Housing Act of 1934

The U.S. Congress passed the National Housing Act of 1934 on June 27, 1934. The most significant piece of federal housing legislation up until that time, it established the Federal Housing Administration (FHA), introduced a system of mutual mortgage insurance, created the Federal Savings and Loan Insurance Corporation (FSLIC), and authorized formation of national mortgage associations. The provisions of this legislation continue to play a major role in the housing and finance sectors of the American economy.

Prior to the 1930s, the federal government rarely intervened in housing matters. Local institutions and conditions generally determined the supply of private dwellings, as well as the methods used to finance them. Widespread economic dislocation following the 1929 stock market crash illustrated the precariousness of these dynamics. Small savings and loan banks, which financed most of the nation's home mortgages by borrowing funds from other fiduciaries, were forced [Page 354]to close their doors as commercial banks collapsed in record numbers—about 9,760 between 1929 and 1933. The resulting closure of savings and loans had a predictably disastrous effect on the residential mortgage market because 89.6 percent of all savings and loan assets were held as mortgages. By 1933, mortgage foreclosures were averaging 1,000 per day.

Even before the tide of mortgage foreclosures crested, the Hoover administration attempted to ease conditions by supporting passage of the Federal Home Loan Bank bill on July 27, 1932. Although this legislation assisted savings and loans by providing them with additional credit, it did not directly benefit homeowners. The Roosevelt administration lobbied for additional measures, which included creation of the Home Owners Loan Corporation (HOLC) on June 13, 1933. The HOLC reduced foreclosure rates by purchasing and refinancing mortgages that were either in default or foreclosure, but it did little to stimulate new lending or housing construction.

The 73rd Congress, with strong support from a wide range of business and financial interests, passed the National Housing Act of 1934. The centerpiece of the new legislation was the FHA. Lawmakers hoped that the FHA would entice banks to offer additional mortgage loans by insuring such loans against default. For example, if borrowers did not meet their payments, banks could respond by exchanging these impaired mortgage loans for government bonds. Borrowers themselves paid for the insurance, which took the form of a 1 percent (subsequently reduced to ¼ to ½ percent) premium added to their mortgage payments. The federal government underwrote much of the risk incurred by mortgage lenders through this insurance program. Benefits provided by the FHA to homeowners were less direct but nonetheless tangible. The FHA standardized lending practices by requiring its loans to be fully amortized (monthly payments reduced both interest and principle) and financed over a period of 20 years (later extended to 30 years).

The 1934 National Housing Act established other programs that also influenced mortgage financing. During the 1930s, bank failures caused by unprecedented withdrawals greatly undermined public confidence in basic financial institutions. Congress created the Federal Deposit Insurance Corporation (FDIC) to address this situation. The FDIC insured accounts in commercial banks and trust companies up to $15,000. The 1934 National Housing Act launched a companion program, the FSLIC. Capitalized at $100 million, the FSLIC initially insured individual accounts in federal savings and loans (and most state-chartered savings and loans) to a maximum of $5,000. Savings and loans were to pay specified premiums to the FSLIC until a special reserve fund equaled 5 percent of the insured accounts and obligations of all insured institutions. Policymakers hoped that renewed confidence in savings and loans (inspired by the FSLIC) would prompt additional deposits, which, in turn, would increase the amount of money banks could loan in the form of mortgages.

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