FINANCING THE SUBURBS
Few acts of the federal government have had more effect upon the physical form of metropolitan areas than legislation concerning the financing and taxation of housing. Prior to 1935, mortgage lending was very different from what it is today. To protect themselves from losses when the borrower defaulted on a mortgage loan, banks required very large down payments. That, by itself, prevented many people from becoming homeowners. There were other barriers as well.
Lenders considered a ten year mortgage to be long term. Many mortgages ran only one, two or three years, with most of the loan amount due in one large payment at the end of the short term. At the end of this short period, the home purchaser faced great uncertainties. Could he persuade the lender to renew his mortgage? At what interest rate? If he failed to get a renewal, he often lost his home. The standard plots in melodramas of the time [the villain about to foreclose on the hapless widow] were not entirely fiction.25
This situation was radically changed by a single act of the federal government. In 1935 the Federal Housing Administration (FHA), which had been created the previous year, began to offer mortgage insurance. The insurance fund consisted of a small fee paid by each borrower (the buyer of the house). The fund reimbursed banks should the borrower default on the mortgage. Federal mortgage insurance effectively eliminated the risk of default and thus made banks willing to lend for 25 or 30 years and with little down payment. Shortly thereafter the federal government created the Federal National Mortgage Association (FNMA, often referred to as Fannie Mae) to buy mortgages from banks. The bank could sell the mortgage to the FNMA, thus converting the mortgage into cash. The homebuyer would continue to make mortgage payments, but they would go to the FNMA, with the bank acting as intermediary. By creating a secondary market for mortgages, the federal government further increased the willingness of banks to issue mortgages because the bank could now get out of the commitment if and when it saw a more profitable use for its funds. In other words, the operations of FNMA removed much of the "opportunity cost" risks of mortgage lending.26 After World War II the Veterans Administration further encouraged home buying by insuring veterans' mortgages that carried little or no down payment.
Congressional intent in passing the required legislation was primarily to increase homeownership, something that is generally considered to be a central element of "the American dream." Another goal during the Great Depression was to reduce unemployment by stimulating residential construction. The stimulating effect during the Great Depression was not very large, but the effect on both construction and homeownership in the prosperous years that followed World War II was enormous. So far as is known, there was no spatial intent behind Congress's actions. In fact, there is no evidence that members of Congress were aware early on that these actions would have any spatial effect. But the effect of making homeowner- ship more accessible was to promote rapid and extensive suburbanization, since the suburbs rather than the cities were where the mass of land available for building single-family houses was located.
As noted in Chapter 11, both Fannie Mae and Freddie Mac were placed under a federal conservatorship and are not long independent. Both agencies required huge federal bailouts and many in Congress became very critical of the GSE (Government Sponsored Enterprise) model they represented. Although the federal government did not explicitly guarantee their debts it was widely assumed that the federal government would rescue them if necessary, as in fact it did. The idea that independent, profit-making agencies could, in effect, obligate the federal government to huge repayments offended many legislators. Then, too, the assumption that the federal government would come to their rescue if needed seemed to give them an unfair competitive advantage because it let them borrow at lower rates than other mortgage lenders. By 2014 both Fannie and Freddie were profitable again and had repaid all of the federal bailout money they had received. But the hostility of many in Congress remained, and there has been some discussion, particularly on the political right, of abolishing the agencies and leaving the matter of mortgage lending to the banking system without GSEs and with a much smaller federal presence. Significant change in mortgage financing is quite possible but exactly what form it will take is not clear.