Future housing demands and sources of mortgage money

Federal Home Loan Bank Board Journal, April, 1984 by Alan R. Winger

Simultaneous with this diminution of the relative importance of the financial intermediary has been the rapid development of the secondary market for residential mortgages and the related rapid growth of the market for mortgage-backed securities. The growing importance of these markets is clearly reflected in Table 6. Loan sales, as a proportion of total residential mortgage loans originated, rose from about one-third to one-half from 1970 to 1980. The net acquisitions involved in pools of mortgages backing up securities increased from 4 percent of the total to 17 percent over the same period.

Many have argued for some time now that the development of the secondary and mortgage-backed securities markets is essential if the home mortgage borrower is to compete effectively in the Nation's savings market. After the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St Germain Depository Institutions Act of 1982, further expansion and development of the these markets is deemed even more important by most housing finance experts.

Dergulation implies that savings and loans--for years the major source of mortgage money to the American home buyer--will become less important. While thrifts will remain heavily committed to real estate, they now have the opportunity to move in other lending markets and are likely to do so for a number of reasons, not the least of which is to achieve more balance in the maturity or duration of their assets and liabilities. The removal of th rate advantage that thrifits have over commercial banks will also affect deposit inflows into thrifts, which could reduce their ability to add loans to their mortgage portfolio on the basis of funds acquired through deposits. Most expect the traditional commitment of thrifts to real estate lending to remain, but with operations that become increasingly involved with the secondary market in the sense og originating loans, forming mortgage pools, issuing mortgage-backed securities, and selling them to other investors. Savings and loans are thus expected to gear their operations in a way that brings them into the mainstream of developments taking place that restructure the mortgage market and, hence, intensify that development. Alternative Mortgages

Another important recent development in the mortgage market is the alternative mortgage financing arrangements that have flourished over the past four to five years. Some of these--the so-called creative financing arrangements such as builder buydowns, wrap-arounds, mortgage loan assumptions--have become less frequently used as mortgage rates have fallen to levels that reduce the dimensions of the "tilt" problem confronting potential home buyers. Other instruments, such as the adjustable rate and graduated payment mortgages, will remain.

The adjustable rate and adjustable payment mortgages are not new. They were just not used very much because of regulatory constraints. It was not until the inflation of the late 1970s and early 1980s created severe problems for both mortgage lenders and borrowers that these restrictions were eased. Now many lenders make both adjustable rate and adjustable payment mortgages, as well as certain other kinds of mortgages such as the price-level adjusted and shared appreciation mortgages.