Paisley
I'll Lock Up
- Messages
- 5,439
- Location
- Indianapolis
An article by Steven Malanga in City Journal, Spring 2009 edition, discusses homeownership and foreclosures in the 20th century and today. Here's an excerpt from "Obsessive Housing Disorder":
We’ve largely forgotten that Herbert Hoover, as secretary of commerce, initiated the first major Washington campaign to boost homeownership. His motivation was the 1920 census, which had revealed a small dip in ownership rates since 1910—from 45.9 percent to 45.6 percent of all households. The downturn was likely the result of a temporary diversion of resources away from housing during World War I. For Hoover, though, the apocalypse seemed nigh. “Nothing is worse than increased tenancy and landlordism,” he warned—though surely many things were worse. With little justification, he predicted that in just a few decades, three-quarters of all Americans would be renters. The press echoed the urgency. “The nation’s stability [is] being undermined,” the New York Times editorialized. “The masses [are] losing their struggle for a better life.”
Without waiting to see if postwar prosperity might solve the problem, in 1922 Hoover launched the Own Your Own Home campaign, hailed at the time as unique in the nation’s history. “The home owner has a constructive aim in life,” Hoover said, exhorting Americans to buy property. “He works harder outside his home, he spends his leisure hours more profitably, and he and his family live a finer life and enjoy more of the comforts and cultivating influences of our modern civilization.” Hoover urged “the great lending institutions, the construction industry, the great real estate men . . . to counteract the growing menace” of tenancy. He pressed builders to turn to residential construction and employers to support the cause. Some, like United States Steel and General Motors, agreed to provide parks and other amenities for the new housing developments that proliferated in response to Hoover’s call.
Hoover also called for new rules that would let nationally chartered banks devote a greater share of lending to residential properties. Congress responded in 1927, and the freed-up banks dived into the market, despite signs that it was overheating. The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks’ mortgage lending increased 45 percent. The New York Times applauded the “wave of homebuilding” that “swept over” America; the country was becoming “a nation of home owners.” The 1930 census would later reveal a significant elevation in ownership rates, to 47.8 percent of all households.
But beneath the surface were disquieting signs. For as homeownership grew, so did the rate of foreclosures. From just 2 percent of commercial bank mortgages in 1922, they rose to 9 percent in 1926 and to 11 percent in 1927. This happened, of course, just as the stock-market bubble of the late twenties was inflating dangerously, making the federal housing initiative all the more hazardous. Soon after the October 1929 Wall Street crash, the housing market began to collapse, just as in today’s crisis, though the reasons were slightly different: panicked depositors withdrew money from their accounts, prompting bank runs; the banks ran out of capital and stopped making loans; and the mortgage market seized up. Homeowners, who in that era typically had short-term mortgages that required several refinancings before being paid off, suddenly couldn’t find new loans. Defaults exploded—by 1933, some 1,000 homes were foreclosing every day.
The Own Your Own Home campaign had trapped many Americans in mortgages far beyond their reach. New homeowners who had heard throughout the initiative that “the measurement of a man’s patriotism and worth as a citizen” was owning a home, wrote housing policy expert Dorothy Rosenman in 1945, had been “swept up by the same wave of optimism that swept the rest of the nation.” Financial institutions were exposed as well. Their mortgage loans outstanding had more than doubled between the early twenties and 1930—from $9.2 billion to $22.6 billion—one reason that about 750 financial institutions failed in 1930 alone. Construction firms, too, were ensnared, since they had heeded the government’s call and shifted to residential building. Housing starts jumped from about 250,000 new homes a year in the early 1920s to nearly 600,000 after the housing campaign—before slumping more than 80 percent after the crash. Construction jobs fell 70 percent from 1929 to 1933.
You might think that the Own Your Own Home campaign would have taught Washington the danger of trying to force homeownership up. Instead, the feds responded to the crisis with the Home Owners’ Loan Corporation (HOLC), a New Deal bailout program that made government an even bigger player in the housing market. Congress designed the HOLC to buy up troubled mortgages from lenders and then let homeowners refinance the loans with the government on more affordable terms. In theory, this would both aid strapped homeowners and clear bad loans from banks’ books, allowing them to resume mortgage lending.
The HOLC was a massive new federal agency, employing at its height some 20,000 people—appraisers, loan officers, auditors. By 1936, the agency’s total payroll was $26.2 million, the equivalent of $388 million today. The HOLC eventually received 1.9 million applications for mortgages and approved 1 million. Despite the more favorable terms that the HOLC offered, however, about one-fifth of the new mortgages defaulted, a failure rate that would sink a private-sector bank. Many who failed to pay might have been able to, but chose not to work out any arrangement with the government and essentially challenged the feds to kick them out—which officials were reluctant to do in the face of public opposition. HOLC loan officers classified about 65 percent of the defaults as resulting either from borrowers’ “noncooperation” or “obstinate refusal,” according to an analysis by Columbia University economist C. Lowell Harriss. “This type of noncooperation could sometimes be attributed to a desire to obtain free housing . . . an object that, in view of HOLC’s nature, was not difficult to realize,” Harriss wrote.
Ultimately, the HOLC did file more than 200,000 foreclosure actions. And its purchase of bad loans never revived mortgage lending, which stayed flat for the rest of the decade. The nation’s economic fundamentals were so lousy that little demand existed for new home loans.
The Depression-era federal government created many other institutions to fix flaws in the mortgage market: the Federal Home Loan Bank system to provide a stable source of funds for banks; the Federal Housing Administration (FHA) to insure mortgages; the Federal National Mortgage Association (later known as Fannie Mae) to purchase those insured mortgages; and the Federal Savings and Loan Insurance Corporation to prevent future bank runs. These were valuable initiatives, but they meant that by the end of the Great Depression, the U.S. government had become the dominant force in the mortgage market.
Politicians could now use that regulated market to advance their own policy agendas—or their careers. Many housing experts of the time warned against this politicization, anticipating what was to come. Liberal housing advocate Charles Abrams, for example, publicly worried that as the Depression lifted, yet more new government plans to encourage homeownership would lure unsuspecting and unqualified lower-income families into the housing market. In a May 1946 McCall’s article, “Your Dream Home Foreclosed,” Abrams told American housewives that their “dream house will be loaded with booby traps.” The foundation of a stable economic system, Abrams argued, wasn’t a large percentage of homeowning families, as Hoover contended; it was “how sound the ownership is.”
Initially, Abrams’s fear might have seemed without basis. Intent on a postwar project of boosting homeownership, the federal government had passed the GI Bill in 1944, extending a range of benefits to returning veterans—including government-subsidized mortgages. With the feds footing a big part of the bill, the nation’s long-moribund mortgage market came alive, more than doubling in volume between 1945 and 1950. By 1949, more than half of American households owned homes, and 40 percent of the new mortgages were government-subsidized. And with the Housing Act of 1949, Washington made permanent the powerful role in the mortgage market that it had assumed during the Depression.
But as homeownership grew, political pressure to allow riskier loans increased, too—exactly what Abrams had cautioned against. Rising home prices, a result of a booming national economy, soon began to drive some homes out of reach for ordinary Americans, among them veterans returning from peacekeeping duties in Europe and later from fighting in Korea. Under pressure to keep meeting housing demand, the government began loosening its mortgage-lending standards—cutting the size of required down payments, approving loans with higher ratios of payments to income, and extending the terms of mortgages.
By attracting riskier home buyers, these moves provoked a surge in foreclosures on government-backed mortgages. The failure rate on FHA-insured loans spiked fivefold from 1950 to 1960, according to a 1970 National Bureau of Economic Research study, while the failure rate on mortgages made through the Veterans Administration nearly doubled over the same period. By contrast, the foreclosure rate of conventional mortgages barely increased, since many traditional lenders had maintained stricter underwriting standards, which had proved a good predictor of loan quality over the years.
Without waiting to see if postwar prosperity might solve the problem, in 1922 Hoover launched the Own Your Own Home campaign, hailed at the time as unique in the nation’s history. “The home owner has a constructive aim in life,” Hoover said, exhorting Americans to buy property. “He works harder outside his home, he spends his leisure hours more profitably, and he and his family live a finer life and enjoy more of the comforts and cultivating influences of our modern civilization.” Hoover urged “the great lending institutions, the construction industry, the great real estate men . . . to counteract the growing menace” of tenancy. He pressed builders to turn to residential construction and employers to support the cause. Some, like United States Steel and General Motors, agreed to provide parks and other amenities for the new housing developments that proliferated in response to Hoover’s call.
Hoover also called for new rules that would let nationally chartered banks devote a greater share of lending to residential properties. Congress responded in 1927, and the freed-up banks dived into the market, despite signs that it was overheating. The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks’ mortgage lending increased 45 percent. The New York Times applauded the “wave of homebuilding” that “swept over” America; the country was becoming “a nation of home owners.” The 1930 census would later reveal a significant elevation in ownership rates, to 47.8 percent of all households.
But beneath the surface were disquieting signs. For as homeownership grew, so did the rate of foreclosures. From just 2 percent of commercial bank mortgages in 1922, they rose to 9 percent in 1926 and to 11 percent in 1927. This happened, of course, just as the stock-market bubble of the late twenties was inflating dangerously, making the federal housing initiative all the more hazardous. Soon after the October 1929 Wall Street crash, the housing market began to collapse, just as in today’s crisis, though the reasons were slightly different: panicked depositors withdrew money from their accounts, prompting bank runs; the banks ran out of capital and stopped making loans; and the mortgage market seized up. Homeowners, who in that era typically had short-term mortgages that required several refinancings before being paid off, suddenly couldn’t find new loans. Defaults exploded—by 1933, some 1,000 homes were foreclosing every day.
The Own Your Own Home campaign had trapped many Americans in mortgages far beyond their reach. New homeowners who had heard throughout the initiative that “the measurement of a man’s patriotism and worth as a citizen” was owning a home, wrote housing policy expert Dorothy Rosenman in 1945, had been “swept up by the same wave of optimism that swept the rest of the nation.” Financial institutions were exposed as well. Their mortgage loans outstanding had more than doubled between the early twenties and 1930—from $9.2 billion to $22.6 billion—one reason that about 750 financial institutions failed in 1930 alone. Construction firms, too, were ensnared, since they had heeded the government’s call and shifted to residential building. Housing starts jumped from about 250,000 new homes a year in the early 1920s to nearly 600,000 after the housing campaign—before slumping more than 80 percent after the crash. Construction jobs fell 70 percent from 1929 to 1933.
You might think that the Own Your Own Home campaign would have taught Washington the danger of trying to force homeownership up. Instead, the feds responded to the crisis with the Home Owners’ Loan Corporation (HOLC), a New Deal bailout program that made government an even bigger player in the housing market. Congress designed the HOLC to buy up troubled mortgages from lenders and then let homeowners refinance the loans with the government on more affordable terms. In theory, this would both aid strapped homeowners and clear bad loans from banks’ books, allowing them to resume mortgage lending.
The HOLC was a massive new federal agency, employing at its height some 20,000 people—appraisers, loan officers, auditors. By 1936, the agency’s total payroll was $26.2 million, the equivalent of $388 million today. The HOLC eventually received 1.9 million applications for mortgages and approved 1 million. Despite the more favorable terms that the HOLC offered, however, about one-fifth of the new mortgages defaulted, a failure rate that would sink a private-sector bank. Many who failed to pay might have been able to, but chose not to work out any arrangement with the government and essentially challenged the feds to kick them out—which officials were reluctant to do in the face of public opposition. HOLC loan officers classified about 65 percent of the defaults as resulting either from borrowers’ “noncooperation” or “obstinate refusal,” according to an analysis by Columbia University economist C. Lowell Harriss. “This type of noncooperation could sometimes be attributed to a desire to obtain free housing . . . an object that, in view of HOLC’s nature, was not difficult to realize,” Harriss wrote.
Ultimately, the HOLC did file more than 200,000 foreclosure actions. And its purchase of bad loans never revived mortgage lending, which stayed flat for the rest of the decade. The nation’s economic fundamentals were so lousy that little demand existed for new home loans.
The Depression-era federal government created many other institutions to fix flaws in the mortgage market: the Federal Home Loan Bank system to provide a stable source of funds for banks; the Federal Housing Administration (FHA) to insure mortgages; the Federal National Mortgage Association (later known as Fannie Mae) to purchase those insured mortgages; and the Federal Savings and Loan Insurance Corporation to prevent future bank runs. These were valuable initiatives, but they meant that by the end of the Great Depression, the U.S. government had become the dominant force in the mortgage market.
Politicians could now use that regulated market to advance their own policy agendas—or their careers. Many housing experts of the time warned against this politicization, anticipating what was to come. Liberal housing advocate Charles Abrams, for example, publicly worried that as the Depression lifted, yet more new government plans to encourage homeownership would lure unsuspecting and unqualified lower-income families into the housing market. In a May 1946 McCall’s article, “Your Dream Home Foreclosed,” Abrams told American housewives that their “dream house will be loaded with booby traps.” The foundation of a stable economic system, Abrams argued, wasn’t a large percentage of homeowning families, as Hoover contended; it was “how sound the ownership is.”
Initially, Abrams’s fear might have seemed without basis. Intent on a postwar project of boosting homeownership, the federal government had passed the GI Bill in 1944, extending a range of benefits to returning veterans—including government-subsidized mortgages. With the feds footing a big part of the bill, the nation’s long-moribund mortgage market came alive, more than doubling in volume between 1945 and 1950. By 1949, more than half of American households owned homes, and 40 percent of the new mortgages were government-subsidized. And with the Housing Act of 1949, Washington made permanent the powerful role in the mortgage market that it had assumed during the Depression.
But as homeownership grew, political pressure to allow riskier loans increased, too—exactly what Abrams had cautioned against. Rising home prices, a result of a booming national economy, soon began to drive some homes out of reach for ordinary Americans, among them veterans returning from peacekeeping duties in Europe and later from fighting in Korea. Under pressure to keep meeting housing demand, the government began loosening its mortgage-lending standards—cutting the size of required down payments, approving loans with higher ratios of payments to income, and extending the terms of mortgages.
By attracting riskier home buyers, these moves provoked a surge in foreclosures on government-backed mortgages. The failure rate on FHA-insured loans spiked fivefold from 1950 to 1960, according to a 1970 National Bureau of Economic Research study, while the failure rate on mortgages made through the Veterans Administration nearly doubled over the same period. By contrast, the foreclosure rate of conventional mortgages barely increased, since many traditional lenders had maintained stricter underwriting standards, which had proved a good predictor of loan quality over the years.
