HACE 2100 1nd EditionFinal Exam Study GuideIssue #2 - Home Ownership - Should John and Marsha Buy or Rent a Home? ★ In this issue: ○ home ownership policies, trends of homeownership, types of housing and their advantages and disadvantages ○ how much house can you afford? ○ costs and benefits of owning and renting★ The Case For and Against Ownership ○ consumers were told homeownership would do all of the following: ■ President Hoover said it would “change the very physical, mental, and moral fiber of one’s own children” ■ George Bush’s HUD secretary said it would “save babies, save children, save families, and save America” ■ Roosevelt said that a country of homeowners is unconquerable ○ consumers were told that homeownership might: ■ create social/financial stability● living near the same people would create a social neighborhood● having a mortgage to pay may cause you to take your income seriously and cause you to be financially responsible■ create safer neighborhoods● living around people you might recognize, so you can tell when there is a stranger and act to protect your neighbors and children■ create smarter children who do better in school● homes provide resources that enable children to do better in school● *note- correlation between families owning automobiles is a stronger indicator of school success than homeownership ○ approximately 100 years ago: renting versus owning ■ social renting: term referring to rental housing, owned and managed by thestate, by non-profits, or by a combination of the two, generally with the aim of providing affordable housing ○ 20th century ■ 1910 - homeownership rate was 46 percent■ rose to 48 percent during 1920s boom (called the Coolidge Prosperity), after the president at the time)■ this was when government had first homeownership promotion● Own Your Own Home campaign - 1922 - began under then Secretary of Commerce Herbert Hoover● originally launched by National Association of Real Estate Boards in aftermath of WWI - taken over by US Dept. of Labor in 1917 - became first federal program explicitly aimed at encouraging homeownership; no financial incentives offered○ great depression■ bust of 1930s homeownership rates were 44% in 1940 ⇒■ numerous government programs to support homeownership ● Federal Home Loan Banks (FHL Bank) - under Hoover - 1932○ 12 government sponsored banks providing stable, on demand, low cost funding to American financial institutions(not individuals) for home mortgage loans, small business, rural, agricultural, and economic development lending● Homeowner’s Loan Corporation ○ Roosevelt administration’s New Deal created this in 1933■ dissolved with small cumulative net profit in 1951■ established by Homeowner’s Loan Corporation Act - under FDR - purpose was to refinance home mortgages currently in default to prevent foreclosures● National Housing Act of 1934 also called Capehart Act⇒○ June 28, 1934 - part of New Deal - passed during depression to make housing/mortgages more affordable ○ created Federal Housing Administration (FHA) and the Federal Savings and Loan Insurance Corporation (FSLIC)○ Housing Act of 1937 builds on this● FHA○ US government agency that sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building○ goals are to: improve housing standards/conditions, provideadequate financing system via insurance of loans, stabilize mortgage market ● FSLIC○ created to insure deposits in savings/loans a year after the FDIC was created to insure deposits in commercial banks○ 1980s during savings and loans crisis, became insolvent ⇒and was bailed out with taxpayer money several times ○ 1986 - 15 billion dollars ○ 1987 - 10.758 billion dollars○ responsibilities then transferred to FDIC● FDIC - Federal Deposit Insurance Corporation○ US government corporation operating as an independent agency created by US Banking Act of 1933○ purpose was to calm consumers and encourage buying and investing○ August 2014 provides deposit insurance guaranteeing ⇒safety of a depositor’s accounts in member banks up to 250k dollars, for each deposit ownership category in each insured bank● USHA - Federal Housing Authority○ created in 1937 within Dept. of the Interior by Housing Act of 1937 ○ part of New Deal - designed to lend money to states or communities for low cost housing construction ● FNMA - Federal National Mortgage Association○ commonly known as Fannie Mae - founded in 1938 ○ government sponsored enterprise that became a publicly traded company in 1968 ○ purpose is to expand secondary mortgage market by securitizing, or bundling, mortgages in the form of mortgage backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market ● FHLMC - Federal Home Loan Mortgage Corporation ○ better known as Freddie Mac, also a government sponsoredenterprise○ created in 1970 to expand secondary market for mortgages○ does the same thing as Fannie Mae○ Special Government Home Ownership Policies■ 30 year mortgage ● one of the most popular mortgages● most people prefer these because of fixed interest rates and lower monthly payments, but total interest paid on this loan is higher since the life of the loan is longer● therefore, builds equity more slowly than on a shorter-term mortgage■ mortgage interest paid, property tax, and interest on second mortgages (equity lines of credit) are all tax deductible ● interest deduction allows taxpayers who own their homes to reducetheir taxable income by the amount of interest paid on the loan, which is secured by their principal residence (or, sometimes, a second home)● the amount deducted because of property taxes is the amount paid by the property owner, including any payments made through an escrow account at settlement/closing ○ some people pay property taxes through escrow account included with mortgage payments; in this case, amount thatcan be deducted is the amount that the lender actually paid for property taxes from the escrow account■ favorable mortgage interest rates● mortgage rates very susceptible to economic activity, just like treasuries and other bonds ● jobs reports, CPI, GDP, home sales, consumer confidence, and other data can move mortgage rates