FDR’s affordable housing initiative was responsible for the rapid expansion of home ownership throughout the United States (Allen and Barth, 2012). Over the past several decades the United States has continued to implement economic policies to encourage home ownership through affordable low downpayment mortgage programs (Bluhm, Overbeck and Wagner, 2010).
The Housing Cost to Income (HCTI) index consists of the average cost of a single family home divided by median income. According to the 1940 U.S. Census Bureau, the median price of a single family home in the U.S. was approximately $2,938 (Aalbers, 2012). The median yearly wage was $1,730. The HCTI ratio was just over 2:1. The HCTI ratios were 3 - 4:1 throughout the 1950s - 1960s. By the 1970s, HCTI ratios increased to over 5:1 (U.S Census Table I). Figure II denotes the housing appreciation trend in light blue has accelerated at a higher rate of speed during the past 40 years (Shiller, ). Housing values on average have doubled at the end of a housing boom, out pacing increases in median income by 50% (see Figure III, U.S Census, [1969-2008]). The disproportionate rate of speed between a borrower’s housing expense and their income appreciation since the 1970s, has led to the median housing expense to rise to approximately 50% of an average homeowners net income. In an effort to keep the economy growing at a moderate pace the Federal Reserve’s policy is to keep inflation at a rate of 2% per year. Over the past four decades they 're efforts have led to an average inflation rate of 3% per year. When compounded, a 3% inflation rate over 10 years, approaches 40%. The combination of a homeowners hou...
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...again in 2008, is a habitual reminder to the financial industry of the inherent risks associated with the inability of the 30-Year amortization model to sufficiently de-leverage mortgage pools within the first ten years (Alexander and Moloney),. A 30-Year amortization model as demonstrated in Figure V takes nearly 12 years to reduce the LTV to 80%. In contrast, the PRAM model would take approximately five years. As of 2013 approximately three million mortgages were underwater in the U.S resulting in mass foreclosures. (Blinder, Alan.S., ). If all the mortgage pools originated in 2005-2007 were based on the PRAM mortgage model, nearly 100% of the three million mortgages still underwater in 2013 would have been sufficiently de-leveraged. Most of the consequences manifested by the mass foreclosures that followed may have been avoided (see Figure VIII).
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