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How Mortgage Finance Affects the Urban Landscape

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How Mortgage Finance Affects the Urban Landscape

Federal Reserve Bank of New York,

15 min read
10 take-aways
Audio & text

What's inside?

America’s current mortgage finance structure plays a big role in shaping the housing market and in deciding who participates in it.

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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Eye Opening

Recommendation

A housing crash is devastating for any society, but whether all groups in the United States suffered the impacts of the 2008 financial crisis equally is an important topic that the mainstream media seldom discuss. Economists Sewin Chan, Andrew Haughwout and Joseph Tracy take a forensic look at the data and conclude that certain communities felt the pain much more acutely, depending on several factors, including race, ethnicity and location. The authors examine the often-overlooked societal consequences – including growing inequality – of America’s current mortgage finance structure, which plays a significant role in shaping the housing market and in deciding who participates in it. Readers will find the report’s strong analysis refreshing and useful, including its coverage of how foreclosure rates and negative equity affect people and their communities. getAbstract recommends this illuminating report to city planners, policy makers, community leaders and others who share its authors’ advocacy for more research in this area.

Summary

Mortgages Are Not Like Other Loans

Four out of every five Americans live in urban areas, so it is not surprising that housing dominates the landscapes of US cities. Most Americans see home ownership as the key to their financial progress, and most rely on mortgage financing to buy dwellings, because saving enough to buy a home outright would take too long. The mortgage market dictates the rate of home ownership, which in turn influences the stock of housing, as well as other factors like population density. The government has almost always been involved in the mortgage market, given its socioeconomic impact. The availability of mortgage credit was a large factor in the dramatic rise in homeownership rates during the boom period of the late 1990s and the early 2000s.

Most collateralized loans require both an initial margin and a maintenance margin from the borrower; those enable the lender to call the loan as soon as the collateral appears to be worth less than the loan. In a mortgage, the initial margin is the down payment, which establishes the loan-to-value (LTV) ratio, and that determines the interest rate. The lower the LTV ratio – or in other words, the larger...

About the Authors

Sewin Chan is an associate professor at New York University. Andrew Haughwout and Joseph Tracy are economists at the Federal Reserve Bank of New York.

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