For middle-class America the Home Owners' Loan Corporation, founded in 1933, was a crucial New Deal benefit. Americans had always held to an ideal of individualism that included a home of one's own; but in the years leading up to the New Deal, only four out of every ten Americans managed to attain that status. A key reason for the majority's failure was the restrictive mortgage system. Usually, borrowers were required to make down payments averaging around 35 percent for loans lasting only five to ten years at interest of up to 8 percent. At the end of that brief loan period, mortgage holders had to hope they could refinance or else come up with the remaining cost of the property. The minority of home buyers who could manage such terms assumed the additional risk of dealing with local institutions that did not offer loan mortgage insurance and were often dangerously under-funded, especially in areas outside the main cities.
This shaky system was unable to withstand the shock of the 1929 economic collapse. The number of mortgages issued nationwide dropped from 5,778 in 1928 to a mere 864 in 1933, and many banks went under, dragging homeowners down with them. Faced with this dire situation, the New Deal had a basic choice. It could follow the urging of the Federal Reserve Board chairman, Marriner Eccles, echoing the most influential economist of the age, John Maynard Keynes, that money should be pumped into the lagging building trades in order to gain both work for the unemployed and badly needed public housing. Or it could follow the lead of Herbert Hoover, who in 1932 had created the Federal Home Loan Bank to provide federal funding for lenders in the private housing market. Franklin Roosevelt, when he succeeded Hoover as president, inclined toward the latter course, but with government oversight and a focus on hard-pressed homeowners, rather than on the institutions controlling their mortgages.
In June 1933, the Home Owners' Loan Act, following the president's lead, sailed through Congress. The law authorized $200 million to set up the Home Owners' Loan Corporation (HOLC) with authority to issue $2 billion in tax-exempt bonds. The money raised would enable the HOLC to rescue imperiled mortgages by offering financing up to 80 percent of assessed value, to a maximum of $14,000. There followed a rush to file applications in 1934 by those holding 40 percent of all mortgaged properties, of which half with lowest risk were accepted. As intended, the main beneficiaries were homeowners at the lower end of the middle class with incomes in the $50 to $150 monthly range, persons who in the private market would have lost their homes.
The HOLC permanently changed the prevailing mortgage system. It offered money at 5 percent, provided insurance for its loans through the Federal Housing Authority and the Federal Savings and Loan Insurance Corporation, and allowed up to twenty-five years for repayment. To reach far-flung clients the HOLC dispersed into regional centers. Every loan situation was handled individually, including personal visits to prevent default. Given wide discretion to act, agents improved the chances clients would meet their obligations by helping them find work, collect insurance claims and pensions, attract tenants for rental space, qualify for public assistance, and even locate foster children to take in for a fee. The success of this sympathetic outreach was best demonstrated by the fact that the foreclosure rate for HOLC's risky mortgages was no greater than that for much safer mortgages accepted by banks and insurance companies.
HOLC policies favored single-family homes outside the central cities, thus setting in motion the rapid growth of suburbs after World War II. The suburban ideal of privately financed housing also inclined toward segregation on the grounds that racially homogeneous areas were most stable and thus posed the lowest credit risk. That bias, shared by private sector bankers and realtors, excluded most minorities from much consideration. The HOLC Loan Experience Card specified race and immigrant status as a consideration, and the records of the agency showed that from 1933 to 1936, the period it was authorized to issue loans, 44 percent of its help went to areas designated "native white," 42 percent to "native white and foreign," and 1 percent to Negro. Typifying the plight of the cities, the half of Detroit where blacks lived was excluded outright, as was a third of Chicago.
Despite its shortcomings, New Deal innovation helped account for home ownership rising from 40 percent of the population in the prosperous 1920s to almost 70 percent by the mid-1990s, with vast new tracts outside the cities of the Northeast and in new, sprawling urban areas in the South and Southwest setting the most conspicuous example. The historian David Kennedy did not exaggerate in claiming that the HOLC and the housing legislation it set in motion "revolutionized the way Americans lived."
Bibliography
Gelfand, Mark I. A Nation of Cities: The Federal Government and Urban America, 1933–1965. New York: Oxford University Press, 1975.
Harriss, C. Lowell. History and Policies of the Home Owners' Loan Corporation. New York: National Bureau of Economic Re-search, 1951.
Jackson, Kenneth T. Crabgrass Frontier: The Suburbanization of the United States. New York: Oxford University Press, 1985.
