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Justin Fitzhugh

The GSEs: Elusive Promoters of Lifestyle Diversity in America - Housing, Americas Future Continued

Friday, September 12, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation - Message

This is the 4th installment of the series Housing, Americas Future. Through this series, I summarize and discuss this study[1] which was authored by the Housing Commission and sponsored by the Bipartisan Policy think tank.

Today I summarize and discuss Reforming Our Nations Housing System.[2] This part deals with the history of our housing financing system. I found it quite interesting to get a refresher course on what motivated the creation of the Government Sponsored Agencies FHA, Ginnie Mae, Fannie Mae and Freddie Mac. I know that many people attribute our most recent financial crisis to the existence of these institutions, but I believe we must take into account the positive impact, although elusive, these have had in the American way of life.

Lifestyle diversity in America has been promoted by our unique housing finance system. Young adults, young couples with newborn children, or retired workers looking to downsize their house, have been able to access a variety of financing programs that enables them to make better decisions given their own needs. Furthermore, our housing finance system also plays a pivotal role in our economy.

One the main characteristics of our housing finance system is the securitization of mortgages. By turning mortgages into securities that are purchased by investors, lenders are able to free up capital which can be recycled to provide more financing. Not only that, but through securitization creditors shift some of the risk to investors, who in exchange may get a higher return on investment than through other investment vehicles. Today, our housing financing system is the largest in the world.


before the Great Depression, the common mortgage terms spanned from 3 to 10 years, and were characterized by adjustable interest rates. Large down payments and frequent refinancing were common. The homeownership rate before the 1940s was around 45%. For the most part, only the wealthy or those who lived in the land they farmed where homeowners. But the Great Depression was a turning point for our housing market.

As the Great Depression ensued, large numbers of homeowners went underwater, and banks were not willing to refinance their mortgages. Thousands of borrowers defaulted, and during 1931 - 1935, there was a wave of 250K foreclosures per year.


In 1934, the Federal Government created the Federal Housing Administration, FHA, to help stabilize the situation. The FHA offered affordable insurance for mortgages that met certain characteristics. Later in 1944, the Government created the VA Loans, the program that insures long term mortgages for veteran of the military and their families. Following World War II, homeownership rates increased from 43.6% in 1940, to 55% in 1950s, to 66.2% in 2000.

The increase in the homeownership in our country has also been fueled by Federal Government initiatives that resulted in todays Government Sponsored Agencies Ginnie Mae, Fannie Mae and Freddie Mac. When the Government created the FHA, 1934, it also authorized the creation of a national mortgage association to provide a secondary market for mortgage lenders to access FHA-insured loans, Federal National Mortgage Association, 1937. In 1968, this association was divided into Government National Mortgage Association, Ginnie Mae, a government owned entity, and Fannie Mae, a private entity with a public mission: support the mortgage market by purchasing conventional mortgages from originators. In the 1970s, the Federal Home Loam Banks[3] created Freddie Mac, which served as another secondary mortgage market, and in 1989, it was converted into a private corporation sponsored by the Federal Government.[4]

Fannie Mae, Freddie Mac, and Ginnie Mae helped standardize the financing of single-family and multifamily financing, which resulted in cheaper access to credit. These agencies pioneered the securitization of mortgages, which later became widely used investment vehicle. We can attribute the existence of fixed-interest-rate financing to these associations and the growth and standardization of the secondary market. The long-term, fixed-rate mortgage, is rare in other countries, but the many benefits we've enjoyed from our dynamic financing system has been shadowed by the 1989 and 2008 crisis.


In 1989, the Savings and Loan crisis prompted the Federal Government to impose higher capital requirements on the GSEs. At the same time, as private entities, investors expected to get a return on their investments. Pressured by the new capital requirements and investors demands, these agencies leveraged their business to unsustainable levels. Coupled with the widely held, mistaken belief that home prices would continue to increase, the GSEs contributed to the housing bubble that collapsed in 2008.

As we well know it, leading to the Sub Prime Lending Crisis, many creditors lowered their underwriting standards. The tremendous financial loss by hundreds of thousands of investors spooked private capital from the secondary market. Private financing of mortgages went from 22% in 2000, to 3% by the end of 2011. This means the Federal Government unilaterally holds the risk for almost the entire housing system in America.

Mortgage origination also dropped from 53% private sector origination of jumbo-loans, private label securities, and adjustable rate mortgages in 2000 to 12% by the end of 2012, and rise in Federally Guaranteed loans from 47% in 2000 to 88% by the end of 2012. In response to this crisis, lenders, investors, and government agencies have increased their underwriting standards.

The authors of the study identified these as obstacles that impede us to fully recover from the crisis:

  • Overly strict lending standards
  • Lack of access to credit for well-qualified self employed individuals
  • Uncertain lender repurchase requirements
  • Uncertain appraisal environment (resulting from foreclosures)
  • FHA lender compare ratios
  • Uncertainty about new regulations and the implementation of new rules

WHETHER A LENDER, INVESTORS, OR HOME BUYER, I THINK we all miss the good times. The authors of this study offered us a list of potential solutions that may help us accelerate and strengthen our economic recovery. I will discuss these points in the next installment.




1) Housing, Americas Future a study sponsored by the Bipartisan Policy think tank, and put together by their Housing Commission:



4) Freddie Mac was turned into a private entity with the passage of Financial Institutions reform, Recovery and Enforcement Act, FIRREA:,_Recovery,_and_Enforcement_Act_of_1989

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