The Ascent of Money, part 2

The New Deal and Housing

More fascinating tidbits from Niall Ferguson's The Ascent of Money. A long stream of legislation was born out of the Great Depression that reinvented the U.S. housing market, and particularly, the mortgage market.

Prior to federal government involvement, home mortgages were typically 5-year interest only loans with a balloon payment due at the end. If you were unable to pay off or roll over the balloon payment, you were foreclosed. Home ownership was at about 40%. After FHA was established, mortgages were typically 20-year, amortizing, at 80% loan-to-value. FHA mortgages were also federally insured -- safe as houses.

The Public Works Administration spent 15% of its budget on low-cost homes and slum clearance. New agencies created included the Home Owners' Loan Corp to refinance mortgages on longer terms, the Federal Home Loan Bank Board, and the Federal National Mortgage Association (FNMA). By 1960, home ownership was up to about 60%.

Mortgage interest has always been tax deductible, since the inception of the federal income tax in 1913. Ronald Reagan defended the deduction while president stating that mortgage interest relief was "part of the American dream".

Restructuring in 1968

To broaden home ownership in wake of the Civil Rights movement, Fannie Mae was split in two: the Government National Mortgage Association (Ginnie Mae), which was to cater to poor borrowers like military veterans, and a rechartered Fannie Mae, now a privately owned government sponsored enterprise (GSE), ...was permitted to buy conventional mortgages creating a secondary market. Two years later, to provide some competition in the secondary market, the Federal Home Loan Mortgage Corporation (Freddie Mac) was set up.

All of the key government institutions were now in place to support home ownership. My first home loan for $95,000, was through FHA, whose standards in 1992 required only a 3.5% down payment, with a loan limit in Texas of $120,000. I made a small gain when I sold it 4 years later for $108,000. Safe as houses.