October 25, 2013
HBTL-09: Dual mortgage markets are a direct descendent of key policy responses to the Great Depression. Prior to the Depression, nearly all mortgages were five-year balloons, such that homeowners needed to refinance their mortgage every five years. The capital crisis of the Depression limited the ability of households to find new credit when their mortgages reached maturity, which resulted in massive foreclosures. The policy response was to bolster the housing finance system by creating institutions, including Fannie Mae and the Federal Housing Administration (FHA), to provide access to credit for these populations, who would otherwise be forced into foreclosure and be shut out of the market for the foreseeable future. In so doing, Fannie Mae and FHA helped provide access to mortgage credit and homeownership for millions of families, but at a higher cost. In later years, both institutions, but particularly the FHA, would evolve to play a leading role in providing access to borrowers who would be unable to get a mortgage under prevailing underwriting standards but who could afford and reliably repay a mortgage if they were able to get one. In essence, the creation of Fannie Mae and FHA created a dual mortgage market, and in so doing expanded access to mortgage credit.
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