On June 28, 1934, Franklin Delano Roosevelt signed into law the National Housing Act (NHA) of 1934. Hugh Potter, president of the National Association of Real Estate Boards (NAREB) called it "the most fundamental legislation … ever enacted affecting real estate and home ownership." While federal intervention in housing had begun in 1932 under the supposedly laissez-faire Hoover, Potter’s assessment was correct in the sense that the act broke new ground in terms of the range of public-private collaboration — and the unintended destructive consequences of such.
Let’s get the boring housekeeping facts out of the way first: NHA 1934 created the Federal Housing Administration (FHA), which insured private lenders against losses on loans; made loans to lenders; "insured" lender mortgages meeting certain criteria (including much longer loans up to 20 years in length, periodic payments by a borrower "not in excess of his reasonable ability to pay," and interest ceilings); established national mortgage associations that purchased and sold mortgages and issued securities funding such activity; and created the Federal Savings and Loan Insurance Corporation (FSLIC), which insured savings and loan (S&L) deposits. (Recall that FSLIC — pronounced Fizz’-lick in the industry — after repeated bailouts, fizzled into insolvency for the last time before being abolished in 1989.)
The insuring of much longer mortgage loans is key here. In 1930, about 33% of American households owned their own homes and by 1990 that figure had risen to about 67%. The typical mortgage was 5 years in length ending in a balloon payment (principal plus interest). Even though these loans were usually renewed for another 5-year term and were a better reflection of natural scarcity, the system still drew accusations of favoring the upper middle class and the wealthy. The government solution, beginning with NHA 1934, was 20- and 30-year fixed-interest-rate mortgages repaid in small amounts over time to greatly boost house affordability.
This writer, who studied the private-interest dynamics of the time in graduate work, found little evidence, to his surprise, that the class-based criticism of the old mortgage system came predominately from progressives. All the evidence examined clearly revealed progressives desiring more state intervention in terms of housing for the poor, but none asserting that the only suitable dwellings for the poor and lower middle classes were detached houses and some sort of government-given right of affordability to such. (Of course today’s progressives in the Obama administration and the Heather Booths of groups such as ACORN are a different matter. Some of them certainly do assert beliefs bearing some resemblance to the latter.)
The most powerful interests pushing the bill were the usual selectively free-market Republican-leaning bankers, realtors, builders, building-materials manufacturers, and even some architects. One of the most powerful interests at the time was the National Association of Real Estate Boards (NAREB). Leonard Freedman wrote that
these antigovernmental crusades [waged by NAREB against public housing] were hypocritical. No industry has received more help from government than the business of housing. NAREB had advocated a federally chartered mortgage discount bank in the 1920s and early 1930s and was strongly supportive of the Federal Housing Administration and other agencies which employed the resources of the federal government to underwrite the credit structure of the housing industry. To the Home Builders, FHA was indispensable. They were also firm believers in the Federal National Mortgage Administration and the VA mortgage program. While the savings and loan leagues had no use for most of these programs, they had promoted and supported the Home Loan Bank in the 1930s, and it became one of their main props.
While the S&L leagues may not have had much use for some federal programs, the S&L industry would eventually come to be destroyed by the replacement of the 5-year mortgage with the artificial 20-year amortized mortgage, plus regulatory and tax incentives that encouraged S&Ls to load over 80% of their asset portfolios with the new longer-term mortgages.
It is amazing how long the system remained stable before calamity struck. In legend at least, from the end of World War II to about the mid-1960s, the sleepy and idyllic world of the S&L executive conformed to the rule of 3-6-3: pay your depositors 3%, earn 6% on their home loans, and be on the golf course by 3:00 p.m. Even though it was released early during this period, the 1946 movie It’s a Wonderful Life and its beloved protagonist George Bailey (Jimmy Stewart), who operated an S&L in the fictional Bedford Falls, propagates this wholesome apple-pie, church-steeple, red-white-and-blue small-town narrative. While there could have been at least a little more than a grain of truth to this story, Martin Mayer reveals the part that resembles Shirley Jackson’s The Lottery:
[d]espite its lovely reputation … the old fashioned S&L was a nest of conflicting interests that squawked for sustenance from the customers’ deals. On its board were the builder, the appraiser, the real estate broker, the lawyer, the title insurance company, and the casualty insurance company. (Also the accountant: One mutual S&L in Ohio that lost virtually all of its depositors’ money was audited by an accountant who sat on the board, and nobody thought there was anything wrong with that.) Plus there was somebody from the dominant political party and from one of the churches. Many little mouths to feed. It is not unfair to say that nobody controlled what this board did.
The beginning of the end came in about 1965. The rise in interest rates in the two decades after World War II posed little threat to S&Ls. The interest rate on 10-year T-bonds was 2.8% in 1953 and 4% by 1963. The yield curve remained normal throughout this period (i.e., short-term rates were lower than long-term rates). The years between 1965 and 1982 were a different story. By 1982, the rate on 10-year T-bonds was 13.9% and, even worse for S&Ls, the rate on 1-year T-bills was 14%. Not only had rates risen dramatically; the yield curve had inverted as well. The Fed had struck again. For S&Ls, the rule of 3-6-3 had turned into 8-6-0, quickly sinking them into heavier and heavier losses.
