Richard L. Florida - Housing and the New Financial Mark

The past few years have witnessed a virtual revolution in the way this nation finances housing. Gone is the insulated system of thrifts whose special job was to collect savings deposits and issue mortgages. Gone too are the institutional foundations of this systemthe passbook account and the fixed rate mortgage. Residential finance has been transformed from a relatively sheltered to a completely deregulated system. Mortgage lending in this new financial environment is increasingly the province of a shrinking group of large financial firms. These firms compete for funds in domestic and international markets as well as issue and sell the new adjustable-rate mortgages, like securities, on the secondary mortgage market. In the very near future, there will be few, if any, distinct housing finance institutions.

It is not surprising then that the reorganization of the housing finance system has become the focus of a burgeoning policy debate and a growing academic literature. A host of questions have been raised. What are the driving forces behind the financial deregulation? How does deregulation affect housing finance? What are the new institutions and instruments IX being used to allocate housing credit and how do they work? How does the new housing finance system influence the cost and affordability of shelter? What is the future of housing finance?

These are the core questions addressed in the following pages. Reflective of these issues, the readings presented herein have been grouped as follows:

Before proceeding to the readings, however, a brief historical review is presented.

The old housing finance system was part and parcel of the financial structure established under the regulatory framework of the New Deal. The far-reaching New Deal financial reforms, including the Glass-Steagall Act, the Securities and Exchange Act, the Banking Act of 1935 and the Federal Home Loan Bank Act, basically functioned in tandem to erect regulatory barriers between the various segments of the financial industry and to bring the different types of institutions under the umbrella of specific regulatory bodies. These institutions were not allowed to offer checking accounts; their activities, like those of commercial banks, were limited to one state. Thrifts were legally required to invest in housing and were granted generous tax advantages in order to do so.

As a consequence, the thrift industry became virtually synonymous with housing finance. Savings deposits were clearly distinguished from more volatile flows of funds in national capital markets. The basic function of this insulated housing finance system was to accumulate capital from these deposits and to plow that capital back into the economy as housing credit. The advent of government mortgage insurance under the Federal Housing Administration (FHA) and Veterans Administration (VA) brought the next major component to the systemthe low-down payment, long-term, fixed-rate, self-amortizing loan. This became the basic vehicle for channeling housing credit to consumers. Later a limited secondary market, where mortgages could be bought and sold, was set up under the Federal National Mortgage Association (FNMA) to offer some liquidity. Simply put, small thrifts operating in local markets issued mortgages and collected payments as portfolio lenders; new loans were made from repayments and new deposits. presents the basic contours of the New Deal system.