Home Owners Loan Corporation (HOLC)

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HOME OWNERS LOAN CORPORATION (HOLC)

Diminished wages, widespread unemployment, and few, if any, refinancing options made it difficult for home owners to meet monthly mortgage payments during the Great Depression. By the spring of 1933, with almost a thousand foreclosures a day, President Franklin D. Roosevelt asked Congress on April 13, 1933, for "legislation to protect small home owners from foreclosure." Lawmakers responded by creating the Home Owners Loan Corporation (HOLC) on June 13, 1933.

The HOLC, which was under the supervision of the Federal Home Loan Bank Board, did not actually lend money to home owners. Instead, the agency purchased and refinanced mortgages in default or foreclosure from financial institutions (lenders). In exchange for mortgages, the HOLC gave lenders government bonds paying 4 percent interest (later reduced to 3 percent). Capitalized with $200 million from the U.S. Treasury, the HOLC was authorized to issue $2 billion in bonds, an amount eventually increased to $4.75 billion. During a peak period in the spring of 1934, it processed over 35,000 loan applications per week and employed almost 21,000 people in 458 offices throughout the country. The law authorizing the HOLC's lending activities expired on June 12, 1936. By that time, the HOLC had made 1,021,587 loans, making it the owner of approximately one-sixth of the urban home mortgage debt in the United States. The HOLC's operations were not officially terminated until February 3, 1954.

The Roosevelt administration credited the HOLC with a restoration of economic morale, a reduction of foreclosure rates, and payment of almost $250 million in delinquent taxes to state and municipal governments. Subsequent scholars have generally agreed with this positive evaluation, asserting that the HOLC was significant because it introduced the long-term, self-amortizing mortgage. Indeed, with HOLC mortgages refinanced at 5 percent interest over fifteen years, home ownership became feasible for those who had been previously unable to afford short-term mortgages at high interest rates.

Some commentators, however, criticized the HOLC's practice of indirectly assisting home owners through programs that directly aided mortgage lenders. The urban reformer Charles Abrams pointed out that, on average, the HOLC refinanced the mortgages it purchased for only 7 percent less than the previous, admittedly inflated, value of the property in question (the value of residential real estate had risen appreciably during the 1920s). The HOLC, for example, might refinance a $10,000 mortgage as if the initial amount loaned to the home owner had been $9,300, but that figure—$9,300—could still be significantly higher than the current deflated market value of the property. Under this arrangement, lenders only had to forego a small part of their capital, plus they received government-backed bonds in place of frozen mortgages. On the other hand, by propping up the face values of its refinanced mortgages, the HOLC compelled home owners to repay inflated 1920s mortgage loans with deflated 1930s wages.

The HOLC also developed a neighborhood mortgage rating system. The lowest rated neighborhoods—those with high concentrations of racial minorities—were "redlined" by the HOLC, a term denoting an area considered too risky for government mortgage assistance. Redlining was adopted not only by private lenders, but also by public agencies, most notably the Federal Housing Administration (FHA), which was part of the National Housing Act of 1934. The FHA, by extending mortgage insurance to lenders, encouraged banks to liberalize financing terms for potential homeowners. Thus, while the HOLC and the FHA assisted some Americans in keeping their homes or in purchasing new ones, they both used redlining to prevent minority groups, especially African Americans, from doing likewise. This practice helped perpetuate and extend the pattern of segregated neighborhoods and suburbs throughout America.