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United States

Housing Finance Market Overview

In the United States, housing finance is mainly provided by banks. Wells Fargo, with a market share of 25 per cent in 2010 was the largest mortgage producer, followed by the Bank of America with a share of 19.6 per cent.
Before the crises, mortgage brokers have had an important intermediation role. About 68 per cent of all mortgage transactions were processed through mortgage brokers in 2004. In 2009 this share has fallen to less than 20 per cent and in 2010 even to 10 per cent. The business of the brokers has been largely taken up by "correspondent lenders". Though they differ in theory and legally from brokers, they are practically much more alike than they differ.
Between 2000 and 2007 the housing finance market grew considerably. The mortgage debt to GDP ratio increased from 52 per cent in 2000 to 81 per cent in 2007. This level dropped in 2008 to 76 per cent and remained there so far.

The Market from the Perspective of the Demand Side

In the United States, the maximal loan-to-value (LTV) ratio of conventional mortgages equals 80 per cent. Loans exceeding this ratio usually have to carry Lenders Mortgage Insurance. Before the financial crisis, banks readily approved loans with an LTV ratio exceeding even 100 per cent. In 2006, around 27 per cent of all loans were interest-only and another 15 per cent were adjustable rate mortgages (ARM). The remaining mortgages were mainly fixed-interest loans. Though the share of variable rate mortgages seems to be modest, especially mortgages issued to (the most vulnerable) subprime borrowers were mostly (approximately 80 per cent) ARMs. Hence, when U.S. house prices began to decline in 2006, refinancing became more difficult and as ARMs began to reset at higher rates, mortgage delinquencies soared.
The fiscal regime allows full tax deductibility of most mortgage interest payments. This unlimited, untargeted mortgage interest tax deduction causes costs of over 3 per cent of the total budget. Furthermore, the government subsidises mortgage interest rates by backing the government-sponsored enterprises (GSE) Fannie Mae, Freddie Mac and the Federal Home Loan Banks with an implicit guarantee (which became explicit for Fannie Mae and Freddie Mac when they were put into conservatorship in 2008) and the government-owned Ginnie Mae with an explicit one. The mortgage insurance offered by the Federal Housing Agency, a government agency, as well as the “Affordable Housing Program” are other supportive government measures.

House Price Development

House prices have risen considerably with an average annual growth rate of around 7 per cent from the year 2000 to the peak in the beginning of 2007 according to the Federal Housing Finance Agency House Price Index (FHFA index) which gives a more muted picture than the other indices available as the FHFA index does not include many of the really bad loans (subprime and Alt-A) that were sold through Wall Street. According to this index prices started to fall slightly in 2007 and fell by even more than 8 per cent in 2008. The S&P/Case-Shiller Home Price Index reports for 2008 even a drop of around 16 per cent in US property prices. In 2009, prices have continued to fall with a high rate.

Special Characteristics of the Market

There are four major secondary mortgage market institutions in the United Stated: the GSEs Fannie Mae, Freddie Mac as well as the FHLBanks and the government-owned Ginnie Mae. Fannie Mae and Freddie Mac are the main actors in the secondary mortgage market because they buy mortgage loans from approved mortgage sellers, issue the largest share of mortgage-backed securities (MBS) and guarantee investors the timely payment of principal and interest on MBSs. MBSs are not the sole source of funding for the GSEs as they have sizeable holdings of mortgages that are funded by debt (including derivatives). Ginnie Mae’s business is restricted to offer financial guarantees to investors of (Ginnie Mae) MBSs. The funds of the FHLBanks originate with the sale of debt securities, called “consolidated obligations”.
The agencies traditionally have a large impact on the US-American mortgage market. In pre-crises years the share of the agencies was between 30 to 40 per cent but in the wake of the crisis it rose to a staggering 95.2 per cent share (2009). Though that share was down to 87.2 per cent in 2010, 2010 marked already the third year in a row of near-total agency (and therefore government) domination of the mortgage market 

Refinancing Instruments

The securitisation of mortgages is the main funding instrument for the mortgage financiers in the United States. Around 60 per cent of all outstanding mortgages were securitised in 2008; the remaining share is mainly funded with customer deposits but also with the issuance of debt obligations. The high level of securitisation is considered to be one major factor that triggered the financial crisis.  
The largest securitisers are the GSEs. Since the beginning of the financial crisis the issuance of non-GSE residential mortgage backed securities is nearly zero. 



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