The Fixed-Rate Mortgage Helped Forge the Middle Class

1933: The Home Owners’ Loan Corp. introduces a 15-year, self-amortizing home loan.
Photograph by Gallery Stock

1933 The Home Owners’ Loan Corp. introduces a 15-year, self-amortizing home loan.

The standard mortgage that now underpins the housing market first appeared during the Great Depression. The stock market crash of 1929 sparked a wave of foreclosures in the U.S., where home loans typically were interest-only and had terms of about five years. In 1933, to provide stability, the now-extinct Home Owners’ Loan Corp. introduced a new type of mortgage: It had a fixed rate and was fully amortized, meaning borrowers paid off the entire loan by the end of the term. Not everyone cheered. Critics railed that it was “crazy and un-American [to be] putting people in debt for 15 years,” says Louis Hyman, author of Debtor Nation: The History of America in Red Ink. The length of the loans grew even longer during the following decades, eventually stretching to 30 years. By 1960, 62 percent of U.S. households owned their own home, up from 44 percent in 1940.

Today many economists agree that the standard mortgage, with its predictable schedule of payments, is a welcome source of stability in household finances. As homeowners pay down a slice of their loan each month, they build up equity bit by bit. “The net worth of the middle class in this country is almost all home equity,” notes Ellen Seidman, a senior fellow at the Urban Institute.

During the housing boom of the mid-2000s, lenders experimented with new flavors, such as loans with teaser rates that reset after a few years and ones with negative amortization, which meant the balance owed grew each month. As we all know, that didn’t end well. The standard 30-year, fixed-rate mortgage has regained its prominence, accounting for 90 percent of all new home loans issued since 2010.

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