The New Deal and the Origins of the Modern American Real Estate Loan Contract
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.
The authors thank the participants in the Microeconomics of the New Deal conference and the Greater Boston Urban and Real Estate Economics Seminar, especially Alexander Field, Paul Willen, Price Fishback, and Bill Collins. Snowden acknowledges the financial support provided by National Science Foundation Grant SES-1061927. The views presented in this paper are solely those of the authors and do not necessarily represent those of the Federal Reserve Board or its staff, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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. citation courtesy of
The New Deal and the Origins of the Modern American Real Estate Loan Contract, Jonathan Rose, Kenneth Snowden. in The Microeconomics of New Deal Policy, Fishback. 2013