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Banks and s&ls were the primary originators and

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Unformatted text preview: Banks and S&Ls were the primary originators and holders of mortgages, although life insurance companies also were significant holders of mortgages (especially of multi-family mortgages). The economic implosion of the 14 early 1930s, however, meant that many lenders were unwilling to refinance, and many borrowers could not repay. Home foreclosures were widespread; and the losses on the foreclosed loans contributed to the failures of those thousands of banks and S&Ls. The first piece of legislation that made any effort to address these issues preceded the Roosevelt Administration’s “New Deal”. In 1932, during the final year of the Hoover Administration, the Congress created the Federal Home Loan Bank System: 12 regional Federal Home Loan Banks (FHLBs) that were owned by the S&L institutions and a few life insurance companies in the regional territories of the FHLBs and that were regulated by a new federal agency: the Federal Home Loan Bank Board (which would soon also be the national regulator of S&Ls). The FHLB System could borrow funds in the capital markets, and the individual FHLBs could turn around and lend the funds to their member-owners, who were the primary originators of mortgages at the time. Because the FHLB System was a creation of the federal government, it could borrow at favorable rates, and the FHLBs could pass those favorable rates on to their member-owners. In an important sense, the FHLB System was an early “government-sponsored enterprise” (although that term wasn’t used until decades later). It reflected for the first time what was to become a distinguishing feature of the U.S. housing finance for next eight decades: borrowing in the name of the government (explicitly or implicitly) to promote household borrowing in the form of mortgages. With the New Deal came a flurry of legislation that affected the financial system, with some of the legislation leaving a lasting impact on residential mortgage finance. This included the creation of the Federal Housing Administration (FHA) in 1934 to offer mortgage insurance to lenders on qualified mortgages, and of the Federal National Mortgage Association (FNMA) in 1938 to purchase FHA-insured mortgages. Funding for these purchases came through the FHA’s issuance of bonds in the capital markets. The FNMA subsequently acquired the nickname “Fannie Mae” from the bond traders who dealt in those bonds, and the nickname stuck. Over the next two decades, Fannie Mae’s scope was expanded. First, it gained the authority to buy the mortgages insured by the Veterans Administration (VA), another creation of the Congress, the powers of which included the guaranteeing of qualifying mortgages -- in this case the mortgages of veterans. Then, Fannie Mae’s status as a government agency was confirmed, and it was made exempt from state and local income taxes, a substantial competitive advantage relative to private financial firms. As another advantage, the Federal Reserve Banks were required to perform various services for Fannie Mae. And Fannie Mae was to provide...
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Banks and S&Ls were the primary originators and holders...

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