Mortgage Rate History in the United States
Every homeowner and prospective homeowner should know a bit about mortgage rate history and mortgage rate trends in the United States. This information is helpful to help them make the right decisions as to when to refinance existing homes or when to purchase a new one. Knowing the mortgage rate history and the current mortgage rate trend will help them decide if the current rates are good enough for them.
For reasons which you will understand and appreciate later, we shall be discussing the mortgage rate history in the United States using the development and growth of Fannie Mae as perspective! For now, take our word for it – There is no way we can discuss mortgage rate history without taking Fannie Mae’s own history into account!
(Fannie Mae refers to the Federal National Mortgage Association. The name came from the initials FNMA. This was a government owned and controlled corporation created by the then President Franklin D. Roosevelt in 1938 specifically to provide more opportunities for home ownership and stimulate the development of more affordable rental housing units for Americans. Fannie Mae made mortgage funds available to lenders by buying their mortgages and selling them to other investors via mortgage-backed securities. Because of its role, Fannie Mae have had a profound influence on the mortgage rate history in the United States.)
Mortgage Rate History – Pre-Fannie Mae Era (Prior to 1938)
Mortgage rates are the interests paid for mortgage loans. Prior to 1938 (before Fannie Mae was created) mortgage rates were solely determined by lenders. Although the rates were relatively stable and statistically low in this period, many low-income homeowners still had to struggle hard to keep up with the payments just to maintain homeownership. Marginal income earners and other prospective new home buyers had to think twice too before buying new homes because their income can not sustain the high mortgage rate payments.
The average mortgage rate for this period was from 3% to 3.5% while the average cost of a new house is in the $ 3,500 range. Compared to the annual average salary of the ordinary worker from 1935 to 1938 ($1,500 – $1,700), these mortgage rates are still too stiff to tackle! Besides, people have hardly recovered from the Great Depression that started in1929 and lasted until the mid 1930’s!
Mortgage Rate History – Fannie Mae Era (Before Privatization, 1938 – 1950)
Mortgage funds provided by Fannie Mae emboldened lenders to give out more loans and encouraged developers to undertake more affordable housing projects! Unfortunately war broke out! Although the war generated more employment and better income opportunities, much of the economy was controlled by the government. This made acquiring a new house rather difficult! Demand for new houses softened and mortgage rates remained steady at around 4%.
The post war era saw the steady rise of the average American’s annual income and the start of the baby boomers era as veterans return from the war. This in turn spurred growth in the housing sector as well as caused the rapid expansion of Fannie Mae activities. Fannie Mae’s rapid growth alarmed many lawmakers who thought that the government may be dipping its fingers too much on private enterprise. The good side of this was the fact that mortgage rates were effectively kept stable by Fannie Mae’s aggressive funding activities.
Mortgage Rate History – Fannie Mae Mixed Ownership (1950 – 1970)
In 1950, by an act of congress, Fannie May was partly privatized. Nonvoting common shares were sold to mortgage lenders who were required by the same law to own stocks before they are allowed to sell mortgages to Fannie Mae.
Fannie Mae became the largest buyer of mortgages in the secondary market but its activities were limited to buying only FHA and VA approved mortgages! Despite running into liquidity problems at times (1966) because of its aggressive buying activities, Fannie Mae still managed to keep mortgage rates stable within the 5% to 5.5% range.
Mortgage Rate History – Fannie Mae Privatized (1970 – Present)
Although the law that totally privatized Fannie Mae was signed in 1968, the privatization process took 2 years to complete culminating in May 21, 1970 with the election of a new board of directors and the appointment of a new chief by the president of the United States!
Unfortunately interest rates started to rise from 1970. It continued to rise sharply in the early 1980’s due in part to the series of oil price hikes in the world market. The cost of borrowing money became more expensive for Fannie Mae. And since Fannie Mae borrows money to fund its mortgage buying activities via short term notes and debentures, it is highly vulnerable to interest rate hikes. And this had drastically affected its bottom line! Fannie Mae remedied the situation by issuing mortgaged-backed securities (MBS). It also tapped international investors by offering more debentures and short term notes.
These provided more funds for Fannie Mae which expanded its operations to include the purchase of condominium and planned development mortgages. They also started buying adjustable rate mortgages (ARM) and Emboldened by the continuous flow of funds and the guarantees from Fannie Mae, the money lenders also expanded their own operations by encouraging and funding developers to develop more housing projects. Money lenders also aggressively funded sub-prime mortgages – mortgages given to less credit worthy borrowers!
In the meantime, the steep rise in interest rates was discouraging future home buyers. The steep rise in interest rates was causing mortgage rates to rise. While the supply of new houses was on the rise, the demand for them was tapering down. As the effect of the interest rate hike spread to other industries, over-all economic activity slowed down. Workers were laid off. Mortgages (both regular and sub-prime) went into default and foreclosures became widespread. The ensuing mortgage meltdown came to its high point in 2007 and affected not only every financial institution in the United States but also all the other financial institution in the world who had invested on Fannie Mae’s debentures and short term notes.
In the last four decades from 1970 to 2000, the mortgage rates went for a roller coaster ride, perhaps as a result of or in tandem with Fannie Mae’s activities in the same period. It literally went through the roof later part of 70’s to the early 80’s where it reached the 18% to 19% threshold on regular mortgages, and even rising to as high as 23% on the sub-prime market at the height of the oil crisis! It started to fall to the 7% – 9% range in the later part of 80’s when the now infamous Reaganomics was able to effectively bring interest rates down. It continued to fall steadily by an average of ½% since then.
Today the mortgage rate is at 4.22% – a level we’ve never seen since 1950! While it is hard to determine where it is headed from here, I am sure everyone wants to see these low mortgage rates become a more permanent fixture in mortgage rate history!
