Home Owners’ Loan Act (1933)

On June 13, 1933, President Roosevelt signed the Home Owners’ Loan Act into law. The purpose of the law was to “provide emergency relief with respect to home mortgage indebtedness, to refinance home mortgages, to extend relief to the owners occupied by them and who are unable to amortize their debt elsewhere…” The law also ordered the creation of a Home Owners’ Loan Corporation (HOLC) to carry out the provisions of the act [1].

During the 1920s lenders and debtors entered into home mortgage arrangements with “confidence that the burden could be supported without undue difficulty…”, but an enormous real estate bubble arose that badly overextended both banks and home buyers. With the Stock Market Crash of 1929 and the subsequent fall into the Great Depression, “The ability of individual borrowers to meet mortgage payments was reduced by large-scale unemployment and by income reductions generally…This condition quickly led to tax delinquency, mortgage interest default, and ultimately to a wave of foreclosures…[By] March 1933, millions of people faced the loss of their homes, lenders faced heavy investment losses, communities badly in need of funds suffered from an inability to collect property taxes, and the construction industry, which if revived would contribute significantly to general economic recovery, was at a virtual standstill” [2].

As with other problems during those times, the policies of the Hoover Administration were inadequate and “not designed to give help in cases of emergency distress” [3]. New Deal policymakers were much more aggressive and, through the HOLC, made loans to assist both financial institutions and Americans struggling with delinquent mortgages and property tax arrears, not to mention house insurance and maintenance [4]. HOLC typically acquired distressed mortgages by giving lien holders government insured bonds, then would make new loans to home owners – loans that could be repaid over a longer period of time (15 years or more) and at low interest rates (5% or less) [5].

The HOLC was authorized to make loans from June 13, 1933 through June 12, 1936. During this period, HOLC made over 1 million loans totaling about $3.1 billion – $575 million of which went to individuals [6]. The average loan size was $3,039 (about $52,000 in 2014 dollars) [7]. The HOLC ceased operations on April 30, 1951 with “a slight profit,” defying expectations that taxpayer money would inevitably be lost in such a venture [8].

The Home Owners’ Loan Act of 1933 proved to be one of the most successful policies emanating from the first 100 days of the New Deal. Not only did its program of emergency lending rescue hundreds of thousands of home owners and mortgage institutions from loss, it and the Federal Housing Administration (FHA), created a year after HOLC, completely transformed the US mortgage market. It replaced the short-term mortgages and purchase contracts of the 1920s, with their high interest rates and higher risk of default, by long-term (mostly 30 year) mortgages at lower rates of interest backed by the federal government. These reforms greatly expanded home ownership in the post World War II era, from under 50% to almost 70% of American families [9].

Nevertheless, the lessons of the 1920s were forgotten by the onset of the great property bubble of the 2000s, which burst in 2007-08 and left millions of home buyers in foreclosure or ‘under water’ (mortgages worth more than their houses). Once again, the government had to bail out the financial system; but this time it did not step in to provide significant relief to distressed home owners. Contrast this with the New Deal’s, HOLC, whose total lending, in relation to GDP, would be the equivalent of about $700 billion today [10].

Sources: (1) The full text of the law can be found at “Home Owners’ Loan Act…”, FRASER, Federal Reserve Bank of St. Louis, https://fraser.stlouisfed.org/scribd/?title_id=850&filepath=/docs/historical/congressional/hola1933_congress.pdf#scribd-open, accessed June 23, 2015. (2) C. Lowell Harriss (in conjunction with the National Bureau of Economic Research), History and Policies of the Home Owners’ Loan Corporation, New York: H. Wolff Book Manufacturing Co., Inc., 1951, pp. 7-9, available to view at https://babel.hathitrust.org/cgi/pt?id=uc1.$b37493;view=1up;seq=9 (accessed June 23, 2015). (3) Ibid. at p. 8. (4) Ibid. at pp. 127-133. (5) Housing and Home Finance Agency, Home Loan Bank Board, “Final Report to the Congress of the United States, relating to the Home Owners’ Loan Corporation, 1933-1951,” Washington, D.C., 1952, pp. 1-2, available to view at https://fraser.stlouisfed.org/scribd/?item_id=23530&filepath=/docs/publications/holc/hlc_final_report_1952.pdf#scribd-open (accessed June 23, 2015). (6) Ibid. at p. 3. (7) Ibid. at p. iv. (8) See note 2, at p. 6. (9) “Historical Census of Housing Tables,” U.S. Census Bureau, https://www.census.gov/hhes/www/housing/census/historic/owner.html, accessed June 27, 2015. (10) Alan S. Blinder, “From the New Deal, a Way Out of a Mess,” New York Times, February 24, 2008, https://www.nytimes.com/2008/02/24/business/24view.html?_r=0, accessed June 23, 2015, at p. iv.