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The New Deal and the Origins of the Modern American Real Estate Loan Contract in the Building and Loan Industry

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Author Info

  • Rose, Jonathan

    ()
    (Federal Reserve Board)

  • Snowden, Kenneth

    ()
    (University of North Carolina at Greensboro, Department of Economics)

Abstract

We treat the direct reduction loan contract as an instance of financial innovation and describe its adoption within the building and loan (B&L) industry beginning in the 1880s and culminating in the 1930s. A long chain of complementary innovations at B&Ls gradually reduced the costs of adoption, leading to moderate use by the 1920s and potential for far greater use. In the 1930s, extreme dissatisfaction with other contracts radically altered the adoption calculus, as did new competition from FHA-insured lenders. Federal savings and loan charters built upon the accumulated innovations at B&Ls by emulating the small segment of the industry that had adopted direct reduction lending by the 1920s. Other policies helped restructure the liabilities of B&Ls to accommodate the loss of credit risk sharing and mutuality inherent to older contracts. New Deal policies therefore built upon and facilitated the ongoing process of financial innovation that brought the familiar modern loan contract to the conventional loan market.

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Bibliographic Info

Paper provided by University of North Carolina at Greensboro, Department of Economics in its series Working Papers with number 12-6.

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Length: 45 pages
Date of creation: 09 May 2012
Date of revision:
Handle: RePEc:ris:uncgec:2012_006

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Postal: Box 26165, Greensboro, NC 27402-6165
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Web page: http://www.uncg.edu/bae/econ/
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Related research

Keywords: New Deal; Building and Loan;

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  1. Snowden, Kenneth A, 1997. "Building and loan associations in the U.S., 1880-1893: the origins of localization in the residential mortgage market," Research in Economics, Elsevier, vol. 51(3), pages 227-250, September.
  2. Kenneth A. Snowden, 2010. "Covered Farm Mortgage Bonds in the Late Nineteenth Century U.S," NBER Working Papers 16242, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Mutuality and Financial Innovation
    by bbatiz in NEP-HIS blog on 2012-06-22 10:58:32

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