A Little of the History of Housing in America

During the 1920s and 1930’s, mortgage brokers and bankers were pushing some pretty sketchy home financing deals, 50% LTV / 3 – 5 year maturities – semi-annual payments / Little or no amortization of principal. Second Mortgages with brutal repayment terms and/or massive prepayment penalties or renewal fees. Renewal fees were especially treacherous. Each year (or two or three), the mortgage had to be “renewed” (renegotiated) and homeowners often ended up in foreclosure after their “renewal”

This was the typical scenario: $3,000 Home / 50% LTV = $1,500 Mortgage / 6% for 5 years / No amortization / Semi-Annual Payments of $300.81 or $50.14 per month (3.34% of the mortgage amount)

Then Sears entered the housing market and offered a wide variety of mortgages and terms with annual interest rates ranging from 6% - 7% and up to 15 year amortizations (if your home was built over a basement) at 75% LTV. The 25% included the lot and sweat equity. A 2½% down payment was due with the order. Monthly payments began four months after the house shipped. The loan application contained three financial questions: 1) How much cash do you have to put in the deal? 2) How much can you pay each month? 3) What is your vocation?

This was a typical scenario: $3000 Home / 75% LTV = $2,250 Mortgage / 6% for 15 years / Full amortization / Monthly Payments Payment = $18.99 per month (0.8% of the mortgage amount)

To add a little perspective, in 1914, Ford Motor Company established a minimum wage of $5.00 a day in its factories – about $1,300 a year or $100 a month. In the 1920's, skilled laborers like carpenters could earn as much as $8.00 a day - about $2,000 a year or $170 a month.

The Chicago Tribune Jan 22, 1931, reported housing starts for 1930 down 53%. The Depression caused new home starts to fall by 90 percent from 1925 to 1933 and triggered the greatest deflation ever experienced in this country. Sears was forced to liquidate $11 million of their home mortgages in 1934. Funds available for mortgage loans began to disappear as unemployed people started drawing on their savings accounts to replace lost income. Banks and Savings and Loans tried to generate cash by refusing to refinance mortgage loans coming due. Home values plummeted as desperate borrowers tried to salvage something to sell out. In a crashing market, buyers were impossible to find

The federal government eventually stepped in to save the home-building industry. The government created the Federal Home Loan Bank (FHLB) System (1932), the Federal Deposit Insurance Corporation (FDIC) (1933), the Federal Savings and Loan Insurance Corporation (FSLIC) (1934), the Home Owners Loan Corporation (HOLC) System (1934), the Federal Housing Administrations (FHA) (1934), the Federal National Mortgage Association (Fannie Mae) (1938), and the Veterans Administration Home Loan Guarantee Program (1944).

That crisis changed the home building and lending industry in the United States and led to the formation of the Urban Land Institute, the National Association of Realtors, and the National Association of Home Builders.

It also established a precedent for government intervention.

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