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Mortgage and Housing Act in the U.S Research Paper


Introduction

It is pointed out that, “in its preamble to the 1949 Housing Act, Congress declared its goal of ‘a decent home in a suitable living environment for every American family’” (Schwartz 1).

In the course of over the last six decades, beginning from the time this legislation was passed, the U.S Federal Government has engaged in assisting to finance the construction as well as rehabilitation of over five million housing units for the families that have a low income, and has also offered rental vouchers to almost two million more families.

However, the housing problems in the United States remain severe. For instance, it is reported that in the year 2005, over forty two million families stayed in physically deficient housing, with more than thirty percent of their incomes being spent on housing and even some families were homeless (Schwartz 1).

Since housing is very costly, its development as well as acquisition mostly relies on borrowed funds. It is reported that “housing construction, acquisition of existing rental buildings, and the purchase of single-family homes all rely on debt” (Schwartz 51).

It is also reported that in the year 2009, the residential mortgages were more than eleven trillion dollars, and this was more than fifty percent of the whole federal government debt (Schwartz 51).

Much has been written on the impacts of the US mortgage crisis on the global economy. Financial experts have warned that the impacts of the US housing and financial crises might persist if the necessary policies are not implemented (Kolb 6).

As a result, adjustments in the financial institutions have been inevitable. Most mortgage lenders have tightened their lending rates to survive in the changing markets (Bardhan 2). Several financial experts believe that the effects of the current US mortgage crisis are far much worse than stated by the government economists.

Objectives of the Study

The main purpose of the study was to investigate the effects of the mortgage and Housing Act in the United States of America. In this study, I sought to identify how the Housing Act has achieved its intended objectives.

Moreover, my investigation sought to find out how the federal housing program has survived, despite the enormous economic challenges (Krugman 15). Another objective of the study was to assess the level of the current housing crisis in the US.

In this regard, a number of the affected sectors were looked at and an evaluation of how the mortgage markets have behaved all through the recession was carried out.

Last but not least, the study also sought to analyze the magnitude of the effects of the housing crisis on the annual revenue collected by the state and the local governments. The research questions for the study included:

  1. To what extent have the objectives of the Housing Act in the U.S been met?
  2. How have mortgage markets behaved all through the recession (2007- 2008)?
  3. What are the effects of housing and financial crises on the government, organizations and households?

Why I was Interested in Conducting this Study

The Housing Act in the U.S. was enacted with an intention of ensuring that every American has a decent home in a proper living environment. This Act was intended to help ensure that proper housing is affordable to all Americans.

However, the housing and financial crises that occurred starting from the year 2007 made this goal to be hard to achieve. The crises had some negative effects on households, organizations and the government. This study sought to understand these effects and the level to which the objectives of the Housing Act have been achieved.

This study is very important because understanding these effects, and how effective the Housing Act has been, will go a long way in helping to come up with appropriate policies.

Implementation of such policies will serve to prevent the same effects from being felt in the future, and to ensure the objectives of the Housing Act are achieved to the highest level possible.

Literature Review

It is reported that before the commencement of “the Great Depression” in the year 1929; funding for buying “owner-occupied housing was in short supply and expensive”(Schwartz 51). Mortgages usually became due after a period of between two to eleven years, depending on the kind of the lender, “requiring repayment or re-financing” (Schwartz 51).

A large number of lenders had the willingness to engage in covering less than sixty percent of the value of the property, calling for a larger number of borrowers to get “the second and third mortgages”(Schwartz 51).

The difficulty of funding home purchases limited homeownership to the people who were richer and assisted in making rental housing to be the main type of tenure (Schwartz 51).

It is reported that the “Great Depression” affected the homeowners as well as home ownership negatively to a large extent (Schwartz 51). Unemployment became prevalent and several homeowners could not make their monthly payments for the mortgage any longer.

This prompted foreclosure on an immense scale. In the course of the year 1933, over fifty percent of the entire home mortgages “were defaulted and more than 1,000 mortgages were foreclosed every day” (Schwartz 51).

Those homeowners who were able to remain current on their mortgage payments evaded foreclosure (Schwartz 1). However, a large number of them were forced to engage in selling their homes when the mortgages they had come due.

It is reported that “cash-starved banks, beleaguered by customers withdrawing their deposits, became increasingly reluctant to roll over their mortgages and instead demanded that the borrower pay back the principal in full” (Schwartz 52). In addition, during that time, the total mortgage debt of a homeowner could be more than the actual value of the house and this could leave this person in debt even after the house being sold.

This is a problem that appeared again seven and a half decades later, when there was collapsing of the recent housing bubble that caused about twenty percent of the homeowners “to owe more on their mortgage than their homes were worth” (Schwartz 52) (See Appendix 1).

Following increased mortgage closure and collapsing of the whole housing industry, the federal government’s response was to take various measures that completely changed the U.S’s “housing finance system” and assisted in propelling homeownership “within reach of a majority of its households” (Schwartz 52).

Such institutions and programs made it possible to have a considerable increase in the nation’s homeownership beginning from the 1940s until the 1960s; setting up a fresh and steady “system for housing finance” which remained concrete for over four decades (Schwartz 52).

The United States’ housing and financial sectors contribute significantly to the growth of the country’s economy. In the early 1990s, the US government took an initiative of enabling more low- income earners to own homes (Marshall 23). The government authorized all the housing stakeholders to reduce their mortgage requirements.

In the year 1992, the US government, through Fannie Mae and Freddie Mac, acquired loans from mortgage banks and mortgage brokers. Following this move, more secondary mortgage markets were created (Marshall 34).

At that time, regulations required GSEs to allocate 30 % of all the mortgages purchased as affordable housing loans. However, this requirement was not adhered to and in the year 2007, financial experts noted that the percentage had risen to 55% (Marshall 45).

In the years 2007 and 2008, the boom in the housing sector came to an end following the onset of global financial crisis (Francis 12). This crisis and the subsequent recession had great negative effects on the US housing and financial sectors.

A dramatic increase in default rates was realized. The increase in the default rates occurred because most of the homeowners were among the worst hit individuals by the recession. Notably, most of the homeowners had no retirement accounts (Parker 67).

Because of lack of retirement accounts, these individuals were left with nothing they could use to access mortgages. The affected individuals were left with no other choice but to avoid paying their loans. The crisis affected the US government, organizations, institutions, and households (Bardhan 4).

Economists noted that the effects of the crisis were felt by all persons, regardless of whether or not they had participated in the growth of the housing sector (Ellis 78). As a result, most of the gains obtained prior to the recession were reversed.

Methodology

This research involved use of secondary data. The collection of this data involved considering the existing data. The existing data included the surveys that have been conducted by various researchers as well as the general information on mortgages and the Housing Act.

The work presented by other people on the subject was examined and used in this research in order to help answer the research questions and to achieve the objectives of the study.

Results and Discussion

Basing on the research conducted by some researchers in the past, it was found out that, about forty percent of the people in the United States of America have experienced financial distress in the course of the recession (National Bureau of Economic Research 1).

Experts point out that “spending changes provide one measure of the recession’s impact on households’ well-being” (National Bureau of Economic Research 1). In a survey conducted by the National Bureau of Economic Research, it was found that about seventy five percent of the respondents pointed out that they had reduced spending, and this was because of the economic crisis.

Those that reported having engaged in reducing their spending cited various reasons for the reduction: eighty percent of them cited the need of reducing debt; seventy percent cited a decrease in the level of income; forty five percent cited a change in the status of employment; forty five percent cited a reduction in the value of their homes; and thirty five percent cited stock holdings (National Bureau of Economic Research 1).

This is a clear indication that the housing and financial crises have affected the households adversely (National Bureau of Economic Research 1).

In considering the effects of the housing and financial crises on organizations, the existing data on this issue was also used. It was found out that, due to the sharp decline in the value of the “mortgage-backed” securities, the retail as well as the investment banks were compelled to “write-down” losses incurred on the securities that they held (Tiller 45).

This brought about great losses in the whole banking sector in the last two quarters of the year 2007. The crisis became even more intense in March 2008 when the collapse of Bear Steams occurred. It was found out that, because the crisis made the banks to be afraid of lending money, both households and businesses were not able to borrow (Tiller 45).

Therefore, the households put purchases on hold while the businesses engaged in laying-off their workers. It was also found out that, in the last quarter of the year 2008, the banking sector recorded a loss of twenty six billion dollars (Tiller 45).

Moreover, the research established that the local governments were less hit by the recession as compared to the state governments. However, there is likelihood that the pressures will mount. It was found out that the local governments witnessed a smaller decline in the tax revenues as compared to the state governments.

According to the available information, “even as national income home prices fell by 27 percent between the end of June 2006 and the end of 2010, property tax collection increased by 31 percent during the same period, reflecting delayed response to home price changes and new tax measures” (Congressional Budget Office 1).

However, the declining housing prices will, sooner or later, feed into the local government tax revenues.

The research findings indicated that, both the local and state governments reacted in response to the fiscal pressures by bringing down the level of their expenditure by almost 3% in real terms, in the cause of 2008/2009 fiscal year.

Moreover, the local governments engaged in cutting their labor force by approximately two percent within the period between December 2007 and December 2010 (Congressional Budget Office 1).

It was also found out that the local government raised the level of some of the taxes, property taxes included, and made their tax base to be wider. This assisted in supporting collection of tax in the initial stages of the crisis (Congressional Budget Office 1).

The bursting of the housing bubble began in the year 2006 and there was accelerating of the decline in 2007 and 2008 (Baker 73; Lybeck 120) (see Appendix). The housing prices ceased to go up in the year 2006.These prices then began to go down in 2007 and have, up to now, dropped by approximately 25% from the highest point (Moseley 1).

The price reduction implied that homeowners could not be able to refinance any more, where there was resetting of their rates of mortgage This made the delinquencies as well as mortgage defaults to escalate, mainly ‘”among subprime borrowers” (Moseley 1).

Beginning from the month of January 2006 up to August 2008, the proportion of mortgages in foreclosure rose by three times, “and the percentage of mortgages in foreclosure or at least thirty days delinquent more than doubled, from 4.5 percent to 10 percent” (Moseley 1).

These rates are found to be the highest beginning from the time of the Great Depression. The peak of the rate of delinquency that occurred previously was 6.8% in the year 1984 and also in the year 2002 (Moseley 1).

It has been projected that the worst has not yet happened. The hope that the American people have been having of owning their own homes is turning out to prove to be unrealizable.

Conclusion

The enactment of the Housing Act in the U.S. was undertaken with an aim of making sure that each and every American citizen has a decent home in a suitable environment. This Act aimed at ensuring that proper housing is affordable to all Americans.

However, the housing and financial crises that occurred starting from the year 2007 made this goal hard to achieve. The main purpose of this study was to investigate the effects of the mortgage and Housing Act in the United States.

This research sought to identify how the Housing Act has achieved its objectives. In achieving the objectives of this research and answering the research questions; the available literature on the topic was reviewed and secondary data was analyzed.

It was established that, following the housing and financial crises, a considerable number of households reduced their spending. This was due to various reasons, which include; need of reducing debt, reduction in the income level, change in the employment status, reduction in the value of homes, and stock holdings.

It was also found out that, such organizations as banks made big losses. Moreover, both the local and state governments experienced a decrease in the tax revenues. They responded by increasing other taxes, such as property taxes.

The housing and financial crises prevented the Housing Act objectives from being achieved to a considerable level. These crises have made it hard for the households to obtain funds from banks. A considerable number of people are struggling to survive and cannot be able to afford proper housing.

Policies need to be put in place to ensure these effects brought in by these crises are overcome and also to ensure that, the same cannot happen again in the future in order for all of the Housing Act objectives to be achieved to the highest level possible.

Works Cited

Baker, Dean. “The housing bubble and the financial crisis”. Real-world Economics Review, 1.46 (2008):73 – 81. Print.

Bardhan, Ashok. “Housing and financial crisis in the U.S: cause or symptom”. Vikalpa, 32.3 (2009): 1- 7. Print.

Congressional Budget Office, 2010. Fiscal Stress Faced by Local Governments. Washington: Congressional Budget Office. Print.

Ellis, Luci. The housing meltdown Why did it happen in the United States? Basel, Switzerland: Bank for International Settlements, 2008. Print.

Francis, Andrea. Affordable housing: the continuing search for solutions : proceedings of the National Housing Trust’s 20th anniversary housing symposium. Kingston, Jamaica : Planning Research Dept., National Housing Trust, 1996. Print.

Kolb, Robert W.. The financial crisis of our time. New York: Oxford University Press,2011. Print.

Krugman, Paul R.. The return of depression economics and the crisis of 2008. New York: W.W. Norton, 2009. Print.

Lybeck, Johan A.. A global history of the financial crash of 2007-2010. Cambridge, UK: Cambridge University Press, 2011. Print.

Marshall, John. The financial crisis in the US: key events, causes, and responses. London: House of Commons Library, 2009. Print.

Moseley, Fred. , April 2009. Web.

National Bureau of Economic Research, , 2012. Web.

Parker, John. Turmoil in U.S. credit markets recent actions regarding government sponsored entities, investment banks, and other financial institutions : hearing before the Committee on Banking, Housing, and Urban Affairs, United States Senate, One Hundred Tenth Congress, second session. Washington: U.S. G.P.O., 2010. Print.

Schwartz, F. Alex. Housing Policy in the United States. Oxford: Taylor & Francis, 2012. Print.

Tiller, Bo. , 2011. Web.

Appendix

United States House Prices

Source: Tiller, Bo. The subprime crisis and the effects on the U.S banking industry, 2011.

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