As published in Scotsman Guide's Residential Edition, March 2006.
In part one of a two-part series, Alex Nackoul discusses the history of the mortgage-brokering industry. He looks at the roles of mortgage brokers, savings-and-loan associations, economic factors from the 1890s through the early '80s and more. Part two will discuss the industry in the '90s through today. This history includes his personal observations.
Mortgage professionals better chart their future by understanding the history of their industry. In this examination of the history of the mortgage-brokering industry, particular attention will be paid to the industry during the early 1980s, when it began to transform into what it is today.
Brokers' and bankers' early days
Mortgage brokering evolved with the United States' urbanization. One of the first mortgage brokerages was Sonnenblick-Goldman. Founded in 1893 in New York City, Sonnenblick-Goldman started by arranging debt financing for hard-to-finance real estate projects.
In the West, local real estate individuals also saw a business opportunity in the abundance of land and need for mortgage capital. They started arranging mortgage loans for people who were turned down by banks.
These "loan arrangers" brought together bank turndowns and wealthy people to create private mortgages. The number of loan arrangers grew because of a common lament: "The only time a bank will approve my loan is when I prove to the banker that I don't need the loan."
This financial Catch-22 helped to create a new job classification: mortgage brokers.
The Great Depression and the New Deal in the 1930s forever changed our nation's housing policies and real estate financing. The Federal Home Loan Bank system (FHLB) was established in 1932. The U.S. Housing Act of 1934 created the Federal Housing Administration (FHA), while the U.S. Housing Act of 1937 created a public-housing program that paved the way for the U.S. Department of Housing and Urban Development. In 1944, the Veterans Administration (VA; now the U.S. Department of Veterans Affairs) loan program was created.
One purpose of these programs was to broaden borrower qualifications for home mortgages. These government programs created another job classification: mortgage bankers.
The roles of mortgage bankers and mortgage brokers were similar. Both arranged mortgage loans for borrowers who could not get traditional bank financing, and both sold their loans to investors. Brokers arranged loans to wealthy individuals, and bankers arranged loans via government agencies.
The early 1980s: Who did what?
Within a few decades, the New Deal legislation found its place. The mortgage industry's financial markets became clearly defined at the start of the 1980s. Conventional mortgage loans were the domain of savings-and-loan associations (S&Ls), and government mortgage loans were the domain of mortgage bankers. Mortgage brokers handled everything else, including second mortgages and credit-risk first mortgages.
As the 1980s progressed, however, there were many changes to mortgage brokers' roles in conventional home loans, government loans, second mortgages and more. Inflation and the deregulation of the lending industry in the '80s would further impact the mortgage industry.
Institutional lenders (banks and S&Ls) operated in a highly regulated environment in 1980. The lending industry was still a "gentlemen's domain." "Banker's hours" were still in place, which meant that banks and S&Ls were open from 10 a.m. to 3 p.m., Monday through Friday.
There also were no national lenders. Banks and S&Ls funded loans only in the state where they were domiciled. Further, banks made commercial loans while, S&Ls primarily funded home mortgages.
Legislation called Federal Regulation Q had a lot to do with this. Not only were lending activities regulated, but the government also regulated the amount of money that banks and S&Ls paid their depositors. In 1980, Regulation Q authorized S&Ls to pay their depositors 5.25 percent, while banks paid their depositors 5 percent.
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