National Housing Act (1934)

President Franklin Roosevelt signed the National Housing Act into law on June 27, 1934. The purpose of the law was to “encourage improvement in housing standards and conditions, to provide a system of mutual mortgage insurance, and for other purposes.” The law created the Federal Housing Administration (FHA) and the Federal Savings and Loan Insurance Corporation (FSLIC) [1].

The bursting of the housing bubble of the 1920s was a major contributor to the onset of the Great Depression. By “the summer of 1932, as many as one thousand mortgage defaults were being recorded every day…and by early 1933 about half of the nation’s home mortgages were in default…” [2]. Millions of Americans lost their homes and millions more were in danger of doing so. The construction industry ground to a halt and the building trades were hit particularly hard.

In order to revive mortgage lending for housing construction, home purchases and home improvements, the FHA provided federal guarantees of repayment to mortgage issuers—such as banks and savings & loan associations—who submitted to federal standards. FHA regulations were responsible for the standardization of the 30-year, low interest mortgage. To further facilitate the flow of capital into housing, the FHA encouraged the development of a secondary market in which mortgages could be sold to investors [3].

The National Housing Act succeeded in two major ways. First, it helped stimulate the revival of the construction industry and reemployment of workers in the building trades. As the FHA reported by the end of 1934, “In 60 cities it is reported that as a result of the better-housing programs there are no contractors or building-trades men who are unemployed” [4]. Second, by the end of the 1930s it was noted that “12,000,000 people have been enabled to improve their housing standards and conditions under the FHA program, including [new home purchases and] the modernization and repair provisions of the National Housing Act.” After years of economic depression, more Americans could afford “better planned, bettor built, and better financed homes than ever before” [5].

Section 207 of the National Housing Act also authorized mortgage insurance for “low-cost housing projects…to encourage the investment of private funds in the large scale production of housing of adequate standards of sanitation, safety, and amenity, and at rentals within reach of families with small incomes” [6]. River Oaks Gardens (Houston, Texas), Brentwood Village (Washington, DC), and Green Tree Manor (Louisville, Kentucky) were some of the many low-cost rental housing projects made possible by large FHA-backed mortgages [7].

The National Housing Act and the FHA were wildly successful in supporting the great postwar boom in housing and suburbanization, in which the national home ownership rate jumped from under 50% to almost 70% of households. On the other hand, the FHA adopted rules that confirmed existing patterns of racial discrimination in lending and segregation in housing: “…by the late 1950s less than 2 percent of housing built after the war with the help of FHA insurance was sold to minorities, and only 1 percent was built in minority subdivisions… New Deal housing programs that initially envisioned a better quality shelter for all citizens came unstuck, dividing along racial and class lines…” [8].

In 1938, an amendment to the National Housing Act created the Federal National Mortgage Association (Fannie Mae) to purchase “FHA-insured loans from private lenders,” create “liquidity in the mortgage market,” and provide “lenders with cash to fund new home loans” [9]. The FHA lasted until 1965, when its functions and duties were taken over by the newly-created Department of Housing and Urban Development [10]. Fannie Mae still exists and was a major player in the mortgage bubble and crisis of the 2000s.

Sources: (1) The full text of the law can be found at FRASER, Federal Reserve Bank of St. Louis, https://fraser.stlouisfed.org/docs/historical/martin/54_01_19340627.pdf (accessed June 25, 2015). (2) David Freund, Colored Property: State Policy & White Racial Politics in Suburban America, Chicago: University of Chicago Press, 2007 (p. 110 of 2010 paperback edition). (3) First Annual Report of the Federal Housing Administration, June 27, 1934 through December 31, 1934, p. 4. (4) Ibid., p. 13. (5) Sixth Annual Report of the Federal Housing Administration, calendar year 1939, pp. v-vi. (6) Second Annual Report of the Federal Housing Administration, calendar year 1935, p. 30. (7) Fifth Annual Report of the Federal Housing Administration, calendar year 1938, pp. 22-23 and 119. (8) Robert Leighninger, Jr., Long-Range Public Investment: The Forgotten Legacy of the New Deal, Columbia, SC: University of South Carolina Press, 2007, pp. 134-135. See also Freund, note 2 above. (9) “History of the Government Sponsored Enterprises,” Federal Housing Finance Agency, Office of the Inspector General, https://fhfaoig.gov/LearnMore/History, accessed September 16, 2015. (10) “Records of the Federal Housing Administration,” https://www.archives.gov/research/guide-fed-records/groups/031.html#31.1, accessed September 16, 2015. (Note: all annual reports of the FHA can be found at https://www.hathitrust.org/.)