Home Owners' Loan Corporation
|Employees||20,000 (1935) and declined to less than 500 (1950)|
The Home Owners' Loan Corporation (HOLC) was a government-sponsored corporation created as part of the New Deal. The corporation was established in 1933 by the Home Owners' Loan Corporation Act under President Franklin D. Roosevelt. Its purpose was to refinance home mortgages currently in default to prevent foreclosure.
The HOLC issued bonds and then used the bonds to purchase mortgage loans from lenders. The loans purchased were for home owners who were having problems making the payments on their mortgage loans "through no fault of their own." The HOLC then refinanced the loans for the borrowers. Many of the lenders gained from selling the loans because the HOLC bought the loans by offering a value of bonds equal to the amount of principal owed by the borrower plus unpaid interest on the loan plus taxes that the lender paid on the property. This value of the loan was then the amount of the loan that was refinanced for the borrower. The borrower gained because he or she was offered a loan with a longer time frame at a lower interest rate. It was rare to reduce the amount of principal owed.
The Nature of the Loans
The typical HOLC loan before 1939 was an amortized 15-year loan, compared with the 3-5 year mortgages offered by commercial banks and the 10-12 year loans offered by Building and Loans in the 1920s. The interest rate on the original HOLC loans was 5 percent at a time when most mortgage loans were being offered at an interest rate of 6 to 8 percent. In 1939 the corporation lowered the interest rate to 4 1/2 percent for a large group of borrowers. The HOLC loans were typically amortized, so that there were equal payments each month on the loan. This contrasts with interest-only loans in the 1920s in which the borrower would make payments equal to the interest on the loan each month until the end of the loan and then repay the principal (the amount borrowed) at the end of the loan. Until the early 1930s borrowers often paid the principal owed by taking out a new loan. When the economy fell apart in the 1930s it became very difficult to borrow and many borrowers could not repay the principal owed at the end of the loan. It also contrasts with loans at Building and Loans (B&L) in the 1920s, which often lasted 10 to 12 years. The B&L loans were hybrid loans that combined an interest-only loan and a contract to buy shares in the Building and Loan. The borrower would make equal payments on the hybrid loans until the value of the building and loan shares was equal to the principal. At that point the loan was fully repaid. If the value of the shares fell, it took longer to fully repay the loan. This became a major problem in the 1930s. In contrast, the HOLC loans were direct reduction loans in which some payment of the principal owed was made each month; therefore, the length of the loan would not change unless the borrower failed to make payments. The direct reduction loan has become the most common type of American mortgage.
Loan Repayments and Foreclosure Policies
Between 1933 and 1935 the HOLC made slightly more than one million loans. At that point it stopped making new loans and then focused on the repayments of the loans. The typical borrower whose loan was refinanced by the HOLC was more than 2 years behind on payments of the loan and more than 2 years behind on making tax payments on the property. The HOLC eventually foreclosed on 20 percent of the loans that it refinanced. It tended to wait until the borrower had failed to make payments on the loan for more than a year before it foreclosed on the loan. When the HOLC foreclosed, it typically refurbished the home. In many cases it rented out the home until it could be resold. The HOLC tried to avoid selling too many homes quickly to avoid having negative effects on housing prices. Ultimately, more than 800,000 people repaid their HOLC loans, and many repaid them early.  HOLC officially ceased operations in 1951, when its last assets were sold to private lenders. HOLC was only applicable to nonfarm homes, worth less than $20,000. HOLC also assisted mortgage lenders by refinancing problematic loans and increasing the institutions liquidity. When its last assets were sold in 1951, HOLC turned a small profit.
Controversy About Redlining
HOLC is often-cited as the originator of mortgage redlining, although, this claim has also been disputed. The racist attitudes and language found in the appraisal sheets and Residential Security Maps created by the HOLC likely gave federal support to existing bias and racial antipathy in society at large (Crossney and Bartelt 2005; Crossney and Bartelt 2006).
- "Renovation of the Home Owners Loan Corporation (HOLC) Building". John C. Grimberg Company. Retrieved December 23, 2010.
- First Annual Report of the Federal Home Loan Bank Board
- Harriss, C. Lowell (1951). History and Policies of the Home Owners' Loan Corporation (1st ed.). New York: National Bureau of Economic Research. p. 1.
- Fishback, Price; Rose, Jonathan; Snowden, Kenneth (October 2013). Well Worth Saving: How the New Deal Safeguarded Home Ownership (1st ed.). Chicago: University of Chicago Press. ISBN 022608244X.
- Crossney and Bartelt 2005 Urban Geography article
- Crossney and Bartelt 2006 Housing Policy Debate
- Security maps of the Home Owners' Loan Corporation for several U.S. cities
- Annual reports of the Home Owners' Loan Corporation from 1933 through 1952, included in reports of the Federal Home Loan Bank Board
- Historical documents relating to the Federal Home Loan Bank Act of 1932 and the Home Owners' Loan Corporation available on FRASER