History of Housing Finance in the U.S. (1913–Present)

Mortgage Policies: Evolution of Lending Standards and Interest Rate Trends

Early 20th Century (Pre-1930s): In the early 1900s, buying a home required very stringent terms. Mortgages were generally short-term (often 5–15 year loans with balloon payments) and demanded large down payments. A prospective borrower might need to put down about 40% of a home's price and could only obtain a loan term of around a dozen years or less (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) There was no nationwide mortgage market, so interest rates and credit availability varied significantly by region. In fact, before World War I, mortgage rates in some parts of the country could be 2–4 percentage points higher than in others due to the lack of a unified capital market (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) One early policy that encouraged homeownership was the federal income tax law of 1913, which introduced a deduction for mortgage interest. This tax provision reduced the effective cost of borrowing and stimulated housing demand, contributing to a rise in homeownership (the nonfarm homeownership rate climbed from ~37% in 1890 to ~46% by 1930) (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) Nonetheless, lending standards remained conservative, and mortgages were not easily accessible for many Americans before the 1930s.

Great Depression and New Deal Reforms (1930s): The housing finance system was upended by the Great Depression. As the economy collapsed after 1929, mortgage defaults and foreclosures skyrocketed; by 1933 nearly 10% of all homes were in foreclosure (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) The crisis exposed the weaknesses of short-term, non-amortizing mortgages and a lack of federal standards. In response, federal policies dramatically reshaped mortgage lending. New Deal reforms encouraged long-term, fixed-rate, fully amortizing mortgages with lower down payments. The Federal Housing Administration (FHA), created in 1934, pioneered federal mortgage insurance to protect lenders. This incentive pushed lenders to offer loans on much more favorable terms. By the 1950s, FHA’s influence meant most new mortgages were 30-year fixed-rate loans with about 20% down (a drastic change from the pre-Depression 5- or 10-year loans with 40% down) (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) These policies standardized underwriting practices and instilled appraisal and construction standards, improving loan quality. As a result, home financing became more accessible to middle-class Americans in the decades after the 1930s.

Post–World War II to 1970s: In the postwar era, mortgage lending practices stabilized around the long-term fixed-rate model. The typical mortgage remained a 20- to 30-year fixed-rate loan, often with 20% down, which facilitated the post-WWII homeownership boom. Favorable financing (along with rising incomes and suburban development) helped boost the U.S. homeownership rate from 44% in 1940 to 62% by 1960 (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) Government-backed mortgages – FHA-insured loans and new VA-guaranteed loans for veterans – enabled low or zero down payments and below-market interest rates for eligible borrowers (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) further broadening access. At the same time, regulation kept the mortgage market segmented: banks and savings & loan associations (thrifts) mostly made “conventional” loans held in their portfolios, while FHA/VA loans could be resold via emerging secondary markets (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) One important policy was Regulation Q, authorized by the 1933 Banking Act, which capped the interest rates banks and thrifts could pay on deposits. Regulation Q (extended to thrifts by the 1960s) aimed to prevent excessive bank competition but had the side effect of limiting funds for mortgages whenever market interest rates rose above the caps (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) In the relatively low-rate environment of the 1950s and 1960s, this was not immediately problematic. However, it set the stage for issues when inflation accelerated in the 1970s.

Inflation, Deregulation, and Changing Lending Standards (1970s–1990s): The late 1970s brought soaring inflation and interest rates, profoundly affecting mortgage policies. Mortgage interest rates, which had averaged in the single digits, shot up into the double digits – reaching an all-time high of about 18.6% for 30-year loans in 1981 (How Did Homes Get Sold in 1981 with 18% Rates? | Florida Realtors) Such high rates made traditional fixed mortgages extremely costly and nearly froze housing activity. To address this, policymakers and lenders introduced adjustable-rate mortgages (ARMs) in the early 1980s, which allowed interest rates (and monthly payments) to fluctuate over time. Federal legislation like the Depository Institutions Deregulation and Monetary Control Act (1980) and the Garn–St Germain Act (1982) phased out Regulation Q deposit rate ceilings and explicitly authorized alternatives to the standard fixed-rate mortgage (including ARMs and balloons) (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) These changes were part of a broader deregulation wave intended to save the thrift industry and increase credit availability. Lending standards also evolved: throughout the 1980s and 1990s, underwriting gradually became more automated and credit scoring more common (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) enabling faster loan approvals. By the 1990s, lenders, with encouragement from federal affordable housing goals, began to offer more flexible terms to reach historically underserved borrowers. Policies like the Community Reinvestment Act (1977) also pushed banks to extend credit in low-income communities (addressing “redlining” by encouraging reinvestment consistent with safe practices) (Community Reinvestment Act of 1977 | Federal Reserve History) These efforts, along with new mortgage products (such as home equity lines of credit and subprime mortgages), loosened some traditional lending constraints by the late 1990s. However, risk management did not always keep pace with looser credit: many loans were now made by mortgage brokers or non-bank lenders and sold onward, which sometimes reduced the incentive for careful underwriting (a dynamic that became more pronounced in the 2000s).

The Subprime Boom and Regulatory Aftermath (2000s–Present): In the early 2000s, mortgage lending standards in some market segments became markedly easier, contributing to a housing boom. Lenders increasingly offered “subprime” loans to borrowers with weaker credit, often with features like low initial “teaser” rates, interest-only payments, or little documentation of income. Sophisticated credit scoring and automated underwriting allowed firms to qualify many borrowers who previously would have been denied credit (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) During the height of the housing bubble (2004–2006), underwriting criteria deteriorated – for example, high loan-to-value loans and mortgages without full income verification became common (Housing, Housing Finance, and Monetary Policy - Federal Reserve Board) This expansion of credit fueled home purchases and refinancing, but it also meant higher risk in the system. When the housing bubble burst in 2007–2008, many of these marginal loans defaulted, and lenders abruptly tightened standards. In the post-2008 period, mortgage policies swung back toward caution. No-money-down mortgages largely vanished for ordinary borrowers, and banks became far more stringent about credit scores, income proof, and down payments (A Short History of Long-Term Mortgages | Economic History | Richmond Fed) Major legislation in the wake of the crisis – the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – imposed stricter rules on mortgage lending. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) and mandated an “ability to repay” standard for home loans, effectively banning the most abusive or risky lending practices that had proliferated earlier (The Dodd-Frank Act Explained | LowerMyBills) (The Dodd-Frank Act Explained | LowerMyBills) As a result of these reforms, by the 2010s mortgage underwriting was far tighter and more standardized, with an emphasis on fully documented, fixed-rate or safely adjustable loans. Interest rates, for their part, fell dramatically after the financial crisis (helped by Federal Reserve actions) – dropping to historic lows near 3% in the 2010s – which supported a recovery in home financing. Overall, a century’s worth of economic cycles and policy changes have continually reshaped U.S. mortgage terms, oscillating between expanding access to credit and ensuring sound lending standards.

Government Programs: Key Federal Housing Finance Initiatives

From the early 20th century onward, the U.S. government has progressively intervened in housing finance to promote stability, affordability, and broader homeownership. These federal programs and institutions fundamentally altered how mortgages are funded and who can access credit:

Financial Crises and Their Impact on Housing Finance