Sometimes borrowers ask JMAC’s brokers about the government’s role in mortgage finance. When and why did the federal government assume a role in mortgage finance? And is it playing the right role?
Our experienced brokers know that the federal government has a long history of encouraging homeownership by lowering the cost of debt financing. Put another way, much of what it does helps to keep rates low. In the 1930s it created a number of agencies including the Federal Home Loan Banks, a deposit insurer for thrifts, the creation of the FHA (Federal Housing Administration), and the Federal National Mortgage Association (Fannie Mae). In 1944, the government started giving guarantees on 50 percent of mortgage loans for returning veterans.
Then, Fannie Mae was privatized for budget reasons in 1968, but then the government created the Government National Mortgage Association (GNMA) to securitize FHA and VA loans. Freddie Mac was created in 1970. And, while prior to 1986, individuals could deduct interest payments on all loans from taxable income for federal taxes, including mortgage interest, the Tax Reform Act of 1986 eliminated this deduction for almost all personal loans, but the mortgage interest remained tax-deductible, giving mortgages a privileged access to the market.
In more recent times, the primary rational has been to encourage increased homeownership. The Federal Reserve implemented Quantitative Easing (QE) to buy Treasury and mortgage-backed securities to continue to keep rates low. Indeed, compared to other countries, here in the US mortgage debt is cheaper and more widely available, and JMAC’s brokers and their clients have benefited.
That being said, plenty of people wonder if government should scale back its role in mortgage finance, that perhaps we should consider redesigning government programs so that they are better targeted at first-time borrowers and structured in a way such that the benefits are not an increasing function of the amount of debt taken on by the borrower. Time will tell…