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A Nation Moves Forward

July 3, 2018

Tomorrow, we will celebrate Independence Day, also famously known as the Fourth of July. On July 2, 1776, at the conclusion of the American Revolution, the Second Continental Congress comprised of a convention of delegates from the 13 original colonies, voted on their independence from the British Empire. Two days later, the Declaration of Independence was approved. The colonies were now the land of the free and the home of the brave. The heart of America started beating: a new nation was born. Arguably, this is one of the most remarkable federal holidays for the American people. Despite all the contradictions, the unparalleled highs and some deep lows, we continue to look at this great nation with hope and faith. So many glorious men and women gave their life, talents and resources to build this country. We shall not forget all the sacrifices which many before us paid, so we could call ourselves free. Living in times of peace and abundance with many choices available is both a privilege and an opportunity; it is a privilege because we did not work for it directly, and it is an opportunity, because we can achieve much more through what we are given. We shall always be mindful of it! Let’s now explore the American journey of homeownership, from its inception through today.

 

The concept of mortgage originated in England almost a thousand years ago and evolved and spread through the western world across the centuries. In the late 1800s/early 1900s, America was experiencing increased immigration levels and the need for mortgages and affordable property grew accordingly. We have been a country of immigrants since our founding, with folks moving from all over the world to live their own version of the American dream; since the beginning, homeownership was the common denominator of all those dreams. To give you a sense of what mortgages looked like in the early 1900s, homebuyers typically had to make a 50% down payment and pay the loan off over a 5-year amortization period. Understandably, only the wealthy were able to buy a home. The Great Depression changed this landscape dramatically. The subsequent New Deal brought innovation to home financing, and with the creation of the Federal Housing Agency (FHA) in 1934, the modern American mortgage began its course: quality standards were defined, lower down payments became acceptable, prolonged repayment timelines (15-30 years) were set, and amortization periods built into the structure of the loan. As mortgages continued to adapt to demographical and socio-economical changes, Fannie Mae and Freddie Mac were founded and new loan products emerged.

 

Adjustable rate mortgages (ARMs) became popular in the 1980s, along with option-ARMs, infamously known for their predatory lending characteristics led by negative amortization. Previously, buyers had only fixed-rate mortgages available. However, due to inflated financial market activities, interest rates in the 1990’s were so high that home ownership became unattainable to most. To reverse that trend, Congress pressured Fannie and Freddie to loosen underwriting requirements. Banks, mortgage companies, and Wall Street responded by offering subprime lending and less oversight. A windfall of mortgages ensued, pushing home prices up and up, until the housing bubble peaked in July 2006. Then the market came crashing down, led by homeowners’ defaults on those who bit off more than they could chew. These events led us to the recession of 2008/09. The lack of liquidity in the market almost collapsed the modern mortgage system and the economy.

 

Homeownership, ten years after the major crisis, is a force still waiting to be fully revitalized. In present times, young generations have practical difficulties in becoming homeowners; high home prices, slow job growth and limited inventory have been deterring most from becoming homeowners. It is somewhat paradoxical and perplexing that for young American adults, buying a home is still a major challenge, despite them being able to benefit from a vast array of home financing choices and overall improved economic status. Equity sharing as a source of down payment is designed for those home buyers who can become successful homeowners and are just waiting for a little push in order to move forward. Not everybody is ready to take on the responsibility which comes with home ownership, but for those who believe the milestone is within reach, we are here to help. Buying a home is not just good for the individual or the growing family, it is also good for communities and the environment. Homeowners naturally care for their own, as well as their surroundings, which helps neighborhoods flourish and thrive. One home at a time, we can make a difference, collectively. Thanks for reading! In a week, we’ll be here again!

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Laura is a member of the EquiFi leadership team.

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