Well Worth Saving: How the New Deal Safeguarded Home Ownership

Price Fishback is the Thomas R. Brown Professor of Economics at the University of Arizona and a research associate of the National Bureau of Economic Research. He is the author or editor of several books, including A Prelude to the Welfare State and Government and the American Economy, both also published by the University of Chicago Press. Jonathan Rose is an economist with the Federal Reserve Board of Governors. Kenneth Snowden is associate professor of economic history at the University of North Carolina at Greensboro and a research associate of the National Bureau of Economic Research.

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2013 by The University of Chicago

All rights reserved. Published 2013.

Printed in the United States of America

22 21 20 19 18 17 16 15 14 13      1 2 3 4 5

ISBN-13: 978-0-226-08244-8 (cloth)

ISBN-13: 978-0-226-08258-5 (e-book)

DOI: 10.7208/chicago/9780226082585.001.0001

Library of Congress Cataloging-in-Publication Data

Fishback, Price Van Meter.

Well worth saving: how the New Deal safeguarded home ownership / Price Fishback, Jonathan Rose, and Kenneth Snowden.

pages; cm. — (Markets and governments in economic history)

Includes bibliographical references and index.

ISBN 978-0-226-08244-8 (cloth: alkaline paper) — ISBN 978-0-226-08258-5 (e-book)

1. Home Owners’ Loan Corporation—History.   2. Mortgage loans—United States—History—20th century.   3. Home ownership—United States—History—20th century.   4. New Deal, 1933–1939.   I. Rose, Jonathan Derek.   II. Snowden, Kenneth A.   III. Title.   IV. Series: Markets and governments in economic history.

HG3729.U5F57 2013

332.7'220973—dc23

2013015699

This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

Well Worth Saving

HOW THE NEW DEAL SAFEGUARDED HOME OWNERSHIP

PRICE FISHBACK, JONATHAN ROSE, AND KENNETH SNOWDEN

THE UNIVERSITY OF CHICAGO PRESS

Chicago and London

Markets and Governments in Economic History

A SERIES EDITED BY PRICE FISHBACK

Also in the series:

The Charleston Orphan House: Children’s Lives in the First Public Orphanage in America by John Murray

The Institutional Revolution: Measurement and the Economic Emergence of the Modern World by Douglas W. Allen

NBER Series on Long-Term Factors in Economic Development

A National Bureau of Economic Research Series

EDITED BY CLAUDIA GOLDIN

Also in the series:

Robert William Fogel, Enid M. Fogel, Mark Guglielmo, and Nathaniel Grotte Political Arithmetic: Simon Kuznets and the Empirical Tradition in Economics (University of Chicago Press, 2013)

Stanley L. Engerman and Kenneth L. Sokoloff

Economic Development in the Americas since 1500: Endowments and Institutions (Cambridge University Press, 2012)

Roderick Floud, Robert W. Fogel, Bernard Harris, and Sok Chul Hong The Changing Body: Health, Nutrition, and Human Development in the Western World since 1700 (Cambridge University Press, 2011)

NBER Board of Directors: Listed by Affiliation

September 24, 2012

Officers

Kathleen B. Cooper, Chairman

Martin B. Zimmerman, Vice Chairman

James M. Poterba, President and Chief Executive Officer

Robert Mednick, Treasurer

Kelly Horak, Controller and Assistant Corporate Secretary

Alterra Milone, Corporate Secretary

Gerardine Johnson, Assistant Corporate Secretary

Directors at Large

Peter C. Aldrich

Elizabeth E. Bailey

John H. Biggs

John S. Clarkeson

Don R. Conlan

Kathleen B. Cooper

Charles H. Dallara

George C. Eads

Jessica P. Einhorn

Mohamed El-Erian

Linda Ewing

Jacob A. Frenkel

Judith M. Gueron

Robert S. Hamada

Peter Blair Henry

Karen N. Horn

John Lipsky

Laurence H. Meyer

Michael H. Moskow

Alicia H. Munnell

Robert T. Parry

James M. Poterba

John S. Reed

Marina v. N. Whitman

Martin B. Zimmerman

Directors by University Appointment

George Akerlof, California, Berkeley

Jagdish Bhagwati, Columbia

Timothy Bresnahan, Stanford

Alan V. Deardorff, Michigan

Ray C. Fair, Yale

Franklin Fisher, Massachusetts Institute of Technology

Edward Foster, Minnesota

John P. Gould, Chicago

Mark Grinblatt, California, Los Angeles

Bruce Hansen, Wisconsin–Madison

Marjorie B. McElroy, Duke

Joel Mokyr, Northwestern

Andrew Postlewaite, Pennsylvania

Uwe E. Reinhardt, Princeton

David B. Yoffie, Harvard

Directors by Appointment of Other Organizations

Bart van Ark, The Conference Board

Christopher Carroll, American Statistical Association

Jean-Paul Chavas, Agricultural and Applied Economics Association

Martin Gruber, American Finance Association

Ellen L. Hughes-Cromwick, National Association for Business Economics

Thea Lee, American Federation of Labor and Congress of Industrial Organizations

William W. Lewis, Committee for Economic Development

Robert Mednick, American Institute of Certified Public Accountants

Alan L. Olmstead, Economic History Association

Peter L. Rousseau, American Economic Association

Gregor W. Smith, Canadian Economics Association

Directors Emeriti

Glen G. Cain

Carl F. Christ

George Hatsopoulos

Saul H. Hymans

Lawrence R. Klein

Rudolph A. Oswald

Peter G. Peterson

Nathan Rosenberg

John J. Siegfried

Craig Swan

Relation of the Directors to the Work and Publications of the National Bureau of Economic Research

1. The object of the NBER is to ascertain and present to the economics profession, and to the public more generally, important economic facts and their interpretation in a scientific manner without policy recommendations. The Board of Directors is charged with the responsibility of ensuring that the work of the NBER is carried on in strict conformity with this object.

2. The President shall establish an internal review process to ensure that book manuscripts proposed for publication DO NOT contain policy recommendations. This shall apply both to the proceedings of conferences and to manuscripts by a single author or by one or more co-authors but shall not apply to authors of comments at NBER conferences who are not NBER affiliates.

3. No book manuscript reporting research shall be published by the NBER until the President has sent to each member of the Board a notice that a manuscript is recommended for publication and that in the President’s opinion it is suitable for publication in accordance with the above principles of the NBER. Such notification will include a table of contents and an abstract or summary of the manuscript’s content, a list of contributors if applicable, and a response form for use by Directors who desire a copy of the manuscript for review. Each manuscript shall contain a summary drawing attention to the nature and treatment of the problem studied and the main conclusions reached.

4. No volume shall be published until forty-five days have elapsed from the above notification of intention to publish it. During this period a copy shall be sent to any Director requesting it, and if any Director objects to publication on the grounds that the manuscript contains policy recommendations, the objection will be presented to the author(s) or editor(s). In case of dispute, all members of the Board shall be notified, and the President shall appoint an ad hoc committee of the Board to decide the matter; thirty days additional shall be granted for this purpose.

5. The President shall present annually to the Board a report describing the internal manuscript review process, any objections made by Directors before publication or by anyone after publication, any disputes about such matters, and how they were handled.

6. Publications of the NBER issued for informational purposes concerning the work of the Bureau, or issued to inform the public of the activities at the Bureau, including but not limited to the NBER Digest and Reporter, shall be consistent with the object stated in paragraph 1. They shall contain a specific disclaimer noting that they have not passed through the review procedures required in this resolution. The Executive Committee of the Board is charged with the review of all such publications from time to time.

7. NBER working papers and manuscripts distributed on the Bureau’s web site are not deemed to be publications for the purpose of this resolution, but they shall be consistent with the object stated in paragraph 1. Working papers shall contain a specific disclaimer noting that they have not passed through the review procedures required in this resolution. The NBER’s web site shall contain a similar disclaimer. The President shall establish an internal review process to ensure that the working papers and the web site do not contain policy recommendations, and shall report annually to the Board on this process and any concerns raised in connection with it.

8. Unless otherwise determined by the Board or exempted by the terms of paragraphs 6 and 7, a copy of this resolution shall be printed in each NBER publication as described in paragraph 2 above.

As a further and urgently necessary step in the program to promote economic recovery, I ask the Congress for legislation to protect small home owners from foreclosure and to relieve them of a portion of the burden of excessive interest and principal payments incurred during the period of higher values and higher earnings power.

Implicit in the legislation which I am suggesting to you is a declaration of national policy. This policy is that the broad interests of the nation require that special safeguards should be thrown around home ownership as a guaranty of social and economic stability, and that to protect home owners from inequitable enforced liquidation, in a time of general distress, is a proper concern of the Government.

The legislation I propose follows the general lines of the farm mortgage refinancing bill. The terms are such as to impose the least possible charge upon the national Treasury consistent with the objects sought. It provides machinery through which existing mortgage debts on small homes may be adjusted to a sound basis of values without injustice to investors, at substantially lower interest rates and with provision for postponing both interest and principal payments in cases of extreme need.

The resources to be made available through a bond issue, to be guaranteed as to interest only by the Treasury, will, it is thought, be sufficient to meet the needs of those to whom other methods of financing are not available.

At the same time the plan of settlement will provide a standard which should put an end to present uncertain and chaotic conditions that create fear and despair among both home owners and investors.

Legislation of this character is a subject that demands our most earnest, thoughtful and prompt consideration.

—Message from President Roosevelt to Congress, April 13, 1933

Contents

Preface

Acknowledgments

1. Introduction

2. The Patchwork Mortgage Market in the 1920s

3. The Mortgage Crisis

4. Pressures for Government Action

5. The Economic Rationale for the HOLC

6. An HOLC Primer

7. The Lenders’ Good Deal

8. The Borrowers’ Good Deal

9. Repairing Mortgage and Housing Markets

10. The Cost to Taxpayers and Subsidies to the Housing Market

11. Conclusion

Appendix: Walking through the Analysis of the Impact of the HOLC

Notes

References

Index

Preface

In 2008, the Home Owners’ Loan Corporation (HOLC) was in the news for the first time in half a century. The HOLC was a New Deal program created in 1933 to respond to the Depression-era mortgage crisis, and with the advent of a new crisis in 2007, politicians from all parts of the spectrum believed it to be an informative precedent for new legislation. Barack Obama reviewed the history: Roosevelt purchased a whole bunch of homes. Over time, home values went back up, and in fact [the] government made a profit. Hillary Clinton stated, I’ve proposed a new Home Owners’ Loan Corporation, and John McCain suggested something similar: I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes. Economists agreed that policy makers should learn from the HOLC’s history. Robert Shiller, of Yale University, noted that [i]n the short run, a new institution modeled on the old Home Owners’ Loan Corporation of the 1930s would go far in helping to shore up confidence in the mortgage market. Alan Blinder, of Princeton University, called for a revival: It is said that history never repeats itself. But sometimes there are sequels. Now is the time to re-establish the Incredible HOLC.¹

Remarkably, seven decades after the HOLC’s creation, there were no readily available answers to some fundamental questions about the program. To those pondering the HOLC in 2008, it was not immediately apparent how the HOLC had successfully obtained such a large size—having refinanced roughly one-fifth of the nation’s nonfarm home mortgages—nor was it clear exactly how the HOLC interacted with borrowers and lenders. There were deeper questions as well, such as whether the HOLC contributed to the recovery of housing and mortgage markets. And there was a claim that the HOLC had turned a profit, repeated every time the HOLC was discussed (or so it seemed). Moreover, much was unknown about the background to the HOLC, including the broader history of real estate and mortgage finance between the two world wars.²

This monograph provides the first modern, comprehensive analysis of the HOLC that gathers in one place all that we and others have learned about the HOLC over the past several years. In this effort, the authors owe a large intellectual debt to C. Lowell Harriss, whose 1951 study, History and Policies of the Home Owners’ Loan Corporation, is an invaluable documentary guide to HOLC operations and laid the foundation for this book. Our work does not supplant Harriss’s but rather adds to it with analysis of important unanswered questions about the HOLC, such as those raised in the previous paragraph.

Over the past several years, the three of us (through independent research projects) have assembled new databases from printed, mimeographed, and microfilmed HOLC records and employed modern statistical and theoretical tools to investigate important unanswered questions about the HOLC. Rose, for example, uncovered the sample of loans that had been collected by Harriss, which had been microfilmed and placed in a box stored on the Upper East Side of Manhattan for decades. In an analysis outlined in chapter 7, Rose used the data to describe how the HOLC often accommodated lenders when balancing the need to secure the participation of those lenders with the desire to give principal reductions to borrowers. Two groups of researchers—Fishback with Alfonso Flores-Lagunes, William Horrace, Shawn Kantor, and Jaret Treber; and Snowden with Charles Courtemanche—used more standard policy evaluation tools to assess the HOLC’s impact during the mid- and late 1930s on home ownership, housing prices, and new home construction. Independently, both groups of researchers assembled data sets covering HOLC activity in every county of the United States and, through analyses that are described in chapter 9, reached similar conclusions. The HOLC improved prices and home ownership, but not enough to completely reverse the damage to both that occurred during the mortgage crisis.

These three research projects ended in articles published in academically oriented economic journals. After completing these independent studies, we worried that leaving our published research findings in academic journals would make that knowledge inaccessible to a general audience. We also realized that we had learned much more about the HOLC and its era than we had been able to include in those articles, and did not want those findings to be lost, as knowledge about the HOLC had been lost in the past. While two chapters in this book contain versions of our prior work, the rest represent additional analysis that pulls together a wide variety of sources, including dusty volumes and government reports published in the 1930s, 1940s, and 1950s; contemporary press accounts of the HOLC; and the documentary history of the program as it was recorded in correspondence, operations manuals, and other mimeographed, carbon-copied, handwritten, and published documents that are held in the National Archives.

In sum, our published research is summarized in chapters 7 and 9, while the rest of this book covers important aspects of the HOLC and its era that we believe are not well known at this point by anyone except us. We begin in chapter 1 by using the actual stories of several HOLC borrowers to introduce the program and by summarizing our principal results. From there, the book is laid out in four parts.

The first part provides the context for the HOLC. We characterize, in chapter 2, the institutions and contracts that defined mortgage finance in the 1920s, an era with a booming housing market and a corresponding expansion of mortgage debt. As described in chapter 3, the mortgage finance market was in deep crisis by 1933 despite previous attempts to unwind its problems at the state and federal levels over the previous four years. The continued crisis prompted a broad public consensus behind the HOLC Act’s passage, as summarized in chapter 4. This part of the book concludes with chapter 5, which examines the rationale for the HOLC from the public policy perspective that economists use to assess such market interventions.

The second part of the book consists of chapter 6, which is a primer on the HOLC. We hope this will serve as a valuable reference for anyone interested in learning the basic aspects of how the HOLC operated.

The third part of the book analyzes the HOLC as an economic intervention. Chapter 7 details Rose’s work about how the HOLC interacted with lenders. Chapter 8 considers borrowers. That chapter, along with the story of Joshua Clark told in the introduction, describes what it was like to be a home owner with a mortgage loan during the Great Depression, and gives a clear picture of how Americans benefited from assistance by the HOLC. Joshua’s lender said, We are not willing to carry him. That summarizes the era better than any other words we can muster. Chapter 9 synthesizes the work of the two research teams regarding how the HOLC affected mortgage and housing markets over the decade of the 1930s.

The analysis closes in chapter 10 by providing a detailed accounting of the costs of the HOLC to the US Treasury and the nation’s taxpayers. We debunk the popular conception that the HOLC made a profit. Instead, it was likely the source of a small loss to taxpayers, a loss that should be weighed against the benefits it provided to borrowers, lenders, and mortgage and housing markets.

In the book’s conclusion, we discuss what we have learned about the HOLC, and relate the book to the recent mortgage crisis and efforts that have been made to mitigate it. Crises of these sorts are rare events. Each therefore deserves study on its own and for the sake of comparison. The value of history here is not to uncover exact parallels to current events, however, but to clarify how the incentives and behavior of borrowers, lenders, and other economic actors during crises transcend vastly different institutional contexts to shape the impacts and effectiveness of policy. Along the way, the Depression provides us with a still powerful reminder of how things could go so wrong, and the HOLC provides an important alternative view of how policy can address such a crisis.

In writing this book, we have benefited from the support and insights of many colleagues. First and foremost are our co-authors. The research underlying this book benefited tremendously from Snowden’s collaboration with Charles Courtemanche and Fishback’s collaboration with Alfonso Flores-Lagunes, William Horrace, Shawn Kantor, and Jaret Treber. We thank several people for valuable insights after reading early versions of the manuscript, including Claudia Goldin, Joe Elling, two anonymous referees, students in Fishback’s graduate economic history class at the University of Arizona, and Alison and James Rose.

A note on a convention we use throughout the text. Many details from the case files of individual HOLC borrowers are available from documents at the National Archives. We changed the names of any borrowers whose information is taken from these files. For those interested in conducting further research, the citations still lead to the boxes at the archives.

For acknowledgments, sources of research support, and disclosure of the author’s material financial relationships, if any, please see www.nber.org/chapters/c12909.ack.

Finally, a disclaimer: the views expressed here are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System.

Acknowledgments

Price Fishback is deeply indebted to Shawn Kantor, Alfonso Flores-Lagunes, William Horrace, and Jaret Treber for their help as coauthors on some of the work described in the book. They—along with Larry Neal, Joseph Mason, Michael Haines, John Wallis, and Trevor Kollman—provided a great deal of help in obtaining the data used in the book. I have also benefited from the comments of Charles Courtemanche, Daniel Fetter, Claudia Goldin, Gary Gorton, Chris Hanes, Kei Hirano, Joe Jackson, Harry Kelejian, Robert Margo, Kris Mitchener, David Pervin, Jonathan Rose, David Wheelock, Eugene White, and workshop participants at the University of California, Davis, the University of Kentucky, the University of Maryland, the University of Nevada, Las Vegas, the University of