As part of President Roosevelt's New Deal legislation, Congress passed the Homeowners Loan Act of 1933, which in turn created the Home Owners Loan Corporation (HOLC). This federal agency's main task was to refinance home mortgages that were in default or at risk of foreclosure due to the 1929 crash and the collapse of the housing industry. The loans applied to homes that were non-farm residential properties, did not house more than four families, and were not worth more than $20,000. In order to sell affordable loans to homeowners, the HOLC would buy old mortgages from banks with government bonds that were financed by the Treasury and capital markets. By the HOLC’s final year in 1936, it had provided just over a million new mortgages, had lent out approximately $350 billion ($750 billion today), and by 1934 about one in five mortgages in America were owned by the corporation.
What’s the significance?
Before the HOLC, most mortgage contracts lasted between three and five years and homeowners had high interest rates in addition to paying off the principal. However, HOLC’s implementation of the 15-year amortizing loan led to a new direction for mortgage finance, allowing homeowners to pay off their loans in monthly installments over many years with the principal reduced over time. This would eventually lead to the typical 25- or 30-year mortgage.
While some criticize the HOLC because 20 percent of those who took out loans defaulted, others argue that the agency, temporary and implemented immediately in a crisis, still relieved the suffering of homeowners and the market in a very depressed economy, in which the for-sale market was extremely weak. In addition, the HOLC worked vigorously with borrowers to slow the foreclosure process by carefully appraising and re-appraising properties. In the end, it even ended up turning a small profit, which amounted to a little more than the losses of foreclosures.
There are many progressives today who argue that we need an updated version of the HOLC in order to deal with the millions of foreclosures originating from the recent subprime mortgage crisis. Although the mortgage task force has been created along with the bank settlement, intended to help homeowners at risk of foreclosure and who are underwater on their mortgages, many worry that these actions won’t go far enough.
Who’s talking about it?
Roosevelt Institute Senior Fellow David Woolner argues that our president should model the way FDR dealt with the housing crisis and suggests that we bring back a program like the HOLC...Alan S. Blinder also recommends a new HOLC...Cora Currier calculates just how much the mortgage settlement will actually help homeowners...Ann Carrns explains how to qualify as a homeowner in the mortgage settlement...Gretchen Morgensen is wary of the settlement and how much it will help homeowners in practice...John McCarron reports that the success of settlement depends on whether banks can distribute responsibly.