How Mortgage Policies Affect The Wealth Of A Nation

How Mortgage Policies Affect the Wealth of a Nation

A Luxury Americans Take for Granted

Herrick Mpuku spent a decade to build his home in Zambia, Africa. He financed the building of his home by saving up little by little. Michael Phillips writes in the Wall Street Journal about Herrick's and other Zambian's experiences saving up to build their home. Another Zambian, Humphrey Kapupula, took seven years to build his two-bedroom house. During that seven years, "he sold his Toyota and borrowed against his pension, [and] at times the family went without food to pay for buckets of cement." (Phillips 2007) Until recently, no home loans were available to Zambians. Those who could afford to paid cash for homes and those that could not built their home very slowly as they spent a little of each paycheck (when they could afford to) to purchase the supplies to build their home. Phillips cites a recent report by FinMark Trust, a U.K.-government financed research organization as reporting 0.1% of Zambians have a housing loan from a bank. (Phillips 2007) Phillips attributes the poverty and corruption in the Ministry of Lands as reasons why banks are so hesitant to lend mortgages. Interest rates for those who did borrow to own their home were as high as forty percent. (Phillips 2007)

The "American Dream"

As Americans living in the twenty-first century, it's easy to make the false assumption that owning a home is just as easy for one person to achieve as it is for another. Growing up in America, we're taught to believe that if you work hard and desire something enough, you can make it yours. Owning a home doesn't seem out of reach for any middle class American. In 1995, when homeownership rates were stagnate, and in some classes dropping, an Urban Policy Brief was written,

"The desire for homeownership is deeply rooted in the American psyche.

Owning a home embodies the promise of individual autonomy and of

material and spiritual well-being that many people sought in coming to

this country. In addition to its functional importance and economic

value, homeownership has traditionally conveyed social status and

political standing. It is even thought to pro-mote thrift, stability,

neighborliness, and other individual and civic virtues." (Urban Policy Brief 1995)

In the 1994 Fannie Mae National Housing Survey, it was reported that 86 percent of a national sample of Americans "believed that a person is better off owning than renting." Two percent claimed that renting was preferable, and another 12 percent answered that they "were not sure," and 2 percent answered, "it depends." (Rossi & Weber 1996)

Recently, before the "United States Mortgage Crisis" as the media likes to call it, just working hard, or merely working, were enough to secure a home mortgage. The TV commercial that blared, "Got a job, you're approved!" advertised car loans, but this was not too far from what mortgage lenders were touting. In 2003, 67 percent of American households owned their home.

How does homeownership affect a country's economy?

Peter Chinloy and John Benjamin, of American University explain how homeownership smooths out the national consumption cycle. They claim this smoothing is done through many avenues. The secondary mortgage market allows lenders to keep funding mortgage loans even when interest rates decline during recessions due to lower demands for business loans. In economic downturns and periods of reduced employment, people spend more time at home and continue to spend money on housing services. (Chinloy and Benjamin 2003)

Another way home owners smooth consumption is by using their homes as sources for cash. Home equity loans are used to purchase items that, had they not had the opportunity to borrow from their home, they wouldn't be able to purchase. Chinloy's and Benjamin's article, entitled "Housing: An Investment and a Piggybank for Spending" explains, "During the recent 2001 recession, homeowners refinanced and used proceeds for college tuition, furniture, credit card debt reduction, vacations, cars, and other personal consumption. Thus, the housing market tends to operate by increasing consumption counter-cyclically, potentially offsetting pro-cyclical variations in income and the valuation of financial assets"

Homeownership can also affect the balance of payments for a country in that the bonds issued to the lender are bought both domesistically, and by foreign lenders. "By refinancing," say Chinloy and Benjamin, "domestic borrowers receive a savings through a lower interest rate at the expense of foreign savers." (Benjamin & Chinloy 2003)

Also benefiting a country's economy is the positive affect a housing industry has on the employment rate. Schwartz (2006) writes about the economic importance of housing in the United States. At the time of Schwartz writing, over twenty percent of the gross domestic product was attributed to housing. This includes residential construction, remodeling, and "rental payments and the equivalent payments made by homeowners." Schwartz cites the 2002 Millennial Housing Commission: "Residential construction in 2001 accounted for 3.5 million jobs and $166 billion in local income."

In an article entitled "Real Estate Vs. Financial Wealth in Consumption" summarizing the findings of a study commissioned by the National Center for Real Estate research, "The results indicate housing has a substantial impact on economic activity. For

each dollar increase in real estate wealth less mortgage debt, consumers spend 8 cents in

that year. By comparison, a one dollar increase in financial assets from stock and bond

markets increases spending by 2 cents in the current year. The impact of housing is four times as large." (Benjamin, Chinloy, & Jud)

The History of Mortgages

What is a mortgage? Quite literally, Brower (1991) points out that the origin of the two parts "mort" and "gage" mean "death" and "pledge". In the Smithsonian article, Why Don't We Pronounce the T in 'Mortgage'? (History of Mortgages and Homeownership) Brower explains that in