CHAPTER 3Birth, Trial, and Turnaround

THREE CONSISTENT THREADS RUN THROUGHOUT THE HISTORY OF U.S. mortgage finance over the past century: a high degree of risk, heavy involvement by the government in determining how the system operates, and—not unrelated to the first two—periodic and spectacular failures. Although the mortgage market collapse of 2008 was by far the most cataclysmic of these failures, it was not the first, and its roots reached far back in time.

A System in Transition

At the beginning of the 1920s, the main sources of U.S. mortgage finance were small, mutually owned building and loan societies. Along with mutual savings banks, they were known as thrift institutions. Commercial banks and life insurance companies did some mortgage ...

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