by Sara -- a reconstruction
Sadly, the last version of this disappeared into Typepad Heaven.
Way back when I was teaching, I used to give students zerox copies of the forclosure and bank sale notices from the local papers from the early 1930's, and send them out to map and describe what they could actually see as the indications (in an almost anthropological sense) about the impact of the Great Depression of the late 20's and early 30's. What I wanted them to comprehend was less the arguments about what was done about those times, but more about what really went wrong, and ultimately how things were fixed. In essence, I wanted them to have good pictures in their heads as we evaluated what FDR actually did, and the results, and how we should evaluate those results.
Virtually every city in the US has an architectual line between late 1920's domestic construction, and what was built in the late 1930's. Most of the lines are mixed constructions -- you will find 2 story houses with gables and creative lines, mixed in with small, well-built, what we today call starter homes, single story, cape cod or ranch styles, rather simple in design. This is where the speculative builders of the 20's left lots in between their offerings, and then in the late 30's, with land released by the banks, those who were following the modest income and credit codes of FDR's FHA Mortgage program, built the next generation of houses. Between the houses of the 20's, and the late 30's is a revolution in Housing Finance as well as ultimately, a considerable cause of the Great Depression.
Prior to the Depression, the majority of homes were purchased on a short term note. You got a note for 5 years, with a balloon payment at the end, and then one negotiated with the bank for a new note covering the balloon. Of course the rate of interest would be adjusted with the new note. But what happened in the 1920's, at a time when commercial and investment banking were not seperate, was that Banks moved assets into the attractive stock market which was zooming, and then, after 1929, when they went bust in the market, the liquid cash available to re-finance the balloons simply disappeared, and the Banks took back the housing where owners could not meet the balloon or had cash to cover. It was not at all unusual after 1929 for Banks to repossess homes that were nearly 2/3rds paid up, with all owner-equity being lost. So families doubled up, tripled up, and tried to keep one note paid up. None the less the Banks, repossessing acres of property, mostly failed by the dawn of the FDR Administeration. As an example, the Bank of Akron President Wendell Willkie, eventually, after reorganization, paid .07 cents on the dollar for savings accounts when it became Second National.
The New Deal contained three elements of a solution to this problem. First, the division of Banking into two segments, Commercial and Investment, with only small accounts in the commercial segment insured. In addition, the Savings and Loan segment was created, which advantaged small savers with insured accounts, and a small advantage in savings interest rates, but a clear restriction on lending -- limited to local housing that met FHA standards.
What FHA offered was pretty simple, an inspection system that validated whether the construction of a house met all codes, local, and their own, and insurance to the lender if buyers met credit standards. FHA had a cap on the amount of loans, which was what forced the change in design from the gargoyles of 20's style, to the cape cod or ranch design of the late 30's. Porches, sun and front were eliminated, Entry Halls disappeared, rooms got downsized, and kitchens became streamlined with the efficent work triangle, but became much smaller. Compared with the 1920's nothing anticipated having household help.
But financially, these new houses, and all that came after them with VA and FHA insured mortgages, offered relatively low down payments, and 20 year or later 30 year mortgages at a fixed rate. Over time the cap on loans was raised to accomodate inflation and some additional expectations in what was a basic house, but until the late 1970's the early 1930's reforms held. Local savings converted into local mortgages, with the lender insured.
In his second Inaguaral Address, FDR's famous words were about one third of this nation being Ill Housed, Ill Clothed and Ill Fed. FHA which was on the books, but had not yet kicked in, began to deal with the housing problem on the margins. That's what those older "Starter Homes" really represent that I taught my students to find and mark on maps as an indication of the impact of the Great Depression. But what made that recovery possible was not white lightening or political rhetoric, it was something we hate to discuss -- pure and simple regulation of the banking and financial sectors of the economy.
While FDR died in early 45, and Truman retained all his regulatory policy well into the 50's, and Eisenhower did not change much, nor did Kennedy or LBJ, it began to change with Nixon, with moving up the cap on FHA loans beyond the rate of inflation, and then following the Carter inflation, the regulation of Savings and Loans was eliminated, leading to the crash of these institutions in the late 1980's. Without understanding cause, or the reason for these plain jane savings organizations in sustaining middle and working class home ownership -- Congress just bailed out the lenders who had the wit to reorganize, and let it go at that. Essentially they financed the next bump in housing inflation, whether it be in inflated prices for existing homes, speculation in lots for tear-downs in good areas, or McMansion housing far from jobs and culture in the exurbs, that requires vast investment in infrastructure on the part of existing home owners and the states. Essentially we are back to 1928 what with ARM Mortgage arrangements (like the old Balloons) that can be massively increased without any relationship to wages or salary or the economy, and the "right" of the financial institutions (probably foreign speculators in our Real Estate Market) to again foreclose acres and acres of housing.
I don't know that Obama has said anything at all about this -- Hillary wants a 90 day moritorium on forclosures. Neither discuss re-regulation of the Finanial Institutions so as to protect capital dedicated to working and middle class home ownership, which is what will be necessary. FDR did it by inventing FHA Insurance (good home and good credit was insured) and by banking regulation that isolated small private and insured savings for the home ownership market. What worked is his legacy well into the late 1970's.