National Housing Act of 1934

The National Housing Act (NHA, NHA 1934) created the Federal Housing Administration (FHA), which insured private lenders against losses on loans; made loans to lenders; "insured" lender mortgages meeting certain criteria (including much longer loans up to 20 years in length, periodic payments by a borrower "not in excess of his reasonable ability to pay," and interest ceilings); established national mortgage associations that purchased and sold mortgages and issued securities funding such activity; and created the Federal Savings and Loan Insurance Corporation (FSLIC), which insured savings and loan (S&L) deposits.

Background and effects
NHA was signed into law by Franklin Delano Roosevelt on the June 28, 1934. Hugh Potter, president of the National Association of Real Estate Boards (NAREB) called it "the most fundamental legislation … ever enacted affecting real estate and home ownership." While federal intervention in housing had begun in 1932 under the supposedly laissez-faire Herbert Hoover, the act broke new ground in terms of the range of public-private collaboration — and the unintended destructive consequences of such.

The insuring of much longer mortgage loans is of key importance. In 1930, about 33% of American households owned their own homes and by 1990 that figure had risen to about 67%. The typical mortgage was 5 years in length ending in a balloon payment (principal plus interest). Even though these loans were usually renewed for another 5-year term and were a better reflection of natural scarcity, the system still drew accusations of favoring the upper middle class and the wealthy. The government solution, beginning with NHA 1934, was 20- and 30-year fixed-interest-rate mortgages repaid in small amounts over time to greatly boost house affordability.

NAREB had advocated a federally chartered mortgage discount bank in the 1920s and early 1930s and was strongly supportive of the Federal Housing Administration and other agencies which employed the resources of the federal government to underwrite the credit structure of the housing industry. To the Home Builders, FHA was indispensable. They were also firm believers in the Federal National Mortgage Administration and the VA mortgage program. While the savings and loan leagues had no use for most of these programs, they had promoted and supported the Home Loan Bank in the 1930s, and it became one of their main props.

While the S&L leagues may not have had much use for some federal programs, the industry would eventually come to be destroyed by the replacement of the 5-year mortgage with the artificial 20-year amortized mortgage, plus regulatory and tax incentives that encouraged S&Ls to load over 80% of their asset portfolios with the new longer-term mortgages.

The FSLIC — pronounced Fizz'-lick in the industry — after repeated bailouts, fizzled into insolvency for the last time before being abolished in 1989.

Links

 * National Housing Act (pdf), the law, Approved, June 27, 1934
 * National Housing Act of 1934
 * National Housing Act of 1934