Throwback Thursday: Mortgages, A History Lesson

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mort·gage (noun) \ˈmȯr-gij\
1: a legal agreement in which a person borrows money to buy property (such as a house) and pays back the money over a period of years
2: a conveyance of or lien against property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms
3: a : the instrument evidencing the mortgage b : the state of the property so mortgaged c : the interest of the mortgagee in such property
(definition from Merriam Webster Online)
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It’s not often that we stop to consider how the modern system of mortgaging property came to be so entrenched in our everyday lives. The basic idea has never changed – the high price on property puts it out of reach for the vast majority of people, unless presented with a means to borrow large sums of money in a secure manner. How did we get to where we are today, you ask? Well…

Let’s Start In Merry Olde England
As far back as 1190, English common law included an ordinance that would protect a creditor by giving him an interest in his debtor’s property. As such, the mortgage was a conditional sale. In the event that the debt could not be repaid, the debtor could elect to sell the property to recover his money, even though the creditor maintained title on the property.

The history of the word mortgage is in and of itself rather interesting. The prefix, “mort,” is from the Latin word for death; and the suffix, “-gage,” means a pledge to forefit something of value if a debt is not repaid – so “mortgage” really means “dead pledge.”

Also interesting is the fact that during this time period, ownership rights extended from the centre of the Earth up to the sky – unfortunately, today they are generally limited to surface rights.

Coming To The Americas
As European pioneers moved to settle in America, they brought and implemented their systems as well. Land ownership and the need for mortgages increased on a steady and correlated curve, and by the 1900’s, mortgage loans were widespread and readily available.

However, even in those days, not everybody could attain a mortgage loan. It was typical back in those times to be required to pay a 50% down payment on a 5-year mortgage, and it was expected that you would also be responsible to pay interest on the loan amount. At the end of the 5-year term, the unpaid balance would have to either be paid or refinanced.

The system was in place and successful until the Great Depression, when lenders had no money to lend, and debtors had no money to pay – the whole system crumbled, and mortgages were just not available.

FDR And The New Deal
Roosevelt’s election brought with it the hope of rebuilding the American economy through allowing the country to once again become a consumer-friendly nation. He wanted to stimulate the economy by giving people incentive to buy, so the government under his direction introduced laws and institutions designed to make that a feasible goal. Under these new laws, banks, financial institutions, and the industry itself were kept under tight supervision. This new-found system of checks, balances, and securities revolutionized the structuring and availability of mortgage loans radically for the American public.

the Federal Housing Association (FHA) was created in 1934 to protect mortgage lenders against losses from default. With the risk factor alleviated, lenders were more apt to give borrowers mortgages, which opened up the market once again. Conversely, the FHA also enacted 30-year fixed-rate loan programs, which offered homeowners greater stability and lower payment options.

Although the system was working, lenders didn’t always have the capital required to lend freely available. Also, loan terms and interest rates were set in congruence with the local economy, which naturally varied countrywide. More money, as well as a more consistent system were quickly deemed a necessity.

Along Came Fannie Mae To Save The Day!
In order to make the necessary funds available, the government established the Federal National Mortgage Association (FNMA), lovingly known as Fannie Mae, in 1938. The purpose of this association was to buy FHA insured mortgage loans and in turn, to sell them as securities on the financial market. This effectively created the secondary mortgage market by keeping the pool of mortgage-lending funds full.

A secondary advantage with the implementation of FNMA was a more equitable and efficient mortgage lending system. Underwriting guidelines, interest rates, and loan terms became similar as lenders were going to a central pool as a source of money, and lenders had to adhere to FNMA’s guidelines if they wished to sell their loans to the secondary market.

The Baby Boomers Influence
As war veterans began to return from World War II and entered the workforce, they became avid consumers who wanted to buy property.  As the economy boomed, so did the demand for mortgages. In 1944, the Veterans Administration (in a program similar to the FHA), was given the right to guarantee mortgage loans made by private lenders to veterans and active military personnel, allowing them to procure a mortgage without the necessity of a down payment. This in turn triggered a major economic boom, signifying a huge step forwards for the mortgage industry’s want to become efficient and stable.

Not to be left out, the Canadian government introduced the National Housing Act (NHA) in 1938. In 1954, they followed the United States’ lead by insuring mortgage loans. There was also an amendment made to the Bank Act, which allowed Canadian chartered banks to lend capital for mortgages. The growth in the housing industry and the major contributions to national economies was widespread and recognized pretty much globally.

A few years later, as baby boomers (including women) entered the workforce, dual income families quickly became the norm in North America. The demands of the consumer changed to reflect the values and desires of the time, and more expensive, expansive homes came into high demand. Once again, more mortgages (and with those, more capital) became necessary.

Freddie Mac Attacks
To counteract the demand for more mortgage funds, U.S. Congress chartered the Federal Home Loan Mortgage Corporation (FHLMC), colloquially referred to as “Freddie Mac”, in 1970. The whole purpose of this corporation was to increase the supply of funds available to commercial banks, savings and loan institutions, credit unions, and other mortgage lenders, in order to make more capital available to more American citizens.

More, More, More!
Throughout the 1950’s and 1960’s, most mortgages were in 20 to 30 year terms; however, when interest rates rose rapidly in the 1970’s, the system needed to make some adjustments. The course of action was to reduce mortgage terms to one, three, or five-year terms; although, even the 5-year mortgage terms were a rarity in the early eighties, when interest rates soared to over 21% (OUCH!). By 1998, the 5-year mortgage rate had calmed back town, averaging at 6.99%, with the 1-year rate hovering around 6.50%. Although banks had been forbidden to lend money for the purpose of mortgage acquisition until 1954, they had written roughly 64% of the more than $381 billion worth of mortgages outstanding in the third fiscal quarter of 1998.

With that amount of money floating around at stake in the mortgage industry, it is clear why the credit business is so important to both sides of the equation. Credit bureaus monitor consumer credit ratings; and consumers monitor the information credit bureaus hold on them. The monitoring of credit is both crucial to and deeply entrenched within the history of mortgage lending.

Keeping Up With The Trends And The Times
The mortgage industry is inherently fluid, ever shifting and changing, looking for ways to expand homeownership amongst lower-and-moderate-income families and individuals. One example of such a develpoment in the industry was the advent of the reverse mortgage, where a homeowner borrows against the value of their home to receive a line of credit. There are constant additions to the manner by which lenders can make capital available to borrowers.

Final Thoughts
When it comes to cash flow, the possibilities by which it can be acquired are limitless. There are literally thousands of available options in regard to financial programs for borrowers of all financial situations and limitations – in fact, there is a right progranm for you! And while trends, markets, and methods may vary, some things never change. Borrowers are going to want to acquire property, lenders want to acquire interest – and regardless of it all, you still need that “dead pledge.”

If you are looking to mortgage a new home, refinance your existing property, or have any other questions or concerns regarding your credit, debt, or strategies by which to consolidate your debts, please contact the Slegg Mortgage Brokerage Team today so that we can get you started down the path best suited for your lifestyle, budget, and needs.

Have a fantastic afternoon, everyone!
I’ll be back tomorrow with some Friday fun.

-Mel

Mel’s Musings #3: Budgeting Basics

Happy Wednesday, everyone!

In the last Mel’s Musing’s segment, we discussed debt and recovery. Today, I wanted to discuss budgeting, which is critical to the financial health and stability of any independent person. Whether you’re trying to pay your debts down, planning to buy a house, or even saving up for a nice vacation, these simple strategies to create your own tailored, customized budget will help you to see where your money is going (and how you’re spending it).

Sound manageable? I promise, it’s easy. All you’ll need to get started is a piece of paper and a pen(cil, whichever you prefer). I’ll touch on apps and other methods of tracking your budget at the end of this article. Let’s get started, shall we?

1. Track Your Expenses

‘Expenses’ in this context relates to the money you spend on things – food, gas, entertainment, et cetera – and in order to start saving money, you must first be privy to how much you are spending to be able to adjust accordingly.
First of all, I need you to gather all of your receipts, bills and bank statements for the past three (at least, if possible) months. If you have access to these items for the past year, even better – the more information you can gather about your spending habits right out of the gate, the better. What we’re trying to achieve here is some pattern recognition – where is your money going on a consistent basis?
Once you’ve gathered all of this material, first separate it into months, and then into categories. My system for breaking down expenses looks like this:
-Sort by month
-Sort the months into bills, credit card receipts (I like to do this by individual card; however, even lumping them together will work), ATM receipts from withdrawls, debit receipts, and other)
-Sort these into :

• Loans
• Utilities
• Medical and dental
• Automobile expenses
• Groceries
• House expenses
• Entertainment
• Taxes

Once you’ve done all your sorting (I promise, that’s the worst of it), tally up the totals for each month. When you have these totals, take this one step further and sort your spending into “fixed” and “flexible” expenses. A fixed expense is something that you can count on being consistent month after month – a car payment or a phone bill, for example; whereas a flexible expense is something that varies from month to month, including grocery bills and entertainment expenses. This will give you an even more accurate picture of what you’re spending and where.
Finally, take the sum total of each month, and add 10-15% to it as a “safety net” fund, and list it as a flexible expense. It’s always a good idea to have enough money saved up to get you through any unplanned events that might occur financially.
This is a great (free!) downloadable template that you can tailor to your own specifications to create an organized and effective expense report.

2. Figure Out Your Income

Knowing what you spend is only useful if you know what you’re making, too. To figure out what you’re actually bringing home, tally up all of your net income – from your job as well as any ongoing side work you may be doing, including babysitting, freelancing, tutoring, and et cetera. Make a note of what you brought home (net) per month, for every month’s worth of expenses you have accrued. I find it a useful tool to keep all of my paystubs in a binder, at least for a year.
To this effect, if you’re looking for ways to earn extra income, I recommend looking at options that allow you to work from home on your own time – this summer, I made some decent money just by writing freelance blog articles. There are always ways to increase your cash flow, and taking on side jobs is an accessible and lucrative one.
If the idea of increasing your money stream intrigues you, I recommend checking out Elance, Craigslist, Kijiji, and UsedVictoria (if you’re local).

3. Set Some Budgeting Goals

So, now that you have a good idea of what you’re spending and what you’re earning, the next step is to subtract your monthly expenses from your monthly income.
If the number is positive, that means you are saving more than you are spending! Awesome!
If the number is negative, that means you are in a deficit and overspending in relation to your income. Not optimal, but fixable.
If the remainder is what you would like to save per month, stop here – your budgeting is already on point; however, in most cases, you’re going to want to save more, in which case the following applies to you.

Simple ways to save more include taking a look at your flexible costs and begin to trim from there. Can you do without that daily latte? Perhaps you can invest $8.00/month on Netflix instead of $25.00 to go and see a movie a couple times a month. A library card is usually under $10/year and will give you access to thousands of books, movies, and magazines. Simple things can add up to savings well over $100/month without even trying too hard or feeling like you’re being deprived of anything. Be creative, and once you hit your savings goal (don’t forget that safety cushion slush fund!!), stick to it. Remember, it takes roughly three weeks to form a new habit, and before you know it, being more frugal will just feel right.

4. Track Your Budget Continuously

Budgeting is really only a useful tool if you stick to it – so make sure that you do, by tracking your spending and income on a continuous monthly basis. Choose a day every month to take an hour or two dissecting your expense report and tallying up your numbers. Take the time to evaluate your progress, set (or reset) goals, and brainstorm new ways to save money and accomplish your goals. It takes diligence and discipline; however, it will be well worth your time in the long run. Nothing feels better than paying off a long standing debt to make room in your finances for a vacation, a new car, or a well-deserved treat (my favorite indulgence is a good manicure) for yourself.

There are a wealth of budgeting apps available for smartphone users, such as iReconcile, Expenditure, MoneyBook, Toshl, and Mint, as well as You Need A Budget, which can be set up on your PC and taken with you on your smartphone to allow for real-time input of expenses. Now, I’m part of the iPhone generation, but I personally prefer pen and paper to any budgeting app; however, the important thing here is to be diligent and make sure that however you prefer to keep a running log of your budget, that you sit down and get it done. Make it accessible, make it comfortable, and make it work for you!

5. Remember To Have Some Fun!

It can feel overwhelming and constricting to stick to a strict budget; however, as important as it is to take care of your financial health, it’s equally important to take care of your mental health. If you’re just starting out and you have every penny accounted for, don’t fret-there are tons of free and low-cost activites to keep you occupied. Take a hike, explore the nooks and crannies of your city’s downtown, look for free museum exhibits or art galleries…the possibilities are endless! I like to lace up my shoes and go for a long run when I’m broke and bored – and then come home to watch Netflix (I recommend ‘Sons of Anarchy’ and ‘Nip/Tuck’ for TV shows – they’re both totally addictive, and as I mentioned before, Netflix will only run you $8/month for all the TV and movies you can watch) with my fiancé and our dog. You can even try searching “free things to do in __________” online. A quick google search for “free things to do in Victoria” pulled up hundreds of results.

Frugal can be a lot of fun!

Recap:

Track your expenses, then track your income. Pit the two against each other and look for either a surplus or a deficit, and use that information to create attainable savings goals. Create a budget and stick to it. Cut down on flexible expenses and start actively saving your money. Remember to have fun while you’re at it!

Sticking to these simple budgeting tips will help you reach your goals in no time – you’d be amazed at what you can do in a year!

If you have any more questions regarding budgeting, debt, or personal finances, please feel free to contact me – I’d be more than happy to get you started on the right track.

For now, have a wonderful Wednesday!

-Mel

 

Bond Price Marches Higher

The Canadian Government 5 year bond seems extraordinarily popular today and, since increasing bond prices lead to decreasing yields, the action has caused the biggest one day drop in yields in over a year and a half.

Readers might wonder what this has to do with mortgages and why I would choose this riveting subject as my very first post. Don’t I have something more interesting to talk about? Usually when I start talking about bond yields my audience simply glosses over and tunes me out but, hopefully you’ll stay with me here.

The “Canada 5 Year”, as it is affectionately known, is probably the single most influential factor in how lenders set their 5 year mortgage rates so when the Canada 5 Year yield trends downwards,  mortgage rates usually follow.  Traditionally, mortgage lenders like to see a spread of between 1.5% and 2% over the bond yield. Yesterday, that translated into a 5 year mortgage rate of around 3.5%. Today, that could be as low as 3.23% which is good news for borrowers. It might not seem like much when the monthly payment on a $500,000 mortgage is only about $70 lower but when you realize the total interest paid over 5 years is almost $6,400 less, it is worth taking note. Exciting I know! Aren’t you glad you stuck with me? 

Could this trend continue? What does the crystal ball say? I don’t know, but I’ll take a guess anyway.

Investors generally buy bonds when they think inflation will be mild and sell bonds when they think prices are set to rise. The statistics the government provide us with show very modest inflation recently and most economists agree we can expect the same for the near future. If they’re right and inflation remains low, bond prices should perform fairly well. Remembering that higher prices equal lower yields, and lower yields lead to lower mortgage rates, we can cautiously predict a continuation of the trend in the near term. Or at least a stable environment. 

Of course, “most economists agree” can mean very little so if prices start to increase, or investors think they will, we could see a reversal toward higher yields, and therefore higher rates. There are other factors to consider including the US Federal Reserve “tapering” their bond purchases south of the border that could have a significant impact on the Canadian bond market. More on that another time.

If you have questions or feedback on the direction of mortgage rates, please leave a comment or contact me directly. I would love to know what you think.

Have a great weekend!

Dan