GOVERNMENT-INDUCED MARKET FAILURE - A NOTE ON THE ORIGINS OF FHA MORTGAGE INSURANCE

The conventional wisdom regarding the creation of federal housing programs during the Great Depression cites market failure as the key factor leading to government action. A review of the historical record regarding one program in particular, the Federal Housing Administration's insurance of real-estate mortgages, suggests a more complex picture. Amortized loans were not created anew by the FHA but had been developed previously by various financial institutions; their use by national banks was restricted by law. What market failure occurred seems to have been induced, at least in part, by the federal government.