Financial History Issue 113 (Spring 2015) - Page 13

Collection of the Museum of American Finance EDUCATORS’ PERSPECTIVE Oklahoma City Building and Loan Association stock certificate, 1919. in the United States, but by 1933 about 5,000 had been forced to close. By 1941 more than half of the B&Ls operating in 1929 had failed. As things grew worse, the federal government intervened in an attempt to relieve the crisis. Economist Alan Blinder, along with Green and Wachter, contend that the fixed-rate, self-amortizing, long-term mortgage was invented by the Home Owners’ Loan Corporation (HOLC), one of the alphabet agencies created by the Roosevelt administration to deal with the mortgage crisis. The HOLC was established in 1933 and charged with buying the mortgages of those who were “in hard straits through no fault of their own.” It was authorized to issue government guaranteed bonds, use the proceeds to purchase mortgages that were in default, and refinance them on more generous terms. Lending institutions were generally happy to get these troubled loans off their books, while borrowers were afforded more reasonable terms on HOLC loans. In the three years after its inception, the HOLC converted about one million short-term, interest-only loans into fixed-rate, 15-year fully-amortized mortgages. The book Well Worth Saving: How the New Deal Safeguarded Home Ownership by Price Fishback, Jonathan Rose and Kenneth Snowden begins with the story of a couple from Coeur D’Alene, Idaho, who purchased their home in 1929 for $3,000. A down payment of $1,750 was required, and the remaining $1,250 was borrowed from the Citizens Savings and Loan Society in Spokane, Washington. The husband was a truck driver who made over $2,000 a year during the 1920s, but in the early 1930s his wife became terminally ill. Faced with mounting medical bills and a severely reduced income because of the Depression, the couple stopped making payments on their mortgage in late 1931. Two and a half years later, Citizens Savings was on the verge of foreclosing when the now-widowed husband applied for a loan from the HOLC. In spite of the fact that the home was now worth only $2,500, the HOLC purchased the loan for the full value that was owed to Citizens Savings, including the interest payments that had not been made over the past two and a half years. The HOLC then consolidated the debts of the homeowner and reissued a loan with a below market interest rate of 5%. The loan principal amount also included money for payment of back taxes and much needed home repairs. With low monthly » continued on page 36  |  Spring 2015  |  FINANCIAL HISTORY  11