Homeownership

History of Government Involvement in Homeownership

The ownership of land and the improvements on that land have been an important aspect of American culture from its early history. Many early immigrants were drawn to the American colonies [Page 294]by the prospect of owning their own land. Early American culture also used land ownership as a way of distinguishing the worthiness of citizens, as only landowners were allowed to vote for elected officials. This requirement was not changed until 1850.

The widespread desire and cultural significance of land and homeownership have led to a variety of government interventions to assist people in attaining it. Examples of early federal initiatives toward this end are land grants made to veterans and the 1862 Homestead Act, which offered free land to those who would construct a home on it. Government involvement in promoting homeownership broadened to city and suburban areas in the 1920s at the urging of real estate interest groups, such as the National Association of Real Estate Boards (now the National Association of Realtors). In 1920, it was successful in getting Congress to pass legislation that allowed home buyers to deduct from their taxable incomes their mortgage interest payments. This provision remains in the tax code today and represents, by far, the largest housing subsidy. (In 2008, the mortgage interest deduction cost the federal government $95 billion, three fourths of which went to households with incomes above $50,000 per year.) During the 1920s, the Herbert Hoover Administration undertook a variety of campaigns to extol the virtues of homeownership to the American people. Among other claims, homeownership was seen as a means of insulating Americans from the evils of socialism and communism as homeowners had a stake in the capitalist system.

The Great Depression led to a significant expansion of federal involvement in the housing market. Bank failures and high rates of unemployment led many households to default on their mortgages and to lose their homes. In 1932, Congress acted to stabilize mortgage lending by passing the Federal Home Loan Bank Act, which brought thrift institutions under federal regulation, and in the following year, it created the Federal Savings and Loan Corporation, allowing many mortgage holders to refinance their loans and keep their homes.

In 1934, Congress created the Federal Housing Administration (FHA), which helped revolutionize mortgage lending. First, it introduced the 30-year fixed-rate, self-amortizing mortgage. Before this time, mortgages typically had 5-year terms and had to be refinanced at the prevailing interest rates when due. The FHA also offered lenders mortgage insurance that guaranteed repayment in cases of default. This reduced the size of the down payment banks required from as much as 50% to 20%, thus allowing many more families to buy homes. At this time, the capital for mortgage loans in a particular area largely came from local banks. Thus, fast growing areas often faced capital shortages. To rectify this problem, the federal government created the Federal National Mortgage Association, known as Fannie Mae, to purchase mortgaged loans from local financial institutions, thereby providing them with additional funds to make new loans. Fannie Mae, in turn, packaged those loans and offered investors mortgage-backed securities. In later years, other federally sponsored secondary market organizations, including Freddie Mac and Ginnie Mae, were created for other types of mortgage loans. By the beginning of World War II, the federal government was firmly ensconced in promoting and supporting the expansion of homeownership throughout the country.

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