Fannie Mae Promotes Home Ownership

Establishment of the Federal National Mortgage Association facilitated the move out of the Great Depression and assisted families in achieving home ownership.

Summary of Event

The Federal National Mortgage Association (FNMA), organized on February 10, 1938, was designed to create and maintain an active market for insured mortgages and a steady flow of mortgage money at relatively favorable interest rates. It provided an avenue of investment for individuals and institutions previously unable to benefit directly from insured mortgage programs. [kw]Fannie Mae Promotes Home Ownership (Feb. 10, 1938)
[kw]Home Ownership, Fannie Mae Promotes (Feb. 10, 1938)
[kw]Ownership, Fannie Mae Promotes Home (Feb. 10, 1938)
Fannie Mae
Housing industry (U.S.)
Home ownership (U.S.)
Mortgage lending
[g]United States;Feb. 10, 1938: Fannie Mae Promotes Home Ownership[09690]
[c]Banking and finance;Feb. 10, 1938: Fannie Mae Promotes Home Ownership[09690]
[c]Organizations and institutions;Feb. 10, 1938: Fannie Mae Promotes Home Ownership[09690]
Bulkley, Robert J.
Steagall, Henry Bascom
Wagner, Robert F.
Goldsborough, T. Alan
Roosevelt, Franklin D.
[p]Roosevelt, Franklin D.;Federal Housing Administration

The U.S. housing industry is made up of hundreds of thousands of small builders, carpenters, and real estate agents, making supervision and control difficult. The construction industry operates in thousands of small, separate sites. The industry is significantly affected by interest rates, which are influenced by fiscal and monetary policies of the U.S. government. The construction industry is an important segment of the economy that can provide a great stimulus to the overall employment level and the economy or can drag it down. Construction activity usually changes in advance of changes in the economy as a whole.

The U.S. housing industry suffered a severe setback as a consequence of the stock market crash of 1929. Investors lost approximately seventy-five billion dollars in the market. Builders stopped work overnight, millions of construction workers lost employment, housing starts plunged, funds for mortgage financing dried up, and more than 1.5 million homes eventually came under foreclosure. Apart from directly affecting the housing industry, the Depression and foreclosures resulted in a large-scale failure of financial institutions, which were left holding foreclosed properties that had declined significantly in value.

By the end of 1930, the housing industry was in disarray as a result of the Depression, Great Depression;housing industry (U.S.) poorly planned projects, badly designed homes and apartments, overextended financing, and second and third mortgages on homes at high interest rates. The mortgage finance structure was weak and almost insolvent. Housing starts declined from a high of 937,000 units in 1925 to 93,000 in 1933. A severe decline in deposits at banks and saving institutions, a natural consequence of unemployment, made home financing difficult to find, and many people were unwilling to buy homes and thereby obligate themselves to make mortgage payments. Inability to meet mortgage payments by many home owners resulted in unusually high rates of foreclosure. The foreclosures and a resulting drop in new construction as foreclosed properties came on the market threw more than two million construction workers out of employment.

In 1932, President Herbert Hoover attempted to alleviate the problem by creating the Reconstruction Finance Corporation Reconstruction Finance Corporation (RFC), with capital of $500 million and the authority to borrow $1.5 billion to make loans to banks, insurance companies, building and loan associations, and others. Hoover also signed the Federal Home Loan Bank Act of 1932, which created the Federal Home Loan Bank Federal Home Loan Bank (FHLB). The FHLB was to act as a reserve system for major mortgage financiers such as savings and loan associations. These actions did not succeed in revitalizing the housing industry.

It was left to the next president, Franklin D. Roosevelt, to stimulate the economy and the construction and financing of housing throughout the country. To get the home-construction industry going, he signed the National Housing Act, National Housing Act (1934) which created the Federal Housing Administration Federal Housing Administration (FHA), in June of 1934. The FHA established standards for insurance and property and standards for economic soundness in lending. The FHA was also authorized to insure regulated financial institutions that were engaged in mortgage financing and to insure mortgages, to encourage private financial institutions to provide financial resources for real estate purchases. To allow the FHA to borrow funds in the market at a relatively low cost, the interest paid by the FHA on its obligations was freed from all taxes. The FHA revolutionized mortgage financing with its long-term amortized mortgages and acceptance of low down payments. The development of long-term amortized loans eliminated the need to frequently refinance short-term mortgages and significantly reduced borrowers’ financing costs.

The RFC Mortgage Company was organized in 1935 as a subsidiary of the RFC to help maintain a market for mortgages. The agency was moved among various departments of the federal government before being abandoned in 1947. By 1937, it had become clear that although the FHA had significantly succeeded in improving the financing of and growth in the real estate industry, it still had not succeeded in attracting private money to the housing market. The construction of housing facilities had not kept pace with the needs and the growth of the population or with recovery in other fields. Industrial production as a whole was more than 90 percent of the average for the period 1925-1930, but residential construction was limping along at only 34 percent of its level during the same period.

The lack of activity had a retarding effect on the recovery of all industries and trade. There was a shortage of affordable housing, especially for lower- and middle-class families. It was estimated that it would be necessary to provide new units at the rate of 760,000 per year for the next ten years to meet the accumulated deficit. The federal government had hoped that private lenders, especially commercial banks, would increase their mortgage holdings in response to federal insurance of mortgages. A lack of an efficient secondary mortgage market, however, kept private resources away from mortgage investments. A secondary market would allow lenders to sell loans they had made, thus allowing diversification.

On February 10, 1938, under provisions of the National Housing Act of 1934 as amended in 1937, the National Mortgage Association of Washington was organized by the RFC. On April 5, 1938, the name of the National Mortgage Association of Washington was changed to the Federal National Mortgage Association, commonly known as FNMA and later as Fannie Mae. The FNMA began as a wholly owned corporation of the federal government, with initial capital of $10 million, a reserve of $1 million, and borrowing capacity limited to twenty times its equity capital.

The FNMA essentially took over the role of the RFC Mortgage Company. The basic goals of the FNMA included utilization of the best available means of achieving sustained long-term residential construction, with a minimum expenditure of federal funds and a maximum reliance on private business enterprise.

During its first ten years of operation, the FNMA performed a useful secondary market function by buying FHA mortgages when private financial institutions were unable to meet the demand and selling mortgages when housing activity, especially during World War II, fell behind the available supply of funds. By 1942, its investment in mortgages amounted to $211 million. Low interest rates and low levels of real estate activity made mortgage investment an attractive vehicle for private investors from 1942 to 1947, and the FNMA sold much of its portfolio.

During the prewar period, the FNMA remained a minor factor in the mortgage market. Its holdings never exceeded 1 percent of the total outstanding mortgage debt on nonfarm properties. During the period from 1948 to 1954, the size and scope of FNMA operations increased sharply. It became a large primary source of funds for real estate. Mortgage bankers and lenders started playing the role of loan originators for the agency. In 1948, Congress authorized the FNMA to purchase Veterans Administration (VA) authorized loans. In 1948, through an amendment to the National Housing Act of 1934, Congress authorized the FNMA to support mortgages for special federal housing programs in cases in which private money was not available. By the end of 1954, 20 percent of the FNMA’s portfolio and 70 percent of its FHA-guaranteed holdings were loans on disaster relief and defense projects.

The FNMA was reorganized in November, 1954. It was to be a true secondary market facility that would eventually be privately owned and financed. To avoid excessive use of its secondary market facilities, it paid going market prices for loans, and sellers were required to purchase equity interests in the agency. The FNMA was to provide special assistance on certain residential mortgages and housing programs as designated by the government. It was to manage and liquidate its mortgage portfolio in an orderly manner, with a minimum of unfavorable effects on the market and a minimum loss to the government.

At the end of 1954, the FNMA’s mortgage portfolio stood at more than $2.4 billion. The FNMA had thus far depended primarily on the Treasury for its financing needs. It experienced substantial growth in its operations after 1954. The most notable change after 1954 was a greater use of private funds to finance FNMA operations. By the end of 1960, $2.5 billion of the FNMA’s secondary market obligations were held by the public. Private investment in its common stock amounted to another $73 million. Early in 1960, the FNMA introduced a new method of financing by selling discount notes with maturities ranging from 30 to 270 days. Rates on these discounts changed periodically to reflect market interest rates. The availability of these investment alternatives proved attractive to private investors and reduced the FNMA’s dependence on Treasury funds. Although mortgage sellers were required to buy FNMA stock, the stock subscriptions were not large. Attainment of private ownership, it became clear, would require a higher rate of stock subscription.

The FNMA was reorganized as a privately owned corporation under the Housing and Urban Development Act of 1968. Housing and Urban Development Act (1968) At that time, all stock, both common and preferred, owned by the U.S. Treasury was redeemed and replaced by the sale of common stock to the public, and the FNMA came to be known as Fannie Mae. The common stock was listed on the New York Stock Exchange. After the reorganization, the FNMA retained its secondary market mortgage operations. Its special assistance and management and liquidation functions were assigned to a new organization, the Government National Mortgage Association, popularly known as GNMA or Ginnie Mae. Ginnie Mae was to remain under the direction of the Department of Housing and Urban Development.

The 1968 act provided for a transitional period for the FNMA’s shareholders to assume control over the FNMA. Although the 1968 act removed all federal ownership interests, significant federal regulation of the FNMA remained. The secretary of the treasury retained the authority to regulate the issuance of the association’s debt instruments. In addition, the secretary of the Department of Housing and Urban Development had the authority to require that a reasonable portion of FNMA mortgage loan purchases be related to the national goal of providing adequate housing to low and moderate-income families, but with a reasonable rate of return to the FNMA. Five of the thirteen members of the FNMA’s board of directors were to be appointed by the president of the United States, with the others elected by shareholders.


By the time the FNMA was created, the FHA insurance program was four years old but not well established. Immediately upon its creation, the FNMA started its secondary market operations by buying, selling, and holding federally underwritten mortgages. It issued short-term and long-term debentures for sale in the markets to raise additional resources. To stimulate recovery, the FNMA purchased FHA mortgages on new houses from all types of mortgage lenders and mortgage companies. Until its dissolution in 1947, the RFC Mortgage Company continued to finance mortgages on existing properties, which were not authorized to be financed by the FNMA.

Although the FNMA operated under strict federal regulations, it also had certain privileges and immunities. Securities issued by the FNMA were considered to be exempt securities not required to be registered with the Securities and Exchange Commission before their issuance. The FNMA was also exempt from all taxation (except for real estate taxes) by any state, county, city, or municipality. The FNMA issued different types of debt instruments to suit different investor needs. Traditionally, its debt traditionally was treated as government-agency debt in the credit markets. The FNMA, then, enjoyed ready access to funds in the credit markets at rates that are slightly lower than those on comparable U.S. Treasury obligations. Over the years, the FNMA evolved from a taxpayer-supported government agency into a federally chartered private company that by 2005 had provided hundreds of billions of dollars in affordable mortgages and helped sixty-three million American families to own their own homes. Fannie Mae
Housing industry (U.S.)
Home ownership (U.S.)
Mortgage lending

Further Reading

  • Brueggeman, William G., Jeffrey D. Fisher, and Leo D. Stone. Real Estate Finance. 8th ed. Homewood, Ill.: Irwin, 1989. This comprehensive text on real estate finance provides a general look at the subject, including legal instruments, institutional sources of funds, and secondary mortgage markets.
  • Bryant, Willis R. Mortgage Lending: Fundamentals and Practices. New York: McGraw-Hill, 1956. A good resource for fundamental aspects of mortgage lending, sources of funds, VA loan programs, and general mortgage loan services.
  • Dasso, Jerome, and Gerald Kuhn. Real Estate Finance. Englewood Cliffs, N.J.: Prentice-Hall, 1983. A detailed book about financial institutions in the real estate industry, primary and other sources of funds, laws relating to real estate finance, and arrangements for financing.
  • De Souza Briggs, Xavier, and William Julius Wilson, eds. The Geography of Opportunity: Race and Housing Choice in Metropolitan America. Washington, D.C.: Brookings Institution, 2005. Contemporary experts in housing and urban policy studies examine the relationship between housing and America’s history of racial, social, and economic segregation.
  • Federal National Mortgage Association. Introducing Fannie Mae. Washington, D.C.: Author, 1992. Twelve-page booklet provides a brief history of the FNMA and its activities in the real estate market. Lists sources of income, securities issued to raise funds, and international activities.
  • Jones, Oliver, and Leo Grebler. The Secondary Mortgage Market: Its Purpose, Performance, and Potential. Los Angeles: University of California, Graduate School of Business Administration, 1961. Excellent work, although somewhat dated, provides a detailed look at the growth and development of the secondary mortgage markets. A good source of data on market activity for the period up to 1960.
  • Mason, Joseph B. History of Housing in the U.S., 1930-1980. Houston: Gulf, 1982. Chapter 1 provides a review of the Depression years and the federal government’s efforts to restart the housing industry.
  • Ward, Colin. Cotters and Squatters: The Hidden History of Housing. Nottingham, England: Five Leaves, 2002. Draws parallels between the history of informal settlements that have been erected throughout human history and the modern debate over zoning, planning, and the availability and cost of housing.

Federal Reserve Act

Banking Act of 1933 Reorganizes the American Banking System

Banking Act of 1935 Centralizes U.S. Monetary Control