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The New Deal and the origins of the modern American real estate loan contract

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  • Rose, Jonathan D.
  • Snowden, Kenneth A.

Abstract

The fully amortized mortgage loan contract is an important instance of financial innovation in the U.S. residential mortgage market. We examine the adoption of this contract from the 1880s to the 1930s by building and loan (B&L) associations, the nation's most important institutional home mortgage lenders at the time. A chain of complementary innovations by B&Ls gradually reduced the costs of adopting amortization, supporting moderate use by the 1920s. During the crisis of the 1930s, the poor performance of the traditional B&L loan contract radically increased the benefit of adoption, as borrowers demanded the new contract. The adoption examined here occurred primarily in the conventional loan market because B&Ls, unlike other lenders, generally avoided the use of the new Federal Housing Administration insurance program. The New Deal may have had more impact through new federal savings and loan charters, which incorporated many of the complementary innovations that supported the new form of lending.

Suggested Citation

  • Rose, Jonathan D. & Snowden, Kenneth A., 2013. "The New Deal and the origins of the modern American real estate loan contract," Explorations in Economic History, Elsevier, vol. 50(4), pages 548-566.
  • Handle: RePEc:eee:exehis:v:50:y:2013:i:4:p:548-566 DOI: 10.1016/j.eeh.2013.06.001
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    References listed on IDEAS

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    1. Jonathan D. Rose, 2012. "The prolonged resolution of troubled real estate lenders during the 1930s," Finance and Economics Discussion Series 2012-31, Board of Governors of the Federal Reserve System (U.S.).
    2. Carl F. Behrens, 1952. "Commercial Bank Activities in Urban Mortgage Financing," NBER Books, National Bureau of Economic Research, Inc, number behr52-1, January.
    3. Carl F. Behrens, 1952. "Introduction to "Commercial Bank Activities in Urban Mortgage Financing"," NBER Chapters,in: Commercial Bank Activities in Urban Mortgage Financing, pages 1-13 National Bureau of Economic Research, Inc.
    4. R. J. Saulnier, 1950. "Appendices to "Urban Mortgage Lending by Life Insurance Companies"," NBER Chapters,in: Urban Mortgage Lending by Life Insurance Companies, pages 107-180 National Bureau of Economic Research, Inc.
    5. Raymond J. Saulnier, 1950. "Urban Mortgage Lending by Life Insurance Companies," NBER Books, National Bureau of Economic Research, Inc, number saul50-1, January.
    6. Carl F. Behrens, 1952. "Appendices and Index to "Commercial Bank Activities in Urban Mortgage Financing"," NBER Chapters,in: Commercial Bank Activities in Urban Mortgage Financing, pages 85-125 National Bureau of Economic Research, Inc.
    7. 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.
    8. R. J. Saulnier, 1950. "Introductory pages to "Urban Mortgage Lending by Life Insurance Companies"," NBER Chapters,in: Urban Mortgage Lending by Life Insurance Companies, pages -23--16 National Bureau of Economic Research, Inc.
    9. Snowden, Kenneth A., 2010. "Covered Farm Mortgage Bonds in the United States During the Late Nineteenth Century," The Journal of Economic History, Cambridge University Press, vol. 70(04), pages 783-812, December.
    10. R. J. Saulnier, 1950. "Scope of Urban Mortgage Lending by Life Insurance Companies," NBER Chapters,in: Urban Mortgage Lending by Life Insurance Companies, pages 1-19 National Bureau of Economic Research, Inc.
    11. Engerman,Stanley L. & Hoffman,Philip T. & Rosenthal,Jean-Laurent & Sokoloff,Kenneth L. (ed.), 2003. "Finance, Intermediaries, and Economic Development," Cambridge Books, Cambridge University Press, number 9780521820547, December.
    12. 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.
    13. R. J. Saulnier, 1950. "Urban Mortgage Lending Costs and Returns of Life Insurance Companies, 1945-47," NBER Chapters,in: Urban Mortgage Lending by Life Insurance Companies, pages 58-78 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Fleitas, Sebastian & Fishback, Price & Snowden, Kenneth, 2016. "Economic Crisis and the Demise of a Popular Contractual Form: Building and Loan Mortgage Contracts in the 1930s," CAGE Online Working Paper Series 275, Competitive Advantage in the Global Economy (CAGE).
    2. Sebastián Fleitas & Price Fishback & Kenneth Snowden, 2015. "Forbearance by Contract: How Building and Loans Mitigated the Mortgage Crisis of the 1930s," NBER Working Papers 21786, National Bureau of Economic Research, Inc.
    3. Olsen, Edgar O. & Zabel, Jeffrey E., 2015. "US Housing Policy," Handbook of Regional and Urban Economics, Elsevier.

    More about this item

    Keywords

    Real estate finance; Mortgage loan contracts; Building and loan associations; New Deal; Great Depression;

    JEL classification:

    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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