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
