Government’s Role in Home Ownership

This topic was discussed on October 21, 2013.
The Federal government has long supported home ownership via its support of the mortgage market through FNMA and FHLMC and a variety of laws and regulations governing other mortgage lender’s activities. Some believe that the benefits of this government support are outweighed by the disruptive side effects of the same intervention.

  • Should the US government be in the home mortgage business, directly or indirectly?
  • Is home ownership so much more valuable to society (vs. home rental or other housing alternatives) that it merits such support?

 

3 thoughts on “Government’s Role in Home Ownership”

    1. Yes, we will be meeting on Oct 14. The topic, which will be posted momentarily, will be to discuss an article praising (in a somewhat backhanded way), the Obama Administration’s foreign policy. If that doesn’t fill the time, I’m sure the other current events (shutdown, debt limit, etc.) will!

  1. I cannot tell from the web site whether this topic was last week or next but I would offer a historical reference, anecdotal though it may be:

    In 1939 my father, who was a Governor of the Federal Home loan Bank Board under the Roosevelt administration, published a legal text titled ‘Cyclopedia of Federal Savings and Loan Associations.’

    Saving or Building and Loan Associations started as mutual associations of individuals in the mid 18th century before the Civil War in the US and in England, becoming popular in the late 19th century. The height of activity occurred in the 1920’s but the real estate bubble price decline, especially the decline in farm commodity prices and farm values (which ultimately lead to the bank failures), actually started before the “1929 stock market crash”. Following the nationwide banking failures of the Depression, the Home Owners’ Loan Act of 1933 and the Rules and Regulations for Federal Savings and Loan Associations of 1935 provided regulations for best practices under which these associations became federally chartered, which included limited Federal Deposit Insurance. This marked a new Government role in home ownership.

    My father’s 1939 text says: “The soundness of the basic principles behind these thrift home-financing institutions was sufficient to give them a commanding place in the home-financing field even before they had the benefit of Federal and public recognition.” And further elaborates: “The handling of such loans in the small amounts necessary for most home financing is a highly specialized business and as such demands a specialized agency. In the first place, the business is local, so the institution and the major portion of its resources must be local. The personal-risk factor is large, so knowledge of the borrower on the part of the institution is essential. The business has profound social significance and affects the entire community, wherefore it seems that as much of the community as possible should participate, benefits should be mutual, and undue profit through exploitation should be impossible. One type of institution above all others satisfies these requirements. That is the local, mutual, nonprofit-making, thrift institution, which devotes itself almost entirely to making long-term amortized loans on homes.” He further states: “Commissions lead to unwise loans.” ….The mortgage broker industry did not read his book.

    The 1980’s deregulation of S&L’s allowing more risky loans, coupled with the liberalized FDIC guaranties driving capital (through brokered deposits) to the most risky institutions, in large part was responsible for the late1990’s S&L crisis. Likewise the combination of securitizing loan portfolios for world bond markets and Government institutions becoming the de-facto lender of last resort created the moral hazard largely responsible for the more recent crisis.

    The answer to the Government’s role in home ownership is the regulation of private markets not underwriting the risk of bad practice as the lender of last resort creating the inevitable moral hazard.

    In 1946 Jimmie Stewart (It’s a Wonderful Life) understood moral hazard.

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