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UGA FHCE 3300 - Federal Housing Policy and Homeownership

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FHCE 3300 1nd Edition Lecture 22Outline of Last Lecture I. AffordabilityII. 30% RuleIII. GuidelinesIV. Housing Cost BurdenV. Lack of Affordable HousingVI. Fair Market RentVII. Affordability at Household LevelVIII. Renting and AffordabilityOutline of Current Lecture I. HomeownershipA. Before Great DepressionB. During Great DepressionII. Transformation of Housing Finance SystemA. Home Loan Bank SystemB. Home Owner’s Loan CorporationC. Federal Housing AdministrationD. Federal National Mortgage Association III. Promoting HomeownershipThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.A. Mortgage Interest DeductionIV. Recovery from Great Depression/Housing BoomV. Expansion of HomeownershipCurrent LectureI. Homeownership- U.S. gov’t has long-standing history of promoting homeownershipA. Before Great Depression- Owner-occupied housing was in short supply and expensive- Mortgages came due after 2-11 years, required refinancing or repayment- Lenders willing to cover no more than 60% of property’s value, meaning most borrowers had to get 2nd and 3rd mortgages- Financing difficulty limited access to homeownership- Rental housing dominant form of tenureB. During Great Depression- $75 billion in equity capital lost on Wall Street- Nearly 25% of workforce unemployed, higher in some cities- More than 11,000 banks closed, banking system in state of collapse - Many homeowners couldn’t make payments- Resulted in foreclosures on massive scale 1933 – More than half of all home mortgages were in default More than 1,000 mortgages foreclosed every day- Many homeowners forced to sell homes when mortgages came due- Banks began to demand mortgages be paid in full rather than extend terms- Homes declined in value, people owned more than homes were worth- Affected homeowners often the middle class, who were facing poverty for 1st timeII. Transformation of Housing Finance System - Old system:- Gov’t responded to housing crisis with 4 stepsA. Step 1: Home Loan Bank System - 12 regional banks, increased access to capital- Extended terms of mortgage (may lower payments)- Increased loan-to-value ratio (smaller down payment for consumers)- Made mortgages less costly- Did not fix foreclosure problem- As a policy, was designed to increase construction and employment, helppeople facing foreclosure, support widespread homeownershipB. Step 2: Home Owners Loan Corporation- Home Owners’ Loan Act of June 13, 1933- Roosevelt administration’s plan to rescue millions of families from mortgage foreclosure- HOLC – purchase and refinance mortgage loans in default- Introduced 15-year amortizing loan, allowing homeowners to pay off loans with monthly payments over many years- Reduced monthly payments- Provided funds to pay taxes, make home repairs- Spend $3 billion, refinanced more than 1 million mortgages – 10% of all eligible homeowners sought assistanceC. Step 3: Federal Housing Administration- Established by National Housing Act of 1934- Intent was to reduce unemployment by stimulating housing construction- Federal gov’t insured mortgages issued by qualified lenders, eliminated risk for lenders- Reduced interest rates- Increased availability of funds for home building and home purchases Largest insurer of residential mortgages in worldD. Step 4: Federal National Mortgage Association- Created FNMA in 1938, later renamed to Fannie Mac, to purchase FHA-insured mortgages- New source of funding for mortgage market- Started as public agency, changed in 1968 to “gov’t sponsored enterprise” (GSE), able to purchase other mortgages other than FHA- Became secondary mortgage market Fannie Mac Freddie MacIII. Promoting Homeownership- Today, U.S. gov’t uses primary tools to support homeownership in U.S. Mortgage interest deduction (tax expenditure) Loans and loan guarantees Secondary mortgage market (Fannie Mae and Freddie Mac)A. Mortgage Interest Deduction- Originated by Union during Civil War- Emergency income tax that excluded interest and payments from definition of income- Federal gov’t used this definition when permanent income tax was est’d in 1913- Had minimal effect on nation’s tax expenditures for many decades- Became substantial tax expenditure as homeownership rates climbed in 1940s and 1950s Tax expenditures were spending programs implemented through tax code Give people and businesses special tax credits, deductions and preferential rates in support of various gov’t policies Compared to direct spending/budget outlay: Gov’t takes tax dollars and gives to others (individuals, programs) for specific purpose  84% of all tax expenditures in 2009 went to homeowners Largest tax break is deductibility of mortgage interest payments from taxable incomeEx: Annual household income = $50,000; mortgage interest paid = $9,600; taxable income = $40,400IV. Recovery from Great Depression/Housing Boom-1940s: FHA & VA loans available to returning war veteransLow down payment (10% or less)Long-term financing over 25 years - Farmers Home Administration: Began making direct loans to purchase and rehab rural farm homes- 1950s: Federal financing of suburban expansionV. Expansion of Homeownership- Policy initiatives by U.S. federal gov’t greatly expanded homeownership in U.S.- Gov’t intervention made homeownership more affordable than renting- Federal housing policies have had substantial impact on how and where Americans live- Early FHA appraisal process highly discriminatory, supported suburban income and racial discrimination- Older city neighborhoods ineligible for loan guarantees, moved mortgage funds out of the cities, fostered suburban


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