The Mortgage Securities Market
An unintended effect of the high interest rates of 1981-1982 was the virtual bankruptcy of the savings and loan industry. The industry had considerable support in Congress, however, which led in 1980 and 1982 to legislation designed to save the industry by broadening its investment powers, increasing its federal deposit guarantee to $100,000, and weakening its accounting. These changes stimulated the growth of the mortgage securities market into one of the most dynamic markets of the late 1980s, and fostered speculative investment activities that precipitated the savings and loan debacle. This chapter will only deal with the beginning of these two developments.
Federal government involvement in home financing began during the 1930s, when the Federal Home Loan Bank System was established to support the thrift industry, the Federal Housing Agency (FHA) was set up to guarantee home mortgages, and the Federal National Mortgage Association (FNMA or "Fannie Mae") was set up to assist secondary markets in mortgages guaranteed by the FHA or the Veterans Administration (VA). In 1968, in an effort to bring the efficiencies of the securities markets to housing, Congress created the Government National Mortgage Association (GNMA or "Ginnie Mae") to guarantee pass-through securities backed by FHA and VA guaranteed mortgages, and the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") to guarantee pass-through securities backed by conventional mortgage loans originated according to specific, limited criteria. 1 At the same time, provisions were made to transfer ownership of FNMA to the private mortgage market participants using it.