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1.2.2.2 The Home Owners’ Loan Act

A year later, in 1933, Congress tried again, passing the Home Owners’ Loan Act (HOLA), which created the Home Owners’ Loan Corporation (HOLC). HOLC used government-backed bonds to purchase and refinance distressed mortgages, often with concessions from the original holder.27 A new mortgage loan granted by HOLC could also be used to pay off other housing-related debts such as delinquent taxes.28 Intended only as an emergency measure, HOLC had a much shorter life than the FHLBanks (which are still operating) but was much more successful at helping distressed homeowners.29

Although HOLC stopped accepting loan applications in 1935,30 it ultimately refinanced more than twenty percent of all nonfarm, owner-occupied home mortgages in the country.31 Even though all the loans HOLC refinanced were originally in distress or from distressed lending institutions, HOLC’s loans had a relatively low default rate of less than twenty percent.32 By the time HOLC was liquidated in 1951 it had even returned a small profit.33 This success is likely attributable to the new loan terms it standardized and its underwriting practices. HOLC received a tremendous number of applications but was only authorized to refinance loans for a limited range of purposes. Many applications were rejected for insufficient income. It is estimated that nearly half of all applications were rejected or withdrawn for various reasons.34

Some of the fundamental aspects of mortgages that are commonplace today began with innovations adopted by HOLC. HOLC was allowed to make loans on one-to-four family dwellings with up to an 80% loan-to-value ratio.35 HOLC loans were also “self-amortizing” loans.36 Initially, interest-only terms were granted for the first three years of a loan. Beginning in 1936, these loans were reamortized as twelve-year fully amortizing loans.37

HOLC also launched a program to modernize and standardize the methods of appraising real estate. This effort included a system of color-coded maps to assess the risk of making loans in different neighborhoods. Green was the least risky category and red the riskiest. Although reliable appraisals were a necessary component of safe lending practices, implementation of this innovation was tinged with blatant racism. As a result, predominantly African-American neighborhoods were often given the lowest rating, a practice that became known as “redlining.”38

Another legacy of the Home Owners’ Loan Act is the Federal Savings and Loan Association charter (federal savings and loans). Although state-chartered savings and loans existed long before the Act,39 HOLA authorized the Federal Home Loan Bank Board to issue a federal savings and loan charter.40 Federal savings and loans, also known as “thrifts” were intended to restore an area of the banking sector that had been crucial to mortgage lending before the Depression but which had been badly hit by unsafe banking practices.41 Supervision of federal savings and loans was eventually transferred to the Office of Thrift Supervision and, more recently, the Office of the Comptroller of the Currency (OCC).

Footnotes

  • 27 {27} Richard K. Green & Susan M. Wachter, The American Mortgage in Historical and International Context, J. Econ. Perspectives 19, 95 (2005). See generally C. Lowell Harriss, History and Policies of the Home Owners’ Loan Corporation (1951), available at www.nber.org; Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 8 (2008).

  • 28 {28} Fred Wright, Commentary: The Effect of New Deal Real Estate Residential Finance and Foreclosure Policies Made in Response to the Real Estate Conditions of the Great Depression, 57 Ala. L. Rev. 231, 242 (2005).

  • 29 {29} See generally Louis Hyman, Debtor Nation: The History of America in Red Ink 49–50 (2011) (brief history of Home Owner’s Loan Corp.).

  • 30 {30} Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 21 (2008).

  • 31 {31} Id. at 22 (based on those with mortgages in 1933).

  • 32 {32} David C. Wheelock, Fed. Reserve Bank of St. Louis, Working Paper No. 2008-038A, Government Response to Home Mortgage Distress: Lessons from the Great Depression 18 (Oct. 2008), available at http://research.stlouisfed.org.

  • 33 {33} Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 23 (2008).

  • 34 {34} C. Lowell Harriss, History and Policies of the Home Owners’ Loan Corporation 23–25 (1951), available at www.nber.org (analyzing rejected applications).

  • 35 {35} Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 8 (2008).

  • 36 {36} David C. Wheelock, Fed. Reserve Bank of St. Louis, Working Paper No. 2008-038A, Government Response to Home Mortgage Distress: Lessons from the Great Depression 13 n.18 (Oct. 2008), available at http://research.stlouisfed.org (citing Fourth Annual Report of the Federal Home Loan Bank Board, 1936, at 30).

  • 37 {37} Id.

  • 38 {38} Joshua L. Farrell, The FHA’s Origins: How Its Valuation Method Fostered Racial Segregation and Suburban Sprawl, 11 J. Affordable Hous. & Cmty. Dev. L. 374, 379–381 (2002). See generally National Consumer Law Center, Credit Discrimination Ch. 7 (7th ed. 2018), updated at www.nclc.org/library (discussing redlining).

  • 39 {39} See generally Lucia J. Mandarino, Too Many Consonants and Not Enough Consonance: The Development of the S & L Regulatory Framework, 59 Fordham L. Rev. S263 (1991).

  • 40 {40} Home Owners’ Loan Act of 1933, ch. 64, § 5(a), 48 Stat. 128, 132.

  • 41 {41} See Lucia J. Mandarino, Too Many Consonants and Not Enough Consonance: The Development of the S & L Regulatory Framework, 59 Fordham L. Rev. S263, S267 (1991).