American Nightmare. Randal O'Toole

or somewhere between 80 and 100 percent of the homeowners who were behind on their payments.⁶

      The total value of the requested loans was $6.2 billion, but HOLC had the authority to lend only $3 billion. HOLC rejected almost 870,000 applications; close to 20 percent of the rejections were for “inadequate security,” meaning the house wasn’t worth enough to support the loan. The next most important reason was “lack of distress,” meaning the homebuyers were not really behind in their payments. Poor credit was the reason for fewer than 10 percent of rejections. About 15 percent of applications were withdrawn, either because the applicants realized they didn’t qualify or because they successfully negotiated new terms with their original lender.⁷

      By 1935, the corporation had refinanced slightly more than a million mortgages, or about 20 percent of all nonfarm residential mortgages in the country. The average loan of just over $3,000 was, on average, 69 percent of the appraised value. HOLC tried to be lenient in administering the loans but ended up having to foreclose on or otherwise acquire nearly 195,000 homes. The highest foreclosure rates of more than 40 percent were in Massachusetts and New York; the lowest of 5 to 15 percent were in the West.⁸

      In the end, HOLC helped more than 800,000 families keep their homes. But it isn’t clear that all those families would have lost their homes without government aid. Nonfarm home foreclosures had steadily grown from 68,000 in 1926 to more than 250,000 in 1933, the year HOLC began its operations. Foreclosures then fell to around 230,000 in 1934 and 1935.⁹ But that decline could be partly due to the rise in personal incomes, which had declined from $705 per capita in 1929 to $374 in 1933, then grew to $474 by 1935. Still, it is likely that the number of foreclosures would have been higher without HOLC.

      The Home Owners’ Loan Corporation ceased lending in 1935 and continued to collect mortgage payments until 1951 when it sold its remaining assets and shut down. Moreover, payments from home-buyers and other revenues covered all its costs, including losses on foreclosed properties and interest on bonds sold to finance the loan program, with $14 million left over to provide a tiny profit. Few federal agencies can claim that they helped hundreds of thousands of people, sunsetted as scheduled, and earned a profit besides.

      Meanwhile, Congress passed the Housing Act of 1934 creating the Federal Savings and Loan Insurance Corporation, which insured S&L deposits. This act was necessary for S&Ls to compete for depositors with banks, whose deposits had been insured by the Banking Act of 1933. The law also contributed to the “bureaucratization of thrift,” that is, the transition of S&Ls “from cozy clubs of shareholders” to institutions not much more personalized than commercial banks.¹⁰

      More important, the 1934 Housing Act also created the Federal Housing Administration, which offered to insure home mortgages just as the federal government insured deposits in banks and S&Ls. Like the Home Owners’ Loan Corporation, the FHA chose to emphasize long-term amortizing mortgages with relatively low down payments.

      Congress created the Federal National Mortgage Association, or Fannie Mae, in 1938. Fannie Mae bought (and buys) mortgage loans from banks and other lenders, effectively increasing the amount of money available for loans. This system works because financial institutions must keep funds in reserve to repay depositors and investors when they lend money. If the reserve requirement is 10 percent, for example, an S&L that receives a deposit of $10,000 can lend only $9,000. But if Fannie Mae buys that mortgage from the S&L, the S&L then has another $9,000 it can lend. Thus, instead of providing the funds for just one loan, the initial deposit can generate the funds for several.

      Public Housing

      Government intervention in the housing market was small in the United States compared with other countries. Germany and Britain, for example, each built more than 1 million units of publicly assisted housing in the 1920s; one out of five residents of the Netherlands also lived in such housing.¹¹ American housers, led by a group called the Labor Housing Conference and its executive secretary Catherine Bauer—who had studied but never practiced architecture—looked on these programs with envy.

      Like Edith Abbott, who preceded her as a leader of the housing reform movement, Bauer questioned whether homeownership made sense for working-class families. Her 1934 book Modern Housing argued that 19th-century cities had failed to provide decent housing and that “modern housing,” meaning public housing, could be found only in Europe.¹² But she closed her eyes to the cottages and bungalows that workers built for themselves and then improved, incrementally, over the years between 1900 and 1930. “After 1910,” says historian Joseph Bigott, housers such as Abbott and Bauer “seldom went into the field with open minds to confront the built environment. Instead, they become predictable, relying on old assumptions that showed little respect for the modest gains that altered substantially the character of modern society.”¹³