Buying a home is only possible with a mortgage loan for most Americans. In the U.S., mortgages are the single largest component of household debt, accounting for over one-third of the total debt held by households. After credit card bills, mortgages are the second most common source of debt among Americans. Homeownership is commonplace in the U.S., which contributes to a bustling housing market and one of the largest mortgage industries in the world. In 2007, the infamous subprime mortgage crisis set the stage for the financial turmoil and subsequent recession of 2008. Outstanding mortgage debt went down after the 2008 financial crisis but has since bounced back and has been on the rise since 2013.
Though mortgage rates are not defined by the Federal Reserve, they are connected to the federal funds rate – the interest rate at which commercial banks can lend or borrow money overnight. A lower rate makes borrowing cheaper for banks, which allows them to offer mortgages at a lower rate and results in a higher origination volume. On the other hand, a higher federal funds rate triggers an increase in mortgage rates and a decline in mortgage borrowing. After the 2008 financial crisis and during the coronavirus pandemic the federal funds rate was as low as 0.1 percent, resulting in the 30-year conventional mortgage rate dropping to an all-time low. That measure aimed to stimulate homebuying and the economy, and indeed, 2021 witnessed skyrocketing demand, some of the fiercest bidding wars, and the number of home sales surging to the highest figure recorded since 2006. Conversely, after inflation started rising, the Federal Reserve responded by tightening monetary policy. In June 2022, inflation peaked at 9.1 percent, prompting the Fed to hike the funds rate to as high as 4.57 percent in February 2023. Mortgage lenders followed suit with an increase of more than double.
Though most of the mortgage debt outstanding is for one-to-four-family residential properties, close to 3.6 trillion U.S. dollars of debt is secured on commercial real estate. The multifamily sector and farms are also a part of the mortgage market. Conventional mortgages - loans made through a private lender - are the most prevalent type for home purchases. Nevertheless, there are also FHA-insured and VA-guaranteed mortgages. Typically, lenders require homebuyers to put down about 20 percent of the home’s value to obtain a loan. An FHA mortgage is a loan backed by the Federal Housing Administration and allows mortgagers to borrow against a lower down payment. VA loans are Veteran Affairs guaranteed loans designed for servicemembers, veterans, and their families. Both FHA and VA loans have lower credit score requirements than conventional loans. Often, borrowers need to renegotiate the terms of the mortgage, such as the principal paid, the interest rate, or the loan term. During the pandemic, favorable mortgage conditions prompted a spike in refinance originations. The forecast until 2024 shows that new mortgage lending would predominantly be for new purchases.
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