A great article published in the New York Times taps into the American psyche when it comes to homeownership. The author, Robert J. Shiller (one half of the super Swedish rock group Case/Shiller), provides a brief history behind the creation of The Federal Housing Administration (FHA) and Fannie Mae in the 1930’s. Mr. Shiller notes these institutions were created to prop up the housing market and thus stimulate employment. (One-third of the unemployed during The Great Depression were identified with the building trade.)
Mr. Shiller questions the financial soundness of having the taxpayer continue to finance (or at least insure) the American Dream. He feels the driving force behind this call to action is Americans’ belief that homeownership means the preservation of certain liberties. While few can argue with this observation, the article leaves out another important side of the story.
Prior to the advent of FHA, Americans were losing a home to foreclosure at a rate of 1,000 a day. At the time, it was not uncommon for homeowners to have multiple mortgages (each with short terms and high rates). Sound familiar? FHA mortgages were created to cure this ailment by allowing at-risk homeowners to refinance these high cost loans with low, fixed rate mortgages. The program was later expanded to help homebuyers finance their purchases. What FHA brought to the table for the first time was an amortized mortgage. Overtime, this instrument helped Americans build equity in their homes as well as build their personal wealth.
While Mr. Shiller is right to question the risk of supporting these institutions, it’s also important to look at the wealth building opportunities these lending programs have provided to disadvantaged populations. Rather than reinventing the wheel to get us out of The Great Housing Depression, we’d be wise to revisit history and learn what we can from the FHA.
DHW asks: What do you think?