The Roots of Government Meddling in Mortgages

Federal Land Banks created in 1916 were the Fannie Mae model. They too went belly up.

From the WSJ, by Judge Glock. Mr. Glock is currently a Miller Center Fellow at the University of Virginia and a Ph.D. candidate in history at Rutgers University.

Excerpts:

"government guarantees, implicit or explicit, are a bad idea with a checkered past. Consider the Federal Land Banks, created in 1916 during the Woodrow Wilson administration. Their history shows that any semi-public mortgage company faces the same bad incentives as Fannie and Freddie did"

"created 12 Federal Land Banks, officially private but with the winking support of the federal government"

"Congress allowed the land banks to have less than half as much capital as other banks at the time"

" It also made the banks’ owners, with little worry about their own risk, overly eager to expand, making those losses even more likely."

"Government support meant that the land banks’ regulatory agency—the Federal Farm Loan Board—instead of working exclusively for the land banks’ safety and soundness, saw themselves as the system’s champions. It wanted, as one regulator said in 1927, not only to “assist the banks, but to persuade, if I may use that word, the public to invest in the securities.”"

"When the banks got into trouble in the mid-1920s due to loans given on poor and unproductive land, the Loan Board worked to cover up dire internal reports."

"federal regulators also filled the banks with political patronage."

"Land banks doled out mortgages in congressional districts whose congressional representatives pressured the White House and Treasury for more loans. The land banks made loans to dozens of senators, congressmen and their relatives"

"The land banks, which had substantially higher losses than other mortgage companies at the time, finally went bust in the Great Depression. Congress bailed them out to the tune of $125 million in 1932. The land banks soon required even more funds and were nationalized a year later."

"The land banks were privatized in 1947 but with similar hints as to their federal backing. They were bailed out during the farm bust of the 1980s to the tune of $4 billion. Fannie Mae in 1938 would be modeled directly on the Federal Land Banks system."