If you are hesitating on getting a mortgage, let’s analyze today’s low rates in a historical context. Prior to the 1930s mortgage funding mainly came from commercial banks. At this point the main source of mortgage funding stemmed from life insurers, commercial banks, and thrifts. It wasn’t until after the crash of the stock market in the 1920s and the Great Depression that the Federal involvement in housing finance starting in the 1930s with the passing of the Federal Home Loan Bank. The Federal Housing Finance agency reported that high unemployment raised to 23.6% and around 20% to 25% of the US’s home mortgage debt was in default by 1933. Basically, the government needed to find ways to help people into homes while they worked on their finances.
In response to this economic downturn, Roosevelt put forth The New Deal which was a series of programs that had to goal of stimulating the US economy and increasing the scope of the government. Including the Federal National Mortgage Association (FNMA) or more commonly known as Fannie Mae. This government sponsored enterprise (GSE) helped to make more mortgages available to moderate- to low-income borrowers. To be clear, Fannie does not provide mortgages themselves but that act as a secondary mortgage market that purchases, holds, and sells FHA (Federal Housing administration) loans.
Coming out the of depression-era in the late 1940s to really the 1920s the US economy was in a “Golden Age” due to high economic growth and low employment and inflation. During the 50s and early 60s short rates averaged between 1 and 2 percent.
In 1970, when Congress passed the Emergency Home Finance Act it helped to established Freddie Mac or the Federal Home Loan Mortgage Corporation. This too is a government-sponsored enterprise which purchases, guarantees and securities mortgages in order to create form mortgage-backed securities. The goal of Freddie Mac was to control the complications of interest rate risk.
As inflation rose throughout the 60s the US was eventually hit hard with the financial crisis of the late 1970s and early 80s. According to the US Federal Reserve, this financial crisis partly stems from the OPEC oil embargo of 1973 which quadrupled crude oil prices. Inflation coupled with high unemployment led the US interest rate to reach an all time high in December of 1980 with a prime rate (the lowest rate of interest at which money may be borrowed commercially) of 21.50. To put that in perspective the the highest the prime rate has been in the last 10 years, despite the housing crash of the 2008 was 8.25.
As the US worked to get back their financial footing rates started to slowly drop but in the early 2000s the US faced another financial crisis. In 2003, Wall Street started purchasing risky loans and people were buying homes that they really could not afford which resulted in a rise in housing prices. In order stay in competition Fannie and Freddie started taking up unstable loans as well. Then the housing prices in 2006 and in order to help bounce back from the housing crisis the treasury stepped in to give $72 billion dollars to Freddie and $112 billion. This lead to increase in interests rates hitting a high of 8.25% in 2006.
Today, the Wall Street Journal reports that rates rest around 3.5% which if you think about it is historically low. Despite the housing crisis not even 10 years ago rates have not been this low since the “golden age” in the 1950s. You probably haven’t seen a better point in your lifetime to get a mortgage.
For additional information on mortgage loans, rates, and more visit us at Greater Home Loans.