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

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  • Jonathan Rose
  • Kenneth A. Snowden

Abstract

The introduction of the direct reduction (fully-amortized) loan contract to the U.S. residential mortgage market is an important instance of financial innovation. We describe the adoption of this contract 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. The poor performance of traditional contracts during the crisis of the 1930s then radically altered the adoption calculus. At this point a new system of federal savings and loan charters incorporated many of the innovations that had been adopted within the small segment of the B&L industry that had introduced direct reduction lending by the 1920s. The B&L transition in mortgage contracts occurred primarily in the conventional loan market because B&Ls, unlike other lenders, generally avoided the use of the new FHA insurance program.

Suggested Citation

  • Jonathan Rose & Kenneth A. Snowden, 2012. "The New Deal and the Origins of the Modern American Real Estate Loan Contract," NBER Working Papers 18388, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18388
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.).
    9. Carl F. Behrens, 1952. "Commercial Bank Activities in Urban Mortgage Financing," NBER Books, National Bureau of Economic Research, Inc, number behr52-1, July.
    10. Raymond J. Saulnier, 1950. "Urban Mortgage Lending by Life Insurance Companies," NBER Books, National Bureau of Economic Research, Inc, number saul50-1, July.
    11. 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.
    12. 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.
    13. 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.
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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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 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

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