Working Paper: NBER ID: w18388
Authors: Jonathan Rose; Kenneth A. Snowden
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G21; N21; N22; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor performance of traditional share accumulation loans during the 1930s crisis (G21) | adoption of direct reduction loans (H81) |
| incremental innovations (O35) | reduction of costs associated with adopting direct reduction loans (H81) |
| adoption of direct reduction loans (H81) | balancing of benefits against costs by the 1930s (D61) |
| federal savings and loan charters (G28) | accelerated adoption of direct reduction loans (H81) |