National Housing Act

The Great Depression was the perfect storm of financial collapse that started in 1929, and afflicted the economy into the early 1940s. This financial meltdown that started in the United States was kicked off by the stock market crash on October 29, 1929 (a.k.a Black Tuesday). Although the market rose in 1930, Americans lost a significant amount of their investments, and that negatively affected the housing market. This laid the groundwork for the National Housing Act.

Lenders were forced into getting the payment on the due mortgages. Many individuals were unemployed, had no mortgage refinancing options for their underwater mortgages, and were low on cash, so the lenders ended up owning a slew of foreclosed properties. With the decrease in property values, the government took action with the National Housing Act of 1934.

Before the National Housing Act was passed, the mortgage industry was quite a different beast than the one we know today. Mortgages were short in terms (three to five years), had fixed rates, no amortization, and no balloon instruments at loan-to-value (LTV) ratios below fifty to sixty percent (Monroe 2001, page 5). The banking crisis of the 1930s forced all lenders to retrieve due mortgages. Refinancing was not available, and many borrowers, now unemployed, were unable to make mortgage payments.

Although designed for good reason (warding off foreclosure), the National Housing Act of 1934 had some negative consequences. Once initially in place, the National Housing Act unintentionally intensified racial segregation as it made very little contribution to the improvement of urban housing. The positive effect of making single-family home living the norm and available to the masses generated a mass suburban sprawl.

Over time, the National Housing Act of 1934 was amended to improve living conditions for lower income families (Housing Act of 1937), and to develop urban renewal program (the Housing Act of 1954). All these programs became arms of the United States Department of Housing and Urban Development (HUD) in 1965.