



• Later the Federal Home Loan Mortgage Corporation (FHLMC) was created to assist in expanding the supply of home mortgage credit and to aid in the development of security-like mortgage instruments to broaden and deepen the market for mortgage credit.



• Among the most important of new mortgage-related securities developed in recent years to expand the depth and breadth of the residential mortgage market are mortgage-backed securities, collateralized mortgage obligations (CMOs), and real estate mortgage investment conduits (REMICs). Each is based on the notion of pooling together a group of similar home mortgage loans and issuing securities against that pool that will eventually be paid off by the principal and interest payments generated from the pooled loans.



• Mortgage-loan-backed-security instruments have been used to attract millions of new investors to the home mortgage market and to increase the liquidity of mortgage instruments. Securitized mortgage instruments have helped make the market for home mortgages a global capital market rather than a regionally isolated marketplace as it was before their invention.



• In order to encourage individuals and families to consider home ownership, many new home mortgage loans and other home financing devices have been developed, some of them making mortgage credit available on more lenient and affordable terms. Examples include variable-rate mortgages (VRMs), adjustable mortgage instruments (AMIs), convertible mortgages, reverse annuity mortgages, and home mortgage refinancings.



• Refinancing of existing home mortgages became popular in the 1990s and early in the new century with record low loan rates. Borrowers became more skilled in using “lock-ins” to protect the interest rate on a new loan from upward interest-rate pressures. However, explosive growth in mortgage lending brought in more high-risk borrowers in danger of losing their homes due to predatory lending.



• The home mortgage market today has become one of the largest markets for a single financial instrument on the planet. It has helped to make U.S. citizens among the best-housed individuals in the world and in the process has interconnected the market for home loans with those for bonds. No longer are mortgage-related instruments insensitive to the broad market trends that affect the global economy and the money and capital markets today.