History of Mortgage Interest Rates
Mortgage interest rates have fluctuated up and down during the past 40 years. This is a result of reactions to forecasts, changes in the economy, the bond market, employment and consumer spending. Interest rates react in a negative manner (slightly increasing) with every release of market statistics in which the report is negative. Interest rates will decrease slightly when market news is positive. This happens daily.
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Historically Speaking
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Prior to the 1930s, mortgages were mainly short-termed with balloon payments (balance due all at once). The Great Depression flattened the economy. Jobs were scarce, and foreclosures were many. President Franklin D. Roosevelt created the "New Deal" to restructure the economy in 1934. Part of the New Deal was the creation of the Federal Housing Authority, which insured mortgage loans to motivate banks to make loans to low-income borrowers with low down payments. Interest rates on mortgages were ranging from 6 percent to 7 percent, but until the FHA implemented its insurance program, banks required a 50 percent down payment, and no one could afford to buy a home.
Moving On
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As we moved into the end of the 1940s and 1950s, the FHA proved to be a big part of the cure for economic woes, and the economy flourished. Interest rates stayed in the 5 percents for a 20-year fixed-rate program. World War II had ended, and in 1944 as part of the veterans' bill of rights, the VA loan program was created. In 1948, the FHA stretched out loan terms to 30 years, and Fannie Mae began purchasing VA loans, freeing up money that banks used to make other loans. This rolled us into the 1960s with a healthy economy, housing growth and jobs.
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Then Came the '70s
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From the mid-1960s, most mortgages were funded by either large commercial banks or savings and loan associations. Mortgage funds used to fund the loans came from depositors' money that was insured by the FDIC (Federal Deposit Insurance Corp.) or the Federal Savings and Loan Insurance Corp. These institutions could offer interest rates from 5 percent to 6 percent. Treasury bills' yield rarely rose above 4 percent, which is how depositors were paid. This gave somewhere around a 2 percent profit margin. In the late 1960s, treasury-bill rates rose above 4 percent, and savings and loans lost many of their depositors, leaving a shortage of funds for mortgage lending. This also left the savings and loans servicing low-interest loans with no profit margin. In 1970, Freddie Mac (FHLMC, the Federal Home Loan Mortgage Corp.) was created to buy loans from those S&Ls.
Era of Rate Horrors
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In the late 1960s and 1970s, inflation was out of control. Interest rates climbed in an attempt to stay ahead of inflation. With each passing year, interest rates continued to rise into the double digits, and in 1981 hit 18.5 percent for 30-year fixed-rate mortgages. The use of adjustable interest rate mortgages (ARMs) was offered, since they could start at a lesser rate than fixed-rate loans, and allowed the borrower to assume some risks since rates would increase over time. The early ARM loans were biased toward the lender, many having no limits to how much they could increase with each change (caps). Some had negative amortization, in which the payment is not sufficient to cover the interest being charged and the loan balance grows rather than decreasing. This created many foreclosures. Toward the end of 1985, fixed-interest rates began to drop below double digits and into the 9 percent range.
Refinance Avalanche
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In the 1990s, the Federal Reserve had inflation under control, and fixed-interest rates had continued to decrease to below 8 percent. This created many refinanced loans, some refinanced several times as rates continued to fall. This created a traffic jam of borrowers in a bottleneck of refinancing, and slowed the flow of the entire industry.
Subprime lending
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Until the mid-1990s, loans had all required that income and assets of the borrowers be documented and disclosed. These loans also required good credit and supporting credit scores. There were many who fell below these prime standards, hence the subprime borrower. Internet lending had become popular, and a larger variety of loan products was needed to compete. Due to the large market for below-standard underwriting requirements, some lenders specialized in this type of loan. Interest rates were typically aligned with level of risk (the higher the risk, the higher the rate), so to make qualifying even easier, adjustable-rate mortgages were combined with subprime lending standards. Over time, industry abuse and increasing payments created an avalanche of billions of dollars in foreclosed properties.
Fixed Rates
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Many lenders have been devastated by the massive losses from foreclosures and have closed their doors. Ailing Fannie Mae and Freddie Mac were bolstered by the federal government with over a billion dollars in money from U.S. taxpayers in September 2008. Subprime lending has disappeared. However, conventional, FHA and VA lending (which has tighter guidelines) are all at favorable interest rates in the low 5 percent for 30-year fixed products.
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