Federal Government

The Federal Role in Promoting Housing Finance

In the wake of the Great Depression, the federal government began enacting a series of programs aimed at promoting homeownership among middle-income families, the most important of which was the creation of the Federal Housing Administration and its mortgage insurance program in 1934. The Depression had resulted in widespread home foreclosures, throwing into relief the dangers and weaknesses of the existing housing finance system. Prior to the mortgage insurance program, families wanting to purchase a home on credit faced large down payment requirements, relatively short repayment schedules, and large balloon payments at the end of their terms. This made homeownership prohibitively expensive and risky for most families. FHA mortgage insurance allowed lenders to soften their terms, in exchange for federal acceptance of responsibility in the case of default. FHA-backed loans required a smaller down payment, had a much longer repayment period (30 years was common), and were fully amortized. The Veterans Administration would later begin a similar program specifically for veterans. Together, these programs played a central role in the post–World War II emergence of the suburbs, the ubiquity of single-family homes, and the establishment of home-ownership as a widely shared cultural norm.

The FHA's early efforts have been criticized for their role in crystallizing patterns of racial neighborhood segregation. FHA refused to back mortgages in many “risky” neighborhoods, which essentially cut off many central city poor and minority neighborhoods from access to homeownership. When combined with the restrictive covenants and other blatantly hostile policies intrinsic to many White and middle-class suburbs, these FHA policies effectively relegated poor and minority families to economically distressed central city neighborhoods and prevented the economic empowerment that accompanies home-ownership. The hypersegregated ghettos that emerged in many cities in the 20th century can be blamed partially on FHA's discriminatory lending policies.

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