FIVE
Building Home
WHILE SOME SOLDIERS and sailors moved home with their parents, doubled up in apartments, or lived in converted garages, Howard and Dottie Ahmanson arrived at the Beverly Hills Hotel on New Year's Eve, 1944, intending to stay for a while.1 Day and night, the hotel was a social center, a community forum, and a watering hole for Hollywood stars. Women's groups held their luncheons and charity events in the ballroom. Hollywood regulars included Humphrey Bogart, Marlene Dietrich, and Katherine Hepburn, as well as the already reclusive Howard Hughes.2 Poolside during the day or sipping cocktails in the Polo Lounge at night, Howard and Dottie were pampered by Howard's college friend, hotel manager Hernando Courtright. Yet the scene was strangely surreal.
The war was not over. Although the Allies were closing in on Germany, the invasion of Japan was expected to be bloody. With the military focus on the Pacific Theater, many people anticipated that Los Angeles would expand even further as it continued to serve as the major West Coast embarkation point and manufacturing center and to receive the battered bodies of the nation's heroes.
In preparation for the last phase of the war against Japan, policy makers worried about housing an even greater number of war workers. “Scores of men and women [are] sleeping in all-night or past-midnight theaters because of lack of conventional quarters,” the Los Angeles Times noted.3 Charities and government agencies appealed to home owners to open spare rooms to families desperate for shelter.4 Mayor Fletcher Bowron wrote to President Roosevelt to say that “more than 100,000 unfilled applications for housing are now on file with the Los Angeles War Housing Centers.”5 The federal government, which controlled the supply of building materials, approved the construction of six thousand new homes in areas of Los Angeles near shipyards and aircraft factories. But this allocation represented only a small step toward meeting the demand.
The need for housing reflected one of many ways in which the city and region that Howard Ahmanson returned to at the beginning of 1945 had been transformed by the war. Nearly a half-million new residents had arrived to assemble aircraft, build ships, forge steel, refine petroleum, make machine tools, and manufacture a host of other vital war matériel. At its peak, the Los Angeles area produced 10 percent of the goods needed to wage the war. Large military installations at Terminal Island, San Pedro, Long Beach, and El Toro also brought soldiers, sailors, airmen, and marines passing through on their way to the Pacific.6
Despite this growth, L.A.’s postwar future was not clear. When builder and developer Mark Taper tried to get a construction loan in 1942 to build government-insured FHA homes, the first bank he approached turned him down. “The bank told me they thought this would be a ghost town once the war ended.”7 When Howard Edgerton went to Chicago to borrow money so California Federal Savings & Loan could buy more government bonds, a senior executive from Continental Illinois eerily told him the same thing: “We do not care to invest our money directly or indirectly in any Southern California enterprise at the present time because we are convinced that when the war is over Los Angeles is going to become a ghost town.”8
Taper and Edgerton weren't convinced, and neither were Howard Ahmanson and Charlie Fletcher. “We already had evidence that some of the war workers who had come here during the peak production periods had decided to stay,” Edgerton recalled later. “What we didn't anticipate was that they would send for all their relatives and friends.”9
For those lucky enough to survive the war, the memory of Southern California was compelling. “A lot of guys had been here and seen what it was not to have snow in their ears,” remembered one local resident.10 The ocean, the mountains, the citrus groves, and the region's bustling wartime economy were all attractive.11 When they returned after the war, these new residents sparked a gold rush in real estate, construction, and mortgage lending. For a handful of entrepreneurs who saw how the government had, intentionally and unintentionally, created profitable opportunities to finance that gold rush, the postwar suburban boom produced massive personal and corporate fortunes.12
A REGION POISED FOR GROWTH
Southern California's growth before, during, and after the war was phenomenal. More people and better wages fed a booming economy. The population of Los Angeles County alone rose more than 50 percent in the 1940s, climbing from 2,786,000 to 4,374,000.13 Before the war, in contrast to most other large American cities, residents had worked in trade, services, and agriculture. With the war, trade and services grew 51 and 35 percent, respectively, but manufacturing jobs more than doubled, adding nearly 213,000 positions. As citrus groves and bean fields were bulldozed to make way for factories and homes, agriculture lost nearly three thousand jobs. Meanwhile, employment in construction increased 88 percent, providing work for another sixty thousand people. The burgeoning field of aeronautics contributed substantially to the growth of L.A.’s manufacturing sector. By 1953, aviation accounted for one in four manufacturing jobs in the region.14
These new jobs came with good wages. Between 1940 and 1951, average income in the area tripled.15 Median family income in Los Angeles County in 1951 was 19 percent higher than the national median for metropolitan regions.16 And like most Americans, Angelenos had saved money during the war.17 Across the country, liquid assets of businesses and individuals had increased 252 percent; in California, they had increased nearly 300 percent.18 In short, households in Los Angeles after the war had income and savings to spend on new homes.
Demographic changes also fed the demand for housing. During and after the war, marriage rates soared. “The nation has fewer bachelors and old maids than in former years,” the Census Bureau reported in 1946. More marriages led to an increase in the birthrate. Even before the end of the war, for every soldier or sailor killed in battle, six “war babies” were born over and above the prewar birthrate.19
Los Angeles was particularly affected by the marriage and baby boom. The migration to California, and especially Southern California, was overwhelmingly youthful, with the great majority of new residents under the age of forty-five. More likely to reproduce, these young newcomers contributed to a 40 percent increase in the birthrate between 1940 and 1950, compared to an increase of 31.3 percent for the country as a whole.20 In Los Angeles, the population of children ages zero to five rose 150 percent during the 1940s.21 All of these new families fueled an overall increase in household formation and a concomitant decline in the number of multigenerational households.
Policy makers across the country anticipated a demand for millions of new homes. In Southern California, the commission charged with planning estimated that Los Angeles County alone would need one hundred thousand family-dwelling units in the first five postwar years.22 Most of these homes would need to be modestly priced, between six thousand and ten thousand dollars, to be affordable to young families. To fill this need, a new breed of home builder emerged with experience rooted in the construction of dams, ships, and communities for farm and war workers. By catering to their need for capital, Howard Ahmanson would build an empire.
A REVOLUTION IN HOME BUILDING
American mass production, in tandem with a remarkably prolific system for industrial research and innovation, played a critical role in winning World War II.23 With the end of the war, industrial leaders and journalists predicted that it would enhance the quality of life of all Americans, especially as increasingly flexible production systems allowed manufacturers to achieve economies of scale while producing goods for a variety of niche markets and tastes.24 In housing especially, expectations were high. Insiders writing in the trade journals and even the popular press predicted that new materials and new methods of construction would speed the process of home building and lower the cost of home ownership.
Mass production depended on standardized building materials and components, which had been under development for decades. As late as the mid-nineteenth century, most homes were built as one-of-a-kind products. Highly skilled craftsmen cut or shaped materials at the site, and each was supervised by a builder or contractor who was often a former craftsman.25
This system of home construction began to change at the end of the nineteenth century. Factory-made components and materials accelerated the process of construction and reduced the need for highly trained craftsmen. A premilled door simply needed to be hung. Precut and sanded floor boards were simply attached to the joists at the job site.26 Soon whole facades for homes were manufactured in cities like Chicago and shipped to communities throughout the country. Catalog companies like Sears and Montgomery Ward loaded precut components of homes onto railroad flatbeds for delivery to customers hundreds of miles away.27 Nevertheless, through the 1930s, the vast majority of American homes were built by their owners or by small-scale contractors who erected an average of only five to twenty homes a year.28
The Depression brought new players and techniques to home construction. A handful of pioneers experimented with the idea of prefabricated homes. Foster Gunnison, who launched Gunnison Magic Homes, adapted the newly developed waterproof, plywood, stressed-skin panel created by the U.S. Forest Products Laboratory to make standardized wall panels. Gunnison offered prefabricated model homes for different income groups and hoped to become the “Henry Ford of housing.” Unfortunately, according to historian David Hounshell, “all of his houses looked very much alike, and they did not satisfy the idiosyncratic, highly personalized tastes of the American home buyer.”29
In the West, innovators focused more on streamlining construction. On the Colorado River, the Six Companies, which included Henry J. Kaiser as a partner, pioneered in situ mass-production techniques when they built the Hoover Dam and housing for workers in Boulder City in the early 1930s. They later adapted these techniques to revolutionize the process of wartime shipbuilding and housing construction.30 Meanwhile, planners and builders working for the Farm Security Administration in California developed new strategies for low-cost housing construction to meet the needs of migrant workers.31
With defense mobilization, the federal government began to finance the construction of new facilities to make tanks, airplanes, and ships. To shelter this workforce, Congress authorized the construction of seven hundred thousand public housing units in key defense industry communities, including Southern California.32 Given the urgency of the situation, Congress and federal policy makers expected that these units would be built by large-scale contractors, like Kaiser, who had political connections and extensive experience with federal projects.33
Traditional home builders feared that they would go out of business if these large contractors won all the government work. Traveling around the country to talk to contractors, Howard Ahmanson's friend Fritz Burns helped to organize the Home Builders Emergency Committee. Their lobbying effort paid off when Congress passed Title VI of the Housing Act in March 1941. The new law offered builders direct, guaranteed loans of up to 90 percent for the construction of homes in 146 industrial areas that were deemed to be critical to the nation's defense. The success of this effort led to the creation of the National Association of Home Builders in 1942 and Burns's election as the association's president.34 It also helped put Los Angeles at the forefront of mass production in home construction as Burns and other builders erected some of the first low-cost, mass-produced tract homes in communities like Westside Village in Mar Vista, Toluca Wood in North Hollywood, and suburban Westchester near aircraft manufacturing facilities owned by Douglas Aircraft, Lockheed, and North American Aviation.35
With the end of the war, many people anticipated that “better and less expensive homes would be coming off assembly lines by the thousands.”36 Only days after the Nazi surrender in Germany in May 1945, Kaiser announced plans to build ten thousand low-cost homes on the West Coast as soon as war restrictions on building materials were lifted. Fritz Burns would serve as president of the newly organized Kaiser Community Homes.37
Kaiser and Burns represented a new kind of home builder.38 In Los Angeles, New York, and other major urban areas, these “minor Henry Fords,” described as “operative” or “merchant” builders, developed assembly lines on the job site and used mass-production strategies to cut costs even below the prefabricators.39 Employing vertical integration strategies to manufacture many of their building materials and preassemble components, they constructed hundreds of homes at a time. At the Kaiser plant in Los Angeles, floor and wall sections were made in the factory, along with ceilings and cabinets. Workers prepainted in spray booths before these components were trucked to the job site.40
The operative builders also adapted the multidivisional structure of the corporate world to keep subcontractors engaged full time. These subcontractors learned the builders’ systems and provided continuity from tract to tract. These subcontractors didn't have to bid on jobs. Instead, they were offered negotiated fees. In essence, they operated as divisional managers, but they had a financial stake in the success of the project.41
With new materials, assembly-line production, and new labor arrangements, tract home builders cut construction costs dramatically. On Long Island in 1947, William Levitt built homes for around seven dollars per square foot at a time when most metropolitan builders incurred costs between ten and fifteen dollars per square foot for non-custom-built homes.42 By 1955, three out of four houses under construction in metropolitan America were being built in housing tracts. In Southern California, the sound of carpenters hammering housing frames together rang out in new bedroom communities in the San Gabriel and San Fernando valleys and along the path from downtown Los Angeles to the coast.
As developers and builders rushed to meet the demand for these affordable single-family homes, the scale of these new projects increased dramatically. Kaiser pledged to build a hundred thousand homes—fifty times the number that Fritz Burns had constructed during World War II, when he was one of the nation's most productive home builders.43 In just two years, between September 1, 1946, and September 1, 1948, Kaiser Community Homes made an aggressive start on this goal by erecting 5,319 homes in the Los Angeles metropolitan area, including 1,295 in Westchester, 562 in Monterey Park, 471 in Ontario, 430 in Compton, and 300 in Westside Terrace.44 In 1947, Kaiser Community Homes developed plans to build a new “City within a City” on the Panorama Ranch in the San Fernando Valley, complete with homes, factories, and shopping centers for “living, work and play.”45
At Lakewood, developer Louis H. Boyar bought 3,375 acres of farmland near Long Beach. With builders Mark Taper and Ben Weingart, he began planning a community of seventy thousand people housed in 17,500 homes.46 Located only a short commute from jobs at Douglas Aircraft and at the port, the project attracted twenty-five thousand people on the day the sales office opened to the public.47 At the height of construction, Taper and Weingart and their crews built fifty houses a day.48
Construction at Panorama City and Lakewood reflected only the most dramatic aspects of an unprecedented building boom in Los Angeles. Throughout the region, other builders and developers launched projects ranging from a few dozen to several hundred new homes. During the five years that followed the Japanese surrender, 327,598 new single-family homes were built in Los Angeles County alone, increasing the overall stock of homes by 45 percent. Few other metropolitan regions in the country rivaled this production.49
None of these new homes would have been possible without construction loans and mortgage capital. But many lenders were intimidated by the risks associated with large projects. Prior to 1938, for example, when Fritz Burns experimented with mass production at Westside Village, no subdivision developer or builder in Southern California had ever received a construction loan for more than 40 units, much less the 788 that Burns proposed to build.50 With the end of the war, builders rushed to follow in Burns's footsteps, but finding lenders to back them remained a challenge. In this situation, Howard Ahmanson recognized a major opportunity.
HOWARD ENTERS THE BUSINESS
Charlie Fletcher wanted to talk politics. He was running for Congress in September 1946, and Howard ostensibly was his campaign manager. With two months left before the election, they had lunch together at the Stock Exchange Club in the heart of L.A.’s financial district. With their voices muffled by the dark paneled walls of the English club room, Howard smoked and listened as Fletcher talked.
Charlie believed he was gaining on the incumbent, Democrat Ed Izak. As an officer in the San Diego Amvets organization, he hoped to win the GI vote. Given his father's twelve-year stint in the California legislature, he was sure to have good name recognition. And it helped that across the country pollsters were predicting a Republican resurgence. Howard offered his support and advice.
As they were walking back to Howard's office, Charlie casually mentioned that he knew a savings and loan manager who wanted to get out of the business. The association was for sale. He suggested Howard should buy it.
“How much is it?” Howard asked.
“Sixty thousand.”
“Where is it?”
“Highland Park,” Charlie replied.
Howard considered the area and the opportunity. Located along the Arroyo Seco just west of Pasadena, Highland Park included some of the oldest homes in Los Angeles. The thrift had been established on November 24, 1924, as the Los Angeles American Building and Loan Association by Walter Giddens Tomlinson, who had served as secretary and manager and now wanted to retire.51 For some unknown reason, the company was in the process of changing its name to North American Savings and Loan Association.52 Howard decided to take a chance.
“Come on up to my office,” he told Charlie.
Upstairs, Howard wrote out a check to Tomlinson and asked Charlie to make the deal for him. Characteristically, he was not interested in negotiating. If the price was fair, he paid it. If it wasn't, he walked away.53
In telling this story years later, Ahmanson made it sound impulsive, as if nothing that came before had prepared him for that moment. In fact, he was anything but impulsive. As one of his longtime employees recalled, “Howard explored every facet of everything before he made a decision.”54 In fact, Ahmanson had spent years studying the savings and loan industry. He owned more than 28 percent of one thrift and served on the board of directors of Hollywood Savings and Loan. He had also spent months thinking about the postwar future of Los Angeles.55
Ahmanson knew the demand for housing in Los Angeles was explosive. He was already positioned to take advantage of this growth by selling residential fire and hazard insurance, but he wanted to increase his bet.56 He bought stock in cement companies because new homes needed foundations. He continued to buy real estate because developers and builders had to have land. But he also recognized that tract builders would need financing and that savings and loans were uniquely positioned in the postwar era to provide construction loans and mortgages.
Ahmanson knew that most savings and loan managers didn't see the opportunity. For too long they had been focused on surviving. Hit hard by the Depression, nearly one in four in California had gone out of business. Those that remained carried large portfolios of delinquent loans and foreclosed properties through the 1930s. By the end of the war, only 101 state-chartered savings and loans and 73 federally chartered thrifts were still in business in California.57 The total assets held by the industry amounted to $642 million, compared to $511 million in 1930. With this weak growth over fifteen years, the industry had failed to keep pace with the state's increase in population or the expansion of real estate lending.58
Within the industry, the federally chartered institutions, like Howard Edgerton's California Federal and Charlie Fletcher's Home Federal in San Diego, were the strongest. Statewide, they accounted for 59 percent of total assets.59 In Los Angeles, the federals, which were all mutuals, commanded much greater resources than the nearly moribund state-chartered institutions. The leader, Coast Federal Savings and Loan, managed by Howard's USC classmate Joe Crail, had nearly $42 million in assets in August 1945.60 The next largest, Western Federal, had just over half that amount.61 Meanwhile, most of the state-chartered, stockholder-owned thrifts had barely $1 million left on their books. With so little money, these thrifts weren't in a position to finance major housing projects. Savings and loans also lacked the skills needed for these kinds of deals. According to builder Mark Taper, “They didn't know what good plans or good locations were.”62 Taper had to get his first tract loan from Bank of America, which dominated the mortgage market and the banking sector, with more than $1 billion in outstanding loans in 1945.63
Savings and loans in California also seemed disadvantaged by public policy that favored commercial banks. Mutual savings banks, the leading source of home loans on the East Coast, had not been enabled by the California legislature, so commercial banks played a greater role in the mortgage market in California than they did on the East Coast.64 California was also unusually permissive with regard to branch banking, which weakened the competitive position of strictly local institutions.65 As a result, Bank of America, the nation's largest commercial bank, had been able to achieve enormous economies of scope and scale.66
Despite all of these drawbacks, Ahmanson saw potential. States and the federal government regulated savings and loans as mutual or cooperative organizations. Given thrifts’ quasi-nonprofit status, lawmakers were inclined to give them competitive advantages. For example, in 1947, savings and loans were completely exempt from federal income taxes if they made substantially all of their loans to their own depositors.67 Given the high federal tax rates still in place in the immediate postwar era, this was a substantial advantage.
Since regulators wanted to ensure that banks would remain liquid enough to meet demands for deposits—especially if there was a run—banks weren't allowed to loan more than a certain percentage of their capital long term for real estate. Commercial banks had to maintain sufficient cash reserves to meet the daily demands of their depositors. Cash tied up in vaults couldn't be invested. Savings and loans could invest more of their cash. State and federal laws made it difficult for depositors to withdraw money from savings and loan accounts. They did this to minimize the risk of a run on the association's deposits.68
Savings and loans also enjoyed other significant competitive opportunities. They could attract savings by advertising the dividend rates (interest) paid on deposits; banks were not allowed to do this.69 This privilege was especially important because, under Regulation Q, the Federal Reserve controlled interest rates paid by banks on savings deposits. Savings and loans had greater freedom to set their own rates.
All of these advantages would have meant little to Ahmanson if all savings and loans in California operated as mutual or cooperative organizations, as they did in most states.70 But in California, entrepreneurs had a unique opportunity to own a savings and loan and profit from its success. In 1909, the California legislature had passed an unusual law that essentially transformed state-chartered thrifts into stockholder, rather than mutual, corporations.71 Some California entrepreneurs had taken advantage of this structure, but the Depression and World War II stifled the industry's growth. Very few entrepreneurs paid attention to the ways in which New Deal legislation, especially government-sponsored mortgage insurance programs, had diminished the risks and enhanced the potential profits of the business.72
Passage of the GI Bill, with mortgage guarantees for veterans, made the business of mortgage lending even more attractive. Officially titled the Servicemen's Readjustment Act, and signed by President Roosevelt on June 22, 1944, the GI Bill offered financial assistance for education, employment, housing, health care, and insurance to veterans returning from the war. The law authorized the Veterans Administration (VA) to guarantee loans for the purchase, construction, alteration, or improvement of homes, farms, or businesses.73 Borrowers could finance the entire purchase price and move in with no down payment.74
All of these government incentives to lenders and particularly to savings and loans, coupled with the latent demand for home ownership in Los Angeles, suggested enormous opportunity to an entrepreneur in California, particularly to a government entrepreneur who saw the potential for profit in aligning his business to achieve public policy objectives. In Washington, Ahmanson had seen men like Donald Douglas and Henry J. Kaiser get rich by focusing on the government's priorities. With the war over, the government no longer needed as many bombers and battleships. Now it wanted homes and mortgages.75 Ahmanson would build a business to meet this demand.
BUYING AND BUILDING HOME
Characteristically, since he was always a delegator, Ahmanson made Gould Eddy president of North American Savings and Loan and named himself chairman. With permission from the Los Angeles office of the California building and loan commissioner, he moved the main office to 9631 Wilshire Boulevard in Beverly Hills.76 To get access to additional capital, North American joined the Federal Home Loan Bank in 1947. It also purchased insurance from the Federal Savings and Loan Insurance Corporation (FSLIC) program to reassure depositors. Then Ahmanson and Eddy began an aggressive campaign to attract deposits.77
Though he had criticized the field of advertising in his speech to the Economic Round Table in the 1930s, Ahmanson shared many of the instincts of the professional ad men. By today's standards, his appeals were very tame, focusing on safety and security, but he was willing to invest in marketing. By the end of 1947, with new customers and deposits and infusions of capital from friends and associates, he had more than tripled North American's assets to just over $6 million.78 He was still far behind Edgerton's California Federal, which was twice as large, and Joe Crail's Coast Federal, which dwarfed all the others with nearly $43.5 million.79 But Howard began to think about catching his friends.
Ahmanson heard about another savings and loan for sale—Home Building and Loan.80 It was hardly a thriving entity in 1947. With its office on West Ninth Street in downtown Los Angeles, the company had seen its assets fall from $610,000 in 1930 to $249,000 by 1940.81 Although it recovered slightly after the war, it still had less than $1 million and had only four employees.82
But Home's intangible assets were very attractive to Ahmanson. The thrift had a name that customers could associate with all of the intangibles they imagined would come with the purchase of a house. Home also had a very valuable charter. California law allowed most thrifts to make loans only in a relatively small area near their offices. Savings and loans, like Home, that had been founded before the law took effect and made loans over a broader geography could continue to do business in a larger territory. This meant Home had growth potential that younger savings and loans did not have.83 Howard also liked the marketing value of Home's track record. The thrift had an unbroken history of paying dividends to depositors. This was a story Howard could sell to working- and middle-class savers who had lived through the Great Depression and seen banks and thrifts fail, with depositors losing their life savings.
Ahmanson bought Home Building and Loan's name and assets for $162,000. Over the next nine months, he restructured the board of directors and brought in new management from among his friends in the insurance industry, including Jack Kuhrts, an insurance broker who was already a business partner on a massive six-hundred-acre, $25 million mixed-use apartment and retail shopping complex near Crenshaw and La Brea. Relative to a project of this size, Home Savings hardly seemed like a racehorse.84 In fact, Ahmanson told his young assistant Robert DeKruif that he would be happy if the company eventually reached ten million dollars in assets.85
To grow both of his new associations, Ahmanson needed deposits. He decided to go after the savings bonds that Angelenos, like many other Americans, had accumulated during the war. Some of these bonds had reached maturity, but they were not especially liquid. Many people were eager to cash them and deposit the proceeds in a bank or savings and loan. Ahmanson liked to tell the story of how he borrowed a tactic from a friend. He mailed pennies to thousands of potential customers, using the coin to highlight the difference between the rates that banks paid on savings and the rate that Home would pay. Ahmanson also gambled and offered an interest rate that was 25 percent higher than what most thrifts were offering.86 The marketing effort worked beautifully and helped lure more than three million dollars in new deposits.87
Ahmanson's aggressive pursuit of deposits posed two major risks. The first was intrinsic to the operations of all savings and loans. The second was unique to H.F. Ahmanson & Co., the legal owner of Home Savings’ stock. To be able to afford to pay depositors a higher rate of interest, any association had to have lower costs or a higher rate of return on its loan portfolio. To achieve this goal, Ahmanson focused on increasing the volume of lending and selling these loans to the Federal National Mortgage Association ("Fannie Mae") for a quick profit.88 In 1947 and 1948, Home lent money for small developments in Compton and Buena Park, but Ahmanson also favored Westside areas, including Westwood and Brentwood, where relatively high prices could be expected to hold their value in times of depression or recession. Lending aggressively in a strong market and taking advantage of these government programs, Ahmanson quickly increased the assets and earnings of the association. Within a year of his acquisition of Home, Ahmanson had increased lending tenfold from dozens of loans a month to hundreds.89
The other major business risk was unique to Ahmanson's situation. By raising the interest rate paid on deposits above what other savings and loans were paying, Howard put market pressure on many of his best insurance customers—other savings and loans. They were not happy. Some stopped doing business with H.F. Ahmanson & Co. altogether. Howard had anticipated this. He encouraged his salesmen to maintain their sales efforts, even if the door was slammed in their face. By ensuring that thrift managers earned good commissions, he believed he could continue to grow his insurance business. For some thrift managers who were both customers and rivals, this was enough. Joe Crail, for example, owned two insurance companies on the side, but in 1958 he still gave H. F. Ahmanson & Co. plenty of business. Ahmanson “gave good service,” Crail said. “He still does, or I'd drop him in a minute. It's not only that he sends out his policies the very next day after he gets them, instead of in the usual week or so. He'll send an appraiser around to the property for a quote the same day, even if he's called at 5:00 p.m.”90
TRACT LENDING
While he coached his salesmen to be persistent, Ahmanson the entrepreneur focused on a once-in-a-lifetime opportunity in mortgage lending. Two years into the postwar era, it was already clear that there was money to be made by financing tract housing construction. Construction loans were highly profitable, and they offered the lender an inside track on permanent loans for home buyers. Ahmanson would later say this strategy gave Home Savings and Loan the ability to “manufacture mortgages” with potential economies of scale from high-volume production.
The GI Bill and VA loans were critical to Ahmanson's strategy. Although some savings and loan managers grumbled about the interest rate cap on VA loans or chafed at the idea of government intervention in the housing market, Ahmanson saw only opportunity. With a conventional-market loan, a thrift could lend up to 80 percent of the appraised value of the home. The loan would then go on the balance sheet, but the lender could book profits only as the borrower made payments. With a VA loan, by contrast, the lender was allowed to underwrite 100 percent of the value of the house, thus putting more money to work at interest, and the VA made the first payment on behalf of the borrower. Lenders could book this first payment immediately as profit. A smart lender, like Ahmanson, could use these immediate profits to build capital reserves. With more reserves, under the regulatory system, a thrift could lend more—and earn even greater profits.
Although mortgage lending to GIs offered quick profits, construction financing promised even bigger returns. Under the rules in place in 1948, Home or North American could charge a major tract builder as much as ten points (10 percent) on a construction loan. When the loan was recorded, the savings and loan could book the ten points as an immediate profit. Meanwhile, the actual cash for the loan would sit at Home Savings for months as the builder received only progress payments as construction was completed. It was as if a person had a ten-thousand-dollar line of credit at the bank and the bank subtracted the full interest cost on the full value of the line before the borrower had taken the money out of the bank.91
Tract builders were willing to pay these points because most did not have the capital they needed for such large projects. Banks were too busy with more secure investment opportunities. Equity financing would require giving potential profits to other investors. In addition, the potential profits were so good that most builders calculated that they could easily absorb the lenders’ high fees.
The rewards for tract lending were good because the risk was high. Builders were notoriously undercapitalized, and many of them were not ready for the scale of operations contemplated in the postwar years. To protect himself, Ahmanson decided that he would limit the size and type of tract loan he would make. As an extra protection, he hired an appraiser to evaluate the properties to make sure the builders were actually constructing homes that would sell.92
Despite his precautions, one of Ahmanson's first forays nearly ended in disaster when a friend Ahmanson recruited from the insurance industry over-committed the firm by nearly a million dollars on a single project and failed to tell Ahmanson.93 The Riviera Housing Corporation planned to build relatively expensive homes on a tract in Palos Verdes. When Howard found out about the project in the summer of 1948, the homes were already under construction and supposed to be 75 percent complete. When he visited the site, however, Howard discovered the project was way behind schedule. Furious, he fired the executive in charge and the company's appraiser. The builder then abandoned the project, leaving Ahmanson to pick up the pieces.94
Ahmanson faced the prospect of a half-million-dollar loss, an amount equal to twice the association's capital reserves. With this kind of loss, the regulators could have forced Home to stop taking deposits or making loans. Even worse, the state could have seized control or forced the company into bankruptcy. To keep the regulators at bay, Howard assured Milton Shaw, the deputy commissioner of the California Department of Savings and Loans, that he would personally compensate Home for any losses.95 When Shaw agreed to give Ahmanson a chance to salvage the situation, Howard called Thurston Ross, his former economics professor from USC. Ross recommended that Howard hire someone who understood the worlds of real estate and construction.96
Like Ahmanson, Ken Childs was a product of the Midwest. Born in Herington, Kansas, in 1901, he was a big man with a dry sense of humor, a sharp mind, and “an instinct for the jugular.”97 With square shoulders, a crew cut, and a broad, open face, he prided himself on his efficiency. He had been working in construction and real estate in the Beverly Hills area since 1925. During the war, he served four years in the army air forces. Afterward, he went to work for the Harry Kem Company, self-proclaimed realtors to the stars.98 “He knew every trick that a builder would try to take advantage of a lender,” remembers one longtime Home employee.99 And that was what Howard Ahmanson needed.
Childs presented his analysis of the situation to Ahmanson and Home's board of directors on September 21, 1948, and the board agreed to let Childs's Commerce Building Company take over the project. They also extended additional loans to complete construction and capped new lending on other projects until the situation could be resolved.100 Over the next year, Childs oversaw the completion of the Palos Verdes project and the sale of the homes. He was so successful that Home's total liability on the project shrank to about $100,000 ($937,000 in 2011 dollars). Howard paid this amount into the company's reserves from his personal funds, honoring his pledge to the California regulators.101
The Riviera project was a disaster, but it wasn't the only tract development to go into default in 1948. The board had to deal with a handful of smaller projects that ran into similar troubles. In response, Ahmanson restructured Home's management and board of directors. In November, he terminated the association's president and personally took charge. Impressed with the way Childs had handled the Riviera project, he put Childs on the board and tapped him to serve as executive vice president. At the same time, he retained his onetime business school professor Thurston Ross as a loan consultant and created a loan committee composed of Ross, Childs, and Ahmanson to tightly control future lending.102 Ross joined Home Savings's board of directors six months later, consolidating Ahmanson's tight circle of trusted advisors.103
To ensure that no builder ever took advantage of Home Savings again, Ahmanson and Childs also introduced a number of innovative management systems and business strategies. Childs organized a department that built one hundred to two hundred homes a year. This department gave Home a better understanding of the costs of construction, which allowed the company more closely to monitor tract builders receiving loans.104 The group also gave Home the ability to complete a project if a builder ran into trouble or if costs started to exceed the builder's estimates.105
To keep a tighter control on cash, Childs established a loan disbursement department. Builders had to show receipts for supplies. An inspector ensured that the supplies had actually been used on the project and that subcontractors had finished their work before the builder was reimbursed. For this service, Home charged 1.5 points on the construction loan.106
Ahmanson also worked with his attorney Thomas Webster to develop a new form of construction mortgage. This agreement gave Home a comprehensive claim on all the houses in a development, rather than individual liens on specific properties.107 This way, if a project ran into major trouble, Home could quickly take over the entire project.
All of these innovations reduced Home's risk and increased Ahmanson's willingness, even eagerness, to lend to tract developers. By 1950, North American and Home Savings and Loan were reportedly financing more than five hundred housing tracts in Southern California.108 Over the next several years, Home continued to lend aggressively. In 1952, Joe Crail acknowledged, “My bet was that the housing boom was over, and I didn't want the risk.” Ahmanson thought differently. He continued to lend and as a result became the major financier for tract builders.109
Commercial banks also seemed to leave the whole field of tract lending wide open to innovators like Ahmanson. They could have doubled their total real estate loans in the first five years after the war and still remained under the federal limit for non-government-insured loans, but they had better options.110 With California cities, school districts, and the state undertaking massive construction projects to keep pace with the growing demand for public infrastructure, and the state's private companies and corporations spending to increase their productive capacity, banks had plenty of investment alternatives that didn't require tying up their money for decades.
Ahmanson also seemed to understand that the postwar years offered a limited opportunity to make extraordinary profits while the demand for housing was high and the supply extremely limited. At some point, he knew, the pent-up demand for housing would be satiated. Continuing immigration to the Golden State would drive growth, but the greatest profits would go to those who moved quickly.