The Historic Role of the Federal Government in Promoting Homeownership
The federal government has long been involved in the U.S. mortgage markets. Its range of
actions, from stemming the tide of foreclosures during the Great Depression to addressing
discriminatory redlining in the 1970s, demonstrates a public commitment to expanding access
to homeownership that has guided federal policy for decades. Here are several of the major
federal actions involving homeownership:
1932: Federal Home Loan Bank Act created the Federal Home Loan Bank System of 12 regional banks,
to provide a source of low–cost capital to certain
mortgage lenders (primarily Savings & Loans, mutual
savings banks, and insurance companies). The Federal Home Loan Banks began lending money in 1933
so that financial institutions could honor customer
withdrawals and refinance distressed mortgages.
1933: In response to the Great Depression,
Congress
created the Home Owners’ Loan Corporation (HOLC)
to purchase and refinance distressed residential
mortgages. HOLC raised money in the bond market
to purchase the distressed mortgages and then restructure them from short–term loans with balloon
payments into 15–year or 20–year, fully amortizing
loans with fixed interest rates.
1934: The National Housing Act created the Federal
Housing Administration (FHA) to administer a federal mortgage insurance program to reduce lenders’
default risks. By 1938, FHA–insured loans accounted
almost 20% of all new mortgage originations. Importantly, FHA established the long–term, low down
payment, fixed–rate amortizing mortgage as a tool
for expanding homeownership for low–income families.
The National Housing Act created the Federal
Savings and Loan Insurance Corporation (the precursor of the FDIC) and authorized federally chartered,
privately owned National Mortgage Associations.
This led to the 1938 amendment that established the
Federal National Mortgage Association (now known
as Fannie Mae) to buy FHA loans.
1968: The Fair Housing Act prohibited discrimination
on the basis of race, religion, and national origin
(expanded to include gender in 1988) in the sale,
rental, and financing of housing.
1970: Fannie Mae is allowed to purchase private
mortgages, and Congress establishes Freddie Mac.
1974: The Equal Credit Opportunity Act (ECOA) prohibited discrimination on the basis of race, religion,
national origin, sex, marital status, or age in any
part of a credit transaction. (ECOA protections are
not limited to housing finance.)
1975: The Home Mortgage Disclosure Act (HMDA)
required lenders to collect and disclose information
on lending activity.
1977: The Community Reinvestment Act (CRA)
required depository institutions to serve the credit
needs of the communities from which they receive
deposits.
1986: The Tax Reform Act of 1986 eliminated interest rate deductions for all personal loans except for
home mortgages.
1992: The Housing and Community Development Act
established affordable housing goals and amended
the charter of Fannie Mae and Freddie Mac to reflect
the view that they “have an affirmative obligation”
to facilitate affordable housing.
2008: Congress passed the Troubled Asset Relief
Program (TARP), an attempt to stabilize the financial markets during the collapse of the subprime
market. TARP authorized the federal government to
purchase or insure up to $700 billion in “troubled
assets,” including mortgages originated before
March 2008 or any financial instrument based on
such a mortgage.
This program allowed the Treasury
department to purchase complex financial derivatives based on subprime loans, which were defaulting in high numbers.
2008: Congress passed the Housing and Economic
Recovery Act (HERA) to stabilize the housing market. It created a temporary first-time home buyer
tax credit and provided funds to purchase and redevelop foreclosed properties through its Neighborhood Stabilization Program. It also authorized the
Federal Housing Authority to guarantee loans for underwater subprime borrowers whose lenders reduce
their principles. HERA also modernized FHA (through
the FHA Modernization Act of 2008), raising its loan
limits and changing its down-payment guidelines.
HERA also strengthened the regulations of and injected capital into Fannie Mae and Freddie Mac