Federal Credit and Insurance Programs: Housing/Commentary

Article excerpt

This paper reviews the evolution of the major credit and insurance programs undertaken by the U. S. government in support of urban housing. As the review makes clear, the Federal Housing Administration (FHA), Veterans Administration, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation have played major roles in the development of liberal and efficient primary and secondary mortgage markets in the United States. The development of capacity in mortgage lending and securitization in the private sector does suggest, however, that federally subsidizing mortgage market activities can be restrained with little effect on homeownership-the principal goal of this federal activity. In particular, the orderly reduction in the mortgage investment activities of the government-sponsored enterprises (GSEs) and the imposition of guarantee fees on mortgage-backed securities insured by the GSEs are first steps in restraining federal activity. More generally, a concentration of FHA and GSE activity on first-time homebuyers would reduce federal risk exposure while preserving the economic rationale for government activity.

Federal Reserve Bank of St. Louis Review, July/August 2006, 88(4), pp. 281-309.

Federal policy affecting housing is dominated by indirect off-budget activities-tax expenditure policies and credit, insurance, and guarantee programs-rather than the direct subsidy of housing production or the payment of shelter allowances to deserving households. This paper reviews federal activity in providing credit and insurance for housing. I begin by reviewing mortgage insurance and guarantee programs: the Federal Housing Administration (FHA) and the Veterans Administration (VA). These large programs are administered by different cabinet agencies: the Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs, respectively.1

I then review federally supported credit activities: the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae). Freddie Mac and Fannie Mae are government-sponsored enterprises (GSEs). Both are publicly chartered, privately owned corporations. They are regulated by the Office of Federal Housing Enterprise Oversight for financial safety and soundness and by HUD for compliance with their public mission. Ginnie Mae is a wholly owned government corporation within HUD.

For these organizations, I briefly recount their history and operations. I review their economic functions and highlight current issues about their roles in the housing system and the broader economy.

FEDERAL INSURANCE AND GUARANTEE PROGRAMS

Before the depression of the 1930s, home mortgage instruments were typically of short terms (3 to 10 years) with loan-to-value ratios (LTVs) of 60 percent or less. Mortgages were nonamortizable, requiring a balloon payment at the expiration of the term. The onset of the Great Depression engendered a liquidity crisis beginning in 1930, preventing renewal of outstanding contracts. Other borrowers were simply unable to make regular payments. The liquidity crisis affecting new mortgage loans, together with elevated default rates on existing loans, had catastrophic effects on housing suppliers as well as housing consumers.

Figure 1 shows the course of house building during the twentieth century. It reports the sustained boom in housing construction in the 1920s-peaking in 1925 but averaging more than 700,000 housing starts per year from 1920 through 1929. The figure also depicts the collapse of the housing market at the onset of the Great Depression. During the period 1930-35, housing starts declined by 75 percent, to about 193,000 per year.

Despite voluntary forbearance on the part of some lending institutions and mandated forbearance enacted by many state legislatures, the system of mortgage lending that existed in the early 1930s continued to contract, and many lending institutions simply failed. …