Born from the Great Depression, the government created a facility to buy loans from troubled or frightened banks. After an 87% default rate on home loans, local banks were terrified to lend money to anybody and the housing market became stagnant. Unable to jumpstart the economy, the administration created FNMA, a branch of the government, to purchase loans from banks right after the loan was provided to the consumer. As FNMA grew in national reach, the need arose for consistency. In turn FNMA created a set of guidelines to approve mortgages, process them and buy them so each loan from each bank would conform. Out of this rose the FNMA guidelines and the Uniform Forms that all mortgage borrowers are subject to today. This system eventually allowed FNMA to pool the loans in similar buckets (groups) and securitize them (sell as stocks and bonds), though this didn’t happen until the 1970s. In 1968 Ginnie Mae was formed to purchase government insured loans. It was Ginnie Mae that developed the first mortgage pass through in 1970. With the home loans used as collateral, the mortgage backed security (MBS) was born into a profit making industry so profitable, that the government privatized FNMA. So you see, the government started these programs to help get us out of the Great Depression of the 20-30’s. These corporate giants can also be blamed for getting us in the train wreck we are now. Unfortunately, on a much great scale and fortunately with the ability to repair the damage more quickly this time. The question is, who will learn from these mistakes the second time around?

Dale Robyn Siegel