This Week in History

April 11 - 17, 1945

Remembering FDR on the 60th Anniversary of his Death: — How He Kept a Roof Over Our Heads

It is sometimes difficult, 60 years after the death of Franklin Delano Roosevelt on April 12, 1945, to comprehend how much he did to create the structure of modern American life. Many things that we take for granted did not exist before his Presidency, or were hopelessly inadequate. One of the programs which reflects his philosophical outlook and its implementation in economic practice is his effort to stop the escalating home foreclosures during the Great Depression.

Most everyone has seen the well-known image from America's early silent films, where the evil villain, stroking his mustache, tries to foreclose on an overdue mortgage and throw the elderly widow out on the street. This was not a Hollywood invention—it was a painfully familiar scene to Americans during the decades before Roosevelt's election. Any citizen of average means who tried to buy a home before 1933 faced interest rates between 6-8%, but could only obtain a mortgage for a term of three to five years. Often the first mortgage could not cover the purchase, and so a second mortgage had to be obtained, and this at rates up to 10%, and for a shorter term than the first.

Complete payment of any mortgage was almost an impossibility, because there was no plan of amortization and therefore a large lump sum became due after just a few years. When the mortgage matured, the "homeowner" had little choice between being foreclosed on, or refinancing by paying exorbitant extra charges and continuing payments which rarely decreased any of the principal because they were always paying off the interest.

Two examples will suffice to make the picture clear. The heirs of an estate in Pennsylvania paid off a $2,500 mortgage which had been placed on a farm in 1868, and they discovered that more than $10,000 had already been paid in interest without reducing the principal. Another family paid $2,520 in interest on a $2,000 mortgage over a period of 21 years without any reduction of the principal at all.

Then the Great Depression hit in November of 1929, and foreclosures escalated at a cruel rate. President Roosevelt wrote, in 1938, that, "One of the major disasters of the continued depression was the loss of hundreds of thousands of homes each year by foreclosure. The annual average loss of urban homes by foreclosure in the United States in normal times was 78,000. By 1932 this had increased over three and a half times, to 273,000. By the middle of 1933, foreclosures had advanced to a total of more than 1,000 per day. Not only did this cause the obvious hardship of loss of homes, but it froze and endangered the assets of the various mortgagees—insurance companies, mortgage banks, savings banks, savings and loan associations, and other financial institutions, which held the savings of over 30,000,000 of our people."

With conditions constantly worsening, President Roosevelt sent a message to Congress on April 13, 1933, asking for legislation to "protect small home owners from foreclosure and to relieve them of a portion of the burden of excessive interest and principal payments incurred during the period of higher values and higher earning power.

"Implicit in the legislation which I am suggesting to you is a declaration of national policy. This policy is that the broad interests of the Nation require that special safeguards should be thrown around home ownership as a guarantee of social and economic stability, and that to protect home owners from inequitable enforced liquidation, in a time of general distress, is a proper concern of the Government."

By June 13, Roosevelt was signing the Home Owners Loan Corporation (HOLC) Act, which created many of the safeguards and standards with which we are familiar today. The Corporation was capitalized with a $200 million subscription by the U.S. Treasury to its stock, and was authorized to issue bonds to the total amount of $2 billion, in exchange for first mortgages on urban homes. Further increases in the amount of dollar authorizations provided funds for the repair and reconditioning of homes. To stabilize the institutions which granted the mortgages, a provision of the act stated that $300 million could be invested in those institutions or in the bonds, debentures, or notes of Federal Home Loan Banks.

As President Roosevelt wrote: "What the Corporation did to accomplish its emergency task was to buy the mortgages of distressed home owners from those institutions and individuals who held them and were unwilling or unable to grant further extensions and concessions to the mortgagor.

"A large proportion of these mortgages were written on a short-term basis for one, two, or five years; and when the Corporation assumed them, many were subject to steadily accumulating delinquencies.... Interest rates on both short-term and long-term loans were high, and great numbers of them were weighted with premiums, commissions, service charges, and extra fees of various kinds which added to the load borne by the borrower.

"The Corporation rewrote all of the loans at a 5% interest rate and allowed a period of 15 years for repayment. All of the initial charges such as appraisal, title fees, etc., and all delinquent taxes and assessments were paid by HOLC, and consolidated with the principal of the loan....

"In cooperation with the Reconstruction Finance Corporation, HOLC was able to place nearly half a billion dollars in circulation to the benefit of small depositors by exchanging its bonds for that amount of frozen mortgage assets in closed banks of the country. The Corporation not only kept the home owners in their homes, but protected the depositors in these closed institutions and stabilized the collapsing home financing structure of the Nation. Funds amounting to hundreds of millions of dollars were released for further investment in new mortgages for building or purchasing of homes, or to meet the demands of investors who sought to withdraw their funds immediately....

"Almost one-quarter of a billion dollars in delinquent taxes were paid to State and municipal governments by HOLC on behalf of its borrowers. The taxes paid had an important influence in reviving the market and restoring the prices for municipal bonds. Through these disbursements many communities have been helped to maintain intact over a desperate period their schools and other essential public services, have been able to operate with less borrowed money, and, in some cases, have been saved from defaulting on their own maturing bond issues."

Of course, President Roosevelt was attacked for creating a debt which would supposedly drag down future generations. At Forbes Field in Pittsburgh on Oct. 1, l936, President Roosevelt gave a ringing answer to those critics. He said that when his new administration came to Washington in 1933, "We saw the millions out of work, the business concerns running in the red, the banks closing. Our national income had declined over 50%—and, what was worse, it showed no prospect of recuperating by itself....

"Something had to be done. A national choice had to be made. We could do one of two things. Some people—who sat across my desk in those days—urged me to let nature take its course and continue a policy of doing nothing.... To have accepted this advice would have meant a continued wiping out of people of small means, the continued loss of their homes and farms and small businesses into the hands of people who still had enough capital left to pick up those homes and farms and businesses at bankruptcy prices.

"It would have meant, in a very short time, the loss of all the resources of a multitude of individuals and families and small corporations. You would have seen a concentration of property ownership in the hands of 1 or 2% of the population, a concentration unequaled in any great nation since the days of the late Roman Empire....

"To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we would either have had to make a capital levy that would have been confiscatory, or we would have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first....

"And now a word as to this foolish fear about the crushing load the debt will impose upon your children and mine. This debt is not going to be paid by oppressive taxation on future generations. It is not going to be paid by taking away the hard-won savings of the present generation. It is going to be paid out of an increased national income and increased individual income produced by increasing national prosperity."

And it was.