This was also a time when the principal mortgage lenders, savings and loans, were sometimes constrained from satisfying mortgage demands by binding Regulation Q ceilings that eroded their deposit base. In these difficult times, the development of the MBS market helped to provide a safety valve. By the mid-1980s, the channels for mortgage originations and holdings had become quite diverse, with the traditional depositories competing against mortgage brokers and mortgage bankers, who sold their loans not only to Fannie Mae and Freddie Mac, but to others as well. The resiliency of the mortgage credit market during this period highlights the value of having a diverse set of financial institutions and financial markets that serve a key sector of the economy, such as housing. Greater stability in the supply of mortgage credit has been accompanied by the unbundling of the various aspects of the mortgage process.
Some institutions act as mortgage bankers, screening applicants and originating loans.
Other parties service mortgage loans, a function for which efficiencies seem to be gained by large-scale operations. Still others, mostly with stable funding bases, provide the permanent financing of mortgages through participation in mortgage pools. Beyond this, some others slice cash flows from mortgage pools into special tranches that appeal to a wider group of investors. These developments, along with a more stable financial environment, have helped to lower mortgage rates to borrowers by shrinking the spread between the long-term fixed mortgage rate on conforming loans and the comparable rate on Treasury notes. This spread has averaged about 140 basis points in the 1990s, compared to an average of more than 210 basis points in the previous decade.