Many borrowers were unable to meet mortgage payments resulting in a wave of foreclosures and homelessness. The Home Owners Loan Act of 1933 and the Home Owners' Loan Corporation Act was passed by Congress on June 13, 1933 and created the Federal Home Loan Bank Board (FHLBB). The FHLBB was directed to establish a new federal agency, the Home Owners Loan Corporation (HOLC) to provide emergency relief to lower mortgages, to help stabilize real estate that had depreciated, to stop foreclosures and provide relief for troubled mortgage lenders.
Facts about Home Owners Loan Corporation
The Home Owners’ Loan Corporation (HOLC) operated by purchasing mortgages from private lenders and issuing new mortgages to the borrowers.The HOLC provided relief by offering lenient terms for HOLC mortgages and the reduction of the principal debt owed.
The HOLC granted long-term mortgage loans to nearly 1 million homeowners who were facing loss of their property.Background history: Prior to the Great Depression mortgage loans typically required high down payments, typically 35% or more, and had repayment terms of between 5 to 10 years. A large "balloon" payment was made at the end of the loan.
Background history: As the economic crisis deepened and unemployment soared homeowners were increasingly unable to meet the balloon payment, had to either refinance the loan or face foreclosure. A middle-class house worth $5,000 in 1926 was worth only $3,300 in 1932.Background history: The number of mortgages had dropped from 5,778 in 1928 to just 864 in 1933 and the average value of homes fell between 30% - 40%. Foreclosures jumped from 150,000 in 1930 to 250,000 in 1932.
Background history: Many banks had failed, dragging homeowners down with them. To meet their own debts, banks had called in "balloon" payments and liquidated the mortgages. With banks needing liquid assets (an asset that can be converted into cash quickly) and no home insurance to protect the owners, the mortgage industry was in chaosThe June 1933 Home Owners Loan Act authorized $200 million to set up the Home Owners Loan Corporation (HOLC) with authority to issue $2 billion in tax-exempt bonds.
The money raised in tax-exempt bonds enabled the HOLC to save endangered mortgages by offering financing up to 80% of assessed value, to a maximum of $14,000.The HOLC offered money at 5%, allowed up to twenty-five years for repayment and provided insurance for its loans through the Federal Housing Authority and the Federal Savings and Loan Insurance Corporation
Instead of a short-term, interest-only loan, the HOLC loans would be fully amortizing over 15 years, meaning that when the last payment was made, the debt was extinguished and the borrower owed nothing further to the bank and owned the home free of any debt, ending the practice of "balloon" paymentsThe HOLC rejected over 800,000 mortgage applications because the household was not in dire need or because the borrower was not likely to repay the loan
The HOLC ceased its lending activities in June, 1936, by the terms of the Home Owners' Loan Act.The HOLC helped to stabilize and rationalize the mortgage process and mortgage loans became more affordable for many more Americans
|US American History|
|1929-1945: Depression & WW2|