Homeownership is a part of the American dream. As a public policy, it’s been a powerful magnet for talented immigrants. From the early promise of 40 acres and a mule for every man and women who would homestead to the Levittowns of post World War Two, America has always promised its people greater rewards.
I took a short look at some of the institutions charged with public policy that made home ownership easy and how they are still playing a big public role.
The New Deal
President Roosevelt’s New Deal created policy and institutions to encourage people to become homeowners. Facing high levels of mortgage foreclosures during the Great Depression, the Roosevelt Administration, created the Federal Housing Administration (FHA) and the Federal National Mortgage Association. Fannie Mae established the 30-year, fixed rate, fully amortized mortgage as a standard. The FHA was created to insure those mortgages, to cushion the loss and so incentivized investors to take risk. Huge capital markets are created to draw pools of money into the housing industry to fuel a politically mandated public homeownership program.
Post World War Two
The GI Bill established the VA mortgage program which provides veterans with high Government Insured lTV loans. Savings banks, now defunct, were created to provide mortgage credit, and the Federal Home Loan Bank System was created to help thrifts manage the whole affair. During the 1970s, thrifts failed and the government helped create a market for mortgage-backed securities, the so called secondary market.
The Government National Mortgage Association (GNMA) began issuing federally guaranteed mortgage pass through securities backed by FHA and VA loans. Freddie Mac began issuing mortgage participation certificates backed by conventional mortgages. Ultimately, most new mortgage loans were securitized by Fannie Mae and Freddie Mac with an implicit federal guarantees. Now, traditional mortgages could be traded like bonds and new money always flowed back to the originators to make new loans to future homeowners. This system works as long as the underlying loans are based on solid economics.
A Bridge Too Far
Markets were created to sell and resell and sell again, packaged mortgage debt. Government directed mandates for massive home ownership were supported by institutions that created a system to provide liquidity and spread risk. Using insurance and capital markets to attract lenders and draw small investors into the game, enabled a homeownership rate that peaked at 69 percent in the third quarter of 2006.
The always unintended consequences of any good idea laid the groundwork for this real estate collapse. By mandating that quasi public institutions provide money for home ownership as a matter of policy, we created a system that sooner or later would stop making good business decisions. Perhaps, its not possible or even desirable for the vast majority to own and certainly if they arent viable borrowers.
And, finally, if you were a bank originating a mortgage that you knew you would sell off to someone else, who might have to collect, would you be very diligent?