An Altered U.S. Housing Finance System - Implications for Housing - NBER Working Paper No. 3770

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During the 1960s and 1970s, the U.S. government tightly regulated single-family housing finance, creating a specialized system characterized by portfolio limits on investments in mortgage-related assets, tax incentives for residential mortgage investment, prohibitions on adjustable-rate mortgages (ARMs), and deposit-rate ceilings. In the 1980s these constraints were removed, reshaping loan terms and mortgage securitization: more new loans used ARMs, savings and loans cut holdings of FRMs, and pass-through pooling increased. With borrower switching and capital-market integration, housing became less interest-rate sensitive. The paper documents these changes, analyzes their effects on the FRM market, and reviews evidence on housing demand, supply, house prices, and ownership.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages42

Reading Time1 h 46 min

AccessFree to download

ABSTRACT

Housing finance regulation in the 1960s and 1970s

Deregulation and changes in the 1980s

Expected and observed interest-rate sensitivity

Organization of the paper

U.S. Housing Finance, 1961-89

Overview emphasizing the 1960s and 1970s

Table 1 and investor-group absorption

NBER WORKING PAPERS SERIES AN ALTERED U.S.HOUSING FINANCE SYSTEM:IMPLICATIONS FOR HOUSING Patric H.Hendershott Working Paper No.3770 NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge,MA 02138July 1991 Patric H.Hendershott is professor of finance and public policyand holder of the Galbreath Chair in Real Estate at the ohioState University and is a research associate of the NationalBureau of Economic Research. Presented at a meeting on TheEconomics of Housing in Japan and the United States;sponsored bythe NBER and the Japan Center for Economic Research,January 3-5,1991,revised May 1,1991.This paper is part of NBER's researchprogram in Financial Markets and Monetary Economics.Anyopinions expressed are those of the author and not those of theNational Bureau of Economic Research. # AN ALTERED U.S.HOUSING FINANCE SYSTEM;IMPLICATIONS FOR HOUSING ## ABSTRACT During the 1960s and 1970s,the U.S.government closely regulated the single-family housing finance system. The regulationmanifested itself in a highly specialized system with four notablecharacteristics:portfolio restrictions against investments incorporate assets,tax inducements to invest in residentialmortgages,prohibitions against investing in ARMS,and depositrates ceilings. All were removed in the 1980s,and,not surprisingly,the housing finance system changed markedly. Betweenearly 1982 and 1989,two-fifths of all new loans had adjustable,not fixed,rates,and savings and loans reduced their holdings ofFRMs(both whole loans and mortgage pass-throughs)by 15 to 20percent.Moreover,the fraction of conventional FRM originationsthat have been pooled into pass-throughs rose from less thanone-twentieth before 1981 to over one-half after 1985. With theopportunity of borrowers to shift to lower coupon ARMs when ratesrise and with the integration of the home mortgage market withcapital markets generally,one would expect that the U.S.housingsector is now less sensitive to rising interest rates than it wasin the 1960s and 1970s. Numerous studies support this expectation. Patric H.HendershottAcademic Facultyof Science Ohio State University1775 College RoadColumbus,Ohio 43210and NBER # An Altered U.S.Housing Finance System:Implications for HousingPatric H.Hendershott During the 1960s and 1970s,the U.S.government closely regulated thesingle-family housing finance system.The regulation manifested itself in ahighly specialized system with four notable characteristics.First,becausefederally-chartered depository institutions were prohibited from originatingadjustable-rate mortgages(ARMs),virtually all homebuyers utilized thelong-term(20 to 30 year)fixed-rate mortgage(FRM).Second,portfoliorestrictlons and tax inducements led nonbank depository institutions(savings and loans and mutual savings banks)to supply two-thirds of allfunds to the home mortgage market.Moreover,the tax inducement caused homemortgage rates to be roughly a half percentage point lower than they wouldotherwise have been.Third,because depository institutions were fundingtheir FRMs with short-term deposits,deposit rate ceilíngs were imposed wheninterest rates rose significantly.Fourth,because the capital market couldnot compete with "cheap"deposit money,few conventional mortgages(thosenot government insured)were pooled into mortgage pass-through securities.As a result of these four characteristics,the U.s.housing sector wasextremely vulnerable to increases in interest rates that caused deposits toflow out of the depository institutions,thereby restricting creditavailability. Portfolio restrictions,tax inducements,prohibitions against ARMs,anddeposit rates ceilings were all removed in the 1980s,and,not surprisingly,the housing finance system changed markedly.Between early 1982 and 1989,two-fifths of all new loans had adjustable,not fixed,rates,and savingsand loans reduced their holdings of FRMs(both whole loans and mortgagepass-throughs)by 15 to 20 percent.Moreover,the fraction of co

FAQs

What were the four major characteristics of the regulated U.S. single-family housing finance system in the 1960s and 1970s?

The system included portfolio restrictions on mortgage-related investments, tax inducements to invest in residential mortgages, prohibitions on investing in ARMs, and deposit-rate ceilings when interest rates rose.

How did the housing finance system change after the 1980s deregulation?

After restrictions were removed, two-fifths of new loans between early 1982 and 1989 had adjustable (not fixed) rates, savings and loans reduced FRM holdings by 15% to 20%, and pass-through pooling of conventional FRM originations rose sharply.

Why is the U.S. housing sector expected to be less sensitive to rising interest rates after the 1980s?

Borrowers could shift to lower-coupon ARMs as rates rose, and the home mortgage market became more integrated with capital markets, reducing reliance on the deposit-driven constraints described earlier.

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