SEVEN

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Home and the State

AS THE SAVINGS AND LOAN INDUSTRY in Southern California grew in the postwar years, it was elaborately integrated with a system of state and federal regulations.1 The system, like the Titanic, was designed to be unsinkable, with separate compartments, so that if one was punctured the others would keep the massive ship afloat and on keel.² It was a system designed by politicians during the Depression to ensure stability regardless of the cost to competition and efficiency. It favored entrepreneurs who understood both the legal and the political purposes of the law and who worked well with lawmakers and regulators to achieve common goals. This climate of cooperation reflected business's embrace of what has been called the “interventionist state,” the “corporate commonwealth,” or the managed economy.³

Some academics have argued that the comfortable relationship between business and government in the postwar years reflected a tendency for businesses to “capture” the agencies created to regulate them. Without a doubt, Howard Ahmanson found ways to influence this system to promote his economic interests. But even when his influence was strongest, he did not always get what he wanted. In reality, as Stephen Adams has described the relationship between government entrepreneur Henry J. Kaiser and federal bureaucrats, the story was “of neither battle nor capture, but rather a process of continuous negotiation.”⁴

From the earliest days of the American republic, the regulation of financial services reflected tensions between state and federal priorities. These tensions were deeply embedded by the end of World War II. Federally chartered banks and thrifts competed with their state-chartered cousins in local communities on the basis of what lawmakers and regulators allowed. A customer could open a checking account at a commercial bank but not at a savings and loan. By law, a thrift could offer a saver more interest than a commercial bank. A prospective automobile buyer could get a consumer loan from a bank but not from a savings and loan. Advertising copy was strictly controlled by state regulators.5

To influence this complex system of laws and regulations, savings and loans individually and collectively developed relationships with regulators and politicians. In Washington, the U.S. Savings and Loan League, with members and customers in nearly every congressional district in the country, exerted a powerful influence on Congress. Closer to home, the California Savings and Loan League drafted legislation and often collaborated with regulators on the development of new rules.

Howard Ahmanson and his companies maintained an ambiguous relationship with these trade associations. While his close friends Charlie Fletcher and Howard Edgerton served terms as president of the California league and Edgerton rose to be president of the national trade association, Ahmanson declined to take a leadership position in either association after 1948. He almost never spoke at an industry gathering, although he did often foot the bill for food and festivities. Usually, Ahmanson let Ken Childs and Robert DeKruif carry the water on most of Home's government relations. At the highest levels, however, he personally cultivated relationships with regulators, legislators, and governors who were critical to Home's success.

THE INFLUENCE OF THE STATE

Because Home was a state-chartered institution, its growth and business opportunities were dictated first by lawmakers in Sacramento and bureaucrats employed in the office of the California commissioner of savings and loans. State regulators approved applications for charters and branches. They monitored lending activity to ensure that an association was not incurring imprudent risks—checking loan-to-value ratios, visiting properties to ensure that valuations were fair and accurate, tracking capital ratios to prevent an association from becoming too highly leveraged. If an association got into trouble on any of these measures, the state could seize the association and operate it, sell it, or liquidate the assets to repay the depositors.

Like most states, California had regulated the industry since the late nineteenth century, largely at the behest of the industry itself. Leaders of the thrift movement initially sought state regulation to ensure best practices and honest management to protect the good name of building and loans. They also hoped that with the state's help they could standardize elements of their operations, which would further increase public confidence in the building and loan concept. And like many industries in the late nineteenth century, thrift leaders turned to the legislature for statutory competitive advantages—particularly in relation to commercial banks.

Formal state supervision began in 1891, after the California legislature passed a law providing for a special form of incorporation for building and loan associations and putting them under the supervision of the state's Board of Bank Commissioners. The act reflected the legislature's belief that thrifts were to serve a public purpose. The law required that articles of incorporation stipulate that “the association is formed to encourage industry, frugality, home building and the accommodation of savings.”6

The bank commissioners, however, did not retain their authority very long. In 1893, they recommended that Governor Henry H. Markham establish a separate regulatory system for building and loans, and the legislature created the Board of Commissioners of the Building and Loan Associations.⁷ Thereafter, like most savings and loans across the country, California thrifts operated under state regulation with little or no supervision by federal authorities.

With the collapse of credit and sweeping federal reforms of the banking system during the Depression, the federal government stepped dramatically into the world of savings and loans. New laws provided for federal charters and access to credit through the newly created Federal Home Loan Banks. The Federal Savings and Loan Insurance Corporation (FSLIC) offered deposit insurance to both federally chartered and state-chartered institutions.

In a very real sense, the New Deal legislation created parallel and competing systems of regulation in California and other states, and over the next several decades savings and loan entrepreneurs would watch the evolution of laws and regulations in each system with an eye to maximizing their competitive advantage. In California, existing savings and loans lobbied for changes that would help them take advantage of the new federal law. “Under the sponsorship of the league, and with the untiring work of league officers, staff and committees,” California Savings and Loan League president Howard Stevens later proclaimed, “the Building and Loan Association Act was entirely rewritten and became law in 1931.”8 During the time that the Federal Home Loan Bank Act was drafted, California league officials worked closely with the U.S. Savings and Loan League to shape this legislation. In subsequent years, as the National Housing Act was revised and renewed, California league officials continued to press the legislature to adapt California's laws to the new federal guidelines.⁹

The savings and loan industry also exerted influence over the operations and management of the office of the California commissioner of building and loans. When Commissioner Leroy Hunt wrote to Governor Warren in 1953 to suggest a reorganization of his department, he noted that he had consulted with “various state officials, the Division of Building and Loan staff and many members of the California Savings and Loan League” in the process of developing his recommendations.¹⁰ The close interaction between regulator and regulated was enhanced by the fact that the expenses of the division were paid for by the industry, not taxpayers, through an assessment based on each association's total assets.¹¹

Thus the relationship that developed between regulator and regulated by the early 1950s was often collaborative and mutually supportive. Regulators believed that a major part of their job was to protect the health of the industry as well as the consumer or depositor. When changes needed to be made in the law, industry officials often drafted the new legislation, and legislators in Sacramento and Washington often accepted their recommendations with little other public input.¹² When influential regulators retired, they often became owners, managers, or consultants to savings and loans.¹³ Meanwhile, many legislators owned shares or served on the boards of local savings and loans.

The self-regulatory atmosphere of the 1950s was also evident when individual companies or bad actors got into trouble and threatened to provoke negative public reaction to the whole industry. In 1953, for example, builder Harold Shaw (no relation to Commissioner Milt Shaw) acquired United Savings and Loan of Glendale but ran afoul of the regulators. Leaders from the industry met in the league's office in Pasadena with Milton Shaw and discussed what should be done. The leaders urged the commissioner to ban all new deposits with United if the company didn't straighten itself out. Ultimately, to make the problem go away, Howard Ahmanson agreed to buy United and turn it around.¹⁴ Howard Edgerton confided in a letter to Governor Goodwin Knight that Commissioner Shaw “should be commended and not criticized for the manner in which he has handled a couple of sore spots that could have been real headaches for our business.”15

THE HOME THAT SHAW BUILT

Of the various commissioners who ran the California Division of Savings and Loans from 1945 to 1965, none was more important to Home Savings than Milton Otis Shaw. A thin, grizzled man in the 1950s, Shaw was born in Ohio and served in the army during World War I. After the war, he earned a degree in business administration and accounting from Ohio State University and then came to California in a Model T Ford roadster in 1923. Smitten with the climate, he became an auditor with the Division of Corporations and was admitted as a certified public accountant in 1927. He joined the Division of Building and Loans in 1930 as a chief examiner. On his first audit in Southern California, Shaw uncovered an eight-million-dollar embezzlement scheme—at the time, the largest building and loan theft in history. Shaw rose through the ranks to become assistant commissioner in 1947, in charge of the office in Los Angeles. When Commissioner Frank Mortimer retired in 1951, Shaw became acting commissioner for nearly a year and a half. After a brief return to his job as deputy commissioner, he finally became commissioner in his own right under Governor Goodwin Knight on January 1, 1954.¹⁶

Some in the industry said that Home Savings and Loan was “the house that Shaw built” because he was so permissive of Home's acquisitions. By the mid-1950s, no other savings and loan in Southern California or the state as a whole had been allowed to acquire so many other thrifts and convert them into branches. In 1958, Fortune asserted that Shaw had “once helped Ahmanson out of a serious jam,” referring to the Palos Verdes episode. The magazine did not provide details, nor did it note Ahmanson's pledge to cover any shortfall from his own personal bank account.¹⁷

There is also considerable evidence that Ahmanson and Home Savings and Loan did not get everything they wanted from Commissioner Shaw. In 1954, for example, the company's applications to open branches in Torrance and Culver City were denied.¹⁸ The following year, when Ahmanson challenged the regulatory conventions by trying to acquire a San Francisco-based thrift, he was rebuffed by Shaw and federal regulators.¹⁹ Without question, however, the commissioner's office often aligned with Home Savings and other successful thrifts, especially on complaints.

COMPLAINTS

As Ahmanson, Edgerton, and other entrepreneurs in the savings and loan industry transformed a business once anchored in localism and mutual ownership into one characterized by aggressive competition and profit making, some objected. In January 1952, Governor Earl Warren received an anonymous letter warning that a building and loan scandal was going to “blow up in your face whenever there is a slight recession, unless something is done to correct it NOW." The writer asserted that North American, Home, Occidental, “and especially the United” (all Ahmanson-controlled companies) were paying excessively high rates on deposits and charging “usurious loan fees ... without regards for the real value of the property” to fuel rapid growth and high profits. Without referencing Ahmanson, the author, a self-described “old-timer” among the state-chartered companies, erroneously suggested that “a paltry original investment of less than $100,000 in both the North American and the Home” had been transformed into $4.5 million in only five years. “Things just don't happen that way in a well-regulated business.” Fearing retribution, the writer refused to sign the letter but did conclude by saying that he or she was acting in the public interest “as well as for the protection of the good name of associations that have been operating soundly since the last depression—and we don't want what happened then to happen again, and I don't believe you do either.”20

Though the letter was not signed, the governor's staff took the issue seriously enough to refer the matter to Milt Shaw, who was then acting commissioner. Shaw's report to the governor highlighted some of the tensions within the industry. After dismissing the specific accusations, he turned to what he suspected was the real issue for the writer—the fact that Home and a number of other thrifts were aggressively pursuing deposits by advertising higher rates. “Banks and other associations paying a lesser rate continually criticize the 3½ percent associations,” Shaw noted, but he also pointed out that there were twenty associations in Southern California offering this rate. Shaw suggested that there were two ways the state could deal with the issue: ban the advertising of rates or set the rates. He artfully noted, however, that the governor had spoken out strongly against state interference in competitive markets.21 The governor's personal secretary answered Shaw with a bureaucrat's and a politician's tact. He instructed Shaw to take all necessary steps “to protect the public interest in connection with the activities of Building and Loan Associations” but made clear his understanding “that this would not involve an attempt to control advertising practices, except as they may be regulated by statute or where, in your opinion, the public interest is endangered.”²²

Still, complaints continued to come in. In 1953, A.T. Purtell wrote to Governor Warren about the interest rates on loans charged by Joe Crail's Coast Federal Savings and Loan and its aggressive profit making. “My understanding has always been that the whole purpose behind the creation of Building and Loan Associations was to enable frugal people to buy homes on reasonable terms.”²³ Ahmanson and other entrepreneurs in the industry dismissed these complaints as sour grapes from an earlier generation of industry leaders out of touch with the modern exigencies of the business.

Records of the investigations into these complaints provide some evidence of Ahmanson's competitive advantage in the marketplace. Audits by state and federal examiners, for example, highlighted the fact that Home Savings and Loan's average loan-to-value ratio (59.5 percent in early 1952) was significantly higher than that of other savings and loans in the area (52 percent). These higher loan-to-value ratios reflected two factors. First, Home's growth had been fast. Therefore, its portfolio was not “aged.” Home buyers had made relatively few payments and had not reduced their principal balances. The high loan-to-value ratio also reflected Ahmanson's willingness to bet bigger than many of his competitors on the home and the borrower. Home's ratios were still within the regulatory limits, but to further inspire confidence in regulators and depositors, Home balanced this greater risk by maintaining reserves that were well above government requirements.²⁴

Federal regulators also fielded occasional complaints engendered by Home's aggressive expansion. In the fall of 1954, Howard Ahmanson and Howard Edgerton were scrutinized by the Federal Home Loan Bank Board after complaints were filed with the Veterans Administration asserting that the two companies were charging builders fees of 10 percent on VA construction loans. In a personal letter to Chairman Walter McAllister, Edgerton suggested that “the complaints, in our case, at least, are completely without foundation.” Eastern mutual savings banks, operating through brokers, dominated the market for construction financing in Southern California. “All we do is compete with them to keep our builders’ business.” California Federal received a gross income of 6 to 7.5 points on interim financing and the VA takeout (or long-term, fixed-rate) loan on a piece of property. But the company often didn't have enough cash to meet the demand. Eastern companies charged even more. Edgerton noted that the market in the fall of 1954 was becoming increasingly competitive, squeezing the company's earnings.25

Home Savings followed a somewhat different strategy that reflected Ahmanson's tolerance for risk and Home's competitive advantages as a state-chartered institution. According to Edgerton, Home had “intentionally taken some of the weaker builders who have to pay a higher price for their financing because they cannot get it from the local commercial banks or savings associations like ours.” He also explained that under California law Home had the ability to buy land and “set up a deal for a builder on a much more elastic basis than a federal savings and loan can do. As a consequence, they have been able to get higher fees.”²⁶

THE FEDERAL HOME LOAN BANK BOARD AND THE FSLIC

As a state-chartered thrift, Home Savings and Loan was not directly regulated by the Federal Home Loan Bank Board (FHLBB), but state-chartered associations that enrolled in the FSLIC agreed to be bound by the FSLIC's rules, and the FHLBB worked closely with the FSLIC to keep state associations in line.

Deposit insurance was one of the most important supports that the federal government offered the savings and loan industry, but not every thrift took advantage of the insurance program. Six years after the creation of the FSLIC, for example, only one in three state-chartered savings and loans across the country had enrolled.²⁷ Some didn't want to be controlled by Washington. Others decided that as public confidence in banks and thrifts began to return in the mid-1930s, the premium for insurance was too high.²⁸

Even if they didn't become members of the FSLIC, state-chartered institutions, especially in California, benefited from the more cumbersome regulatory structure that the FHLBB imposed on the federally chartered savings and loans. Some federal savings and loan managers, particularly Howard Edgerton, felt these disadvantages acutely. The federal system did not allow for stockholder-owned companies, for example. Federal thrift executives could be paid handsomely and enjoy significant perks paid for by the thrift's profits, but they could not accumulate an ownership interest. More than once, Edgerton tried to convert to a state-chartered stock association, but regulators turned down California Federal's applications and resisted these conversions in general.29

Federal regulators also tended to be less sensitive to local market conditions, which posed a major disadvantage to a Los Angeles-based company operating in the most unusual market in the country. Federal regulators were slower making decisions on branches and charters and were deferential to state regulators for political reasons. As a result, Edgerton and the leaders of other federal savings and loans often felt they were unable to grow as fast as the state-chartered institutions.

Edgerton maintained particularly close relationships with the various chairmen of the FHLBB, especially during the years when he served in top leadership roles in the U.S. Savings and Loan League.³⁰ These friendships provided the basis for a more informal regulatory approach. After Bert King, the head of the Veterans Administration, passed on complaints he had received regarding the high rates that California Federal and Home Savings were charging for VA construction loans, FHLBB chairman McAllister wrote to Edgerton to suggest that he might look into the situation. “Don't look on this as an official complaint,” McAllister said. “I merely point out to you that Bert is sensitive and hopes that this doesn't reach, for instance, Senator Homer Capehart.”³¹

As a former savings and loan executive, McAllister also shared his own ambivalence over his regulatory role and his reluctance to interfere in the market. “If the builder can't find someone else from whom to get his money and pays you 10 percent instead of 5 percent, the going rate, if such it is, then either you are taking a terrific risk with that builder, or else your competitors are sound asleep, or else there is something particularly stupid about the builder.” Pragmatically, McAllister suggested that since Edgerton was good friends with Ahmanson, he ought to talk the situation over with him and clear up any misunderstandings with the VA. “Bert is very friendly,” McAllister noted, “but I know that he doesn't want any explosion.”³²

California Federal and Home Savings handled the situation directly and discreetly. Edgerton wrote to King to explain California Federal's loan policies. Ahmanson sent Ken Childs to Washington to meet with the VA's top administrator. Well briefed, King told McAllister at the FHLBB that he was completely satisfied.³³

McAllister's support and encouragement for the savings and loan industry reflected his political philosophy and a developing awareness of the complexities of government's relationship with private enterprise. In a speech to savings and loan executives in Los Angeles in the fall of 1953, he noted that for twenty years he had been a critic of the government's regulatory approach. With Eisenhower's election, champions of limited government faced their first opportunity in two decades to reduce government interference in the daily lives of the nation's citizens. Yet he also noted that in his first year in office he had faced “innumerable requests to get a regulation passed to prohibit this, that or the other thing. We Americans just naturally want to correct the other fellow by passing a law. We would like to squash competition by a regulation.” In this sense, the industry was often its own worst enemy. Even in the Eisenhower administration, “All of us are constantly subject to influence and the advocates of a managed economy are fighting as never before to resume their place in the sun,” McAllister said.34

A deeply conservative man, McAllister continued to struggle with his own sense of how to balance the role of government and private enterprise in the mortgage market. But he was very clear on what the government should not do: build or own public housing.

THE THREAT OF PUBLIC HOUSING

During the war, the government had exercised unprecedented control over the nation's economy, dictating prices and wages, controlling construction and manufacturing, and focusing the nation's productive system on building airplanes, bombs, tanks, and other implements of destruction. To some, this era seemed to suggest that tentative New Deal experiments with social democracy might come to full fruition after the war. But many Americans were eager to get rid of the thinly tolerated systems of rationing and price controls once the war was over.

For many, public housing proved to be the battle line between two alternative views of American society. To the champions of social democracy, public housing, like public roads, schools, libraries, and parks, represented a natural extension of the communitarian and cooperative aspects of American culture. To others it posed a dramatic threat to the ideal of private home ownership and free enterprise. When public officials in Los Angeles proposed to solve the postwar housing crisis by building government-owned apartments and homes, the opponents of social democracy rebelled.35

Charlie Fletcher was one of the leaders of the rebellion. Victorious in his bid for Congress in 1946, he arrived in Washington the following January prepared to fight for an end to price and rent controls and a ban on the development of public housing. Fletcher joined many young World War II veterans, including two future presidents—John Kennedy and Richard Nixon—in the so-called Class of 1946. His victory helped the Republicans gain fifty-six seats in the House. Coupled with a gain of thirteen seats in the Senate, the election set the stage for a new conservative resurgence that was determined to reduce the federal government's role in the economy, weaken the influence of labor unions, and fight the spread of communism.³⁶

Fletcher's self-appointed role in realizing this new agenda was to block the construction of public housing. During a series of hearings that he chaired in San Francisco and Los Angeles, he deplored slums and agreed that something needed to be done about them, but he also noted the housing shortage affecting communities across the country. He favored the establishment of a national building code, especially for rental housing. He expressed confidence that private builders and lenders would be able to meet the nation's needs. Speaking to members of the Los Angeles Chamber of Commerce, he was more partisan. He warned of creeping socialism. “You've all seen what has happened in England,” he said. “I don't want any part of it.”³⁷

Charlie's critics suggested that he was “a tool for the real estate lobby,” which included land developers, builders, and lenders.³⁸ This group launched a major battle over public housing in Los Angeles, much of it centered on a roughly four-hundred–acre site in Chávez Ravine. At the end of the war, housing officials had studied the community's housing stock and identified eleven “blighted” areas, including Chávez Ravine. The city council approved a plan in October 1950 to spend $110 million to construct ten thousand housing units to be built in these areas.³⁹

Scored with dirt streets and walking paths, the old wooden houses of Chávez Ravine were home to a large community of Mexican Americans. City officials commissioned noted architects Robert Alexander and Richard Neutra to design a complex of 24 thirteen-story towers and 163 two-story buildings that would be owned and managed by the city's housing authority.⁴⁰

Private builders and lenders quickly organized in opposition to the city's plan, calling it “creeping socialism” and branding the director of the city's housing office a communist. Under mounting political pressure, the city council narrowly voted to cancel plans to build the development. When the housing authority appealed this decision to the courts, the city council put the issue on the ballot for June 3, 1952. The vote seemed to be obviated when the California Supreme Court ruled that the city could not cancel its contract for the project, but voters rejected the project anyway by a three-to-two margin. To honor the will of the electorate, California's senators, William Knowland and Richard Nixon, pushed for a federal law that would allow the city to cancel the contract.41

Opposition to the public housing projects continued to swell in the fall of 1952 as anticommunism swept the nation. After three of the city housing authority's top officials refused to testify before the California Senate Un-American Activities Committee in the fall of 1952, all three were fired. The following spring, Norris Poulson, a five-term Republican congressman, challenged the incumbent mayor, Fletcher Bowron, a supporter of public housing, and won.⁴² Soon after he took office, Poulson canceled the Chávez Ravine project.⁴³

The California Savings and Loan League supported the fight against public housing. Waving the flag of antisocialism in 1950, the league created a committee on governmental relations “to encourage high caliber men to run for public office, to back them in their campaigns and to help them with their problems after they have attained public office.”⁴⁴ It's not clear that Home officials shared this belief that the country was on a downward slope “toward the welfare state,” but Ken Childs served on this new committee. Howard's friends Mervyn Hope, of Hollywood Savings and Loan, and Joe Crail, of Coast Federal Savings and Loan, ran the Southern California branch of the committee.⁴⁵ Two years later, these members were succeeded by a new group of leaders that included Charlie Fletcher. This group invited another of Ahmanson's friends, Henry A. Bubb, to speak to the midyear meeting of savings and loan executives.

A tall, lean, handsome man right out of a Norman Rockwell painting, Bubb was the president of the Capitol Federal Savings and Loan Association in Topeka, Kansas. He later became a member of the board of directors of Home Savings and Loan. He had started with Capitol Building and Loan in 1926, when it was still a state-chartered institution, and had become president in 1941 after the organization converted to a federal charter. Under his leadership, Capitol Federal had become the largest federally insured association in Kansas.⁴⁶ In his 1952 speech, Bubb encouraged California savings and loan leaders to march at the forefront of “an alert, aggressive movement of political conservatism in this country.” Harkening back to the early days of the building and loan movement, when leaders had seen themselves as a defense against the rising tide of consumer credit, Bubb suggested that building and loan managers who did not join such a movement “are shirking our responsibilities to our savers, to our borrowers, and to ourselves” if “we fail to do everything in our power to elect conservatives to public office.” Bubb insisted that “Washington planners” were promoting inflation and threatening private home ownership in America by building public housing. “Public housing is a scandal,” Bubb declared. He encouraged thrift leaders to campaign against any politician who advocated it and to urge their customers to vote for conservative candidates. By doing so, he said, “we'll put a rope around the public housers yet.”47

While Bubb, Fletcher, and other leaders in the savings and loan movement railed against public housing, Howard Ahmanson said little about his own position on the issue. Some thrift leaders expressed equal concern about the government's role in mortgage lending, but not Ahmanson and Childs. They made government-guaranteed loans a centerpiece of their strategy.

FEDERALLY GUARANTEED LOANS

Thrift industry leaders had helped write the mortgage-guarantee components of the GI Bill. They underwrote 80 percent of the VA loans issued during the first year of the program's operation.⁴⁸ But the program's cap on interest rates soon became a problem. “How can we tie up our money at such a low interest rate for such a long time?” some lenders asked. “What are we going to do when we have to pay higher dividends to attract savings?"⁴⁹

Terms and conditions also proved difficult. The original GI Bill, for example, prohibited the lender from accessing the government's guarantee if the purchase price of the home exceeded a “reasonable normal value” determined by a proper appraisal. Legislators had inserted this provision to try to keep the market honest. In fact, “reasonable normal value” came to be interpreted as the home price absent high demand or an inflationary market, which was unrealistic in the postwar economy. Millions of people wanted to buy homes and prices were rising.

Congress amended the law in December 1945 to fix some of these problems. It increased the maximum loan amount from two thousand to four thousand dollars. It changed “reasonable normal value” to “reasonable value,” which allowed lenders to accept an appraisal based on current market conditions. Congress also extended the maximum term of the loan from twenty to twenty-five years, enhancing the affordability of the program. Responding to complaints from veterans and lenders, the VA streamlined procedures. “Supervised lenders,” for example, including financial institutions subject to state or federal oversight, were allowed to automatically write government-guaranteed loans to eligible veterans without prior VA approval. Congress gave veterans ten additional years to exercise their rights under the bill. It also allowed the VA to pay lenders 4 percent of the amount of the guaranty upon completion of the loan—a first payment on the veteran's behalf.50

Still, many bankers and lenders continued to be more concerned than excited by the law. One thrift manager asked: “Should Government be called upon to make good those guarantees there will be some excitement. . . . Who will be blamed for making the poor loans that caused the loss to the Government and a drain on the taxpayers’ money? What do you imagine the electorate will think of a financial system that collects income and profits on its loans but transfers losses to the Government?"⁵¹

Some lenders balked because the rules kept changing. Years later, Howard Edgerton noted that “the housing authorities in Washington issued directive after directive” regarding federal mortgage insurance and loan programs. “Life was never boring” in this environment, “but it was a bit difficult to make business plans as much as 30 days in advance.”⁵²

Given these problems, some savings and loan leaders avoided the federal programs. In fact, two-thirds of all single-family residential loans made by the nation's savings and loans were conventional loans without any government guarantee. Walter Ray, the president of the U.S. Savings and Loan League, warned his peers that if government guarantee programs “should ever become the sole and exclusive avenue through which mortgage credit was available, we would be at the point in the game where Uncle Sam would be able to tell a home buyer where he should buy his house, what kind of house it should be, and how much he should pay for it.”⁵³

Despite this dire warning, government-guaranteed loans were popular with Americans and seemed like a prudent investment to many people. In March 1954, the National Association of Home Builders noted triumphantly the biggest mortgage burning in history when the FHA commissioner delivered a check for $16.45 million to the U.S. Treasury to pay off loans the federal government had provided to the FHA in the darkest days of the Great Depression.⁵⁴

One prominent builder also reminded thrift managers that when their industry had failed to embrace the FHA's programs during the Depression they had left the door wide open for mortgage brokers who increased their market share significantly. If banks and savings and loans refused to make loans to veterans, they were also “lending weight to the eventual entry of the government into the field of direct loans to veterans.”55

Despite these warnings, thrifts showed a declining interest in VA loans in the mid-1950s. They wrote only about 20 percent of all VA loans in the country in 1955, at a time when VA and FHA loans accounted for nearly half of all new mortgages. As predicted, mortgage brokers and insurance companies rushed back into the business after Congress gave new freedom to Fannie Mae to buy and sell government-backed mortgages.⁵⁶ In 1956, Barron's noted that in the savings and loan industry, “the more enterprising [institutions] avoid VAs and FHAs entirely.”⁵⁷

Veterans groups lobbied hard for the government to fix the program. Los Angeles County supervisor John Anson Ford received a brochure from the Veteran's Organizations Council of Altadena titled The Big Promise. Echoing the prose rhythms of the novelist John Dos Passos, the brochure depicted the men who had preserved the nation, who “flew down the cloud-lined slots of sudden death” or “charged the bullet-laced Siegfried Line.” In gratitude, the nation had promised them “a share of the fullness of America, of the dreams of America: Was not every man's home his castle, and did not every man dream of a home of his own. Then, this you do for the men who preserved a nation; you promise them a home of their own.”⁵⁸

The promise came with the GI Bill. But with the competition for money in the postwar economy, the incentives to lenders were too slim. Fewer than twenty-five thousand veterans a month were able to obtain the home loans they wanted, while “twelve million veterans cannot get GI Home Loans today.” The solution: “The Congress must incorporate features which make the GI Home Loan competitively attractive in this age of atoms and economic worlds within worlds; adjust the interest rate on GI Home Loans to the average market level.”⁵⁹

The U.S. Savings and Loan League also lobbied for changes to make VA loans more amenable to lenders. Home Savings played a major role in this effort, although Howard never became directly involved. When the league began a campaign to raise the interest cap in 1953, Ken Childs led the charge. He told reporters that a raise was desperately needed because “the percentage of GI lending to the total volume of home financing had dropped to the lowest level since the close of World War II.” Childs insisted that the industry wanted to help the program “get back on its feet.”60 He didn't tell reporters that an increase in the maximum interest rate would benefit Home Savings more than any other lender in the nation.

HOME SAVINGS, VA LOANS, AND SOUTHERN CALIFORNIA

Los Angeles was the capital of the VA loan program in the postwar years. More VA home loans had been written in Los Angeles County by the fall of 1954 than anywhere else in the country—245,035 total, for a combined value of nearly $2 billion. These loans accounted for 7 percent of all VA loans in the country and more than half of California's 12.5 percent share of the national total.⁶¹

Home Savings and Loan wrote a huge share of these loans. Across the country, GI loans made up only 18 percent of the total loan portfolio of the average savings and loan in the mid-1950s, but they accounted for 68.2 percent of the value of Home's $377 million portfolio in 1956, increasing to 70 percent in 1958.⁶² The numbers were staggering. As Howard told reporters, this was the largest such portfolio in the United States.⁶³

Ahmanson and Childs relied on the safety of VA loans to balance the risks they were taking with tract lending and development.⁶⁴ With hundreds of millions of dollars invested in very safe but low-yielding government-insured loans, they could afford to buy big undeveloped pieces of property. Some financial analysts marveled at this strategy. While good conventional uninsured mortgages were earning 6 percent, the overwhelming majority of Home Savings and Loan's mortgages were earning closer to 4.5 percent. Ahmanson said he didn't mind. Commenting on the company's overall financial conservatism in 1958, he pointed out: “With the kind of reserves and the insured loan portfolio that we've got, we could stand a double 1929.”⁶⁵ In other words, real estate values could plummet, yet Home's asset base would be secure.

Howard also recognized a key opportunity in VA loans that many other lenders didn't see. As we saw in chapter 5, conventional loans went on the books at 100 percent of the value of the loan. The lender might earn a point or two in fees, but the major profits on the loan were amortized over the life of the loan. In contrast, VA loans went on the books for 92 percent of their value, and the lender was allowed to book as much as 8 percent of the loan immediately as earnings. This 8 percent margin enhanced Home's capital, allowed the company to grow more quickly, and gave the company greater lending capacity.66

Beyond the direct subsidy and guarantee inherent in the VA program, Ahmanson and Childs recognized other benefits from the government's involvement with housing. Historically, many savings and loans wrote loans and then held them for the duration of the loan. During the Depression, the government had tried to introduce greater liquidity by creating the Federal National Mortgage Association (FNMA) to buy and hold loans originated by certified lenders. Many savings and loans were skeptical of FNMA, but Childs and Ahmanson saw what most grocery store owners understood: the fastest way to profits was in the turnover of stock on the shelves. If they could book a profit from selling a loan to FNMA and then make a new loan to another builder, profits would be higher. Childs, for example, made that clear to his boss in 1951, when he expressed frustration that he could not offer more loans to tract builder Milton Kauffman because North American had reached the legal lending limit based on its capital. If he could deliver a new batch of loans to FNMA fast enough, North American would be able to finance an additional 118 homes.⁶⁷

BUILDING CODES AND MASS PRODUCTION

In addition to providing liquidity, as described earlier, the federal government's mortgage loan guarantee programs increasingly standardized the way homes and neighborhoods were designed and built. This trend toward standardization and mass production received additional support at the state and local level as communities adopted and enforced building codes after World War II.

Since the early part of the twentieth century, California, and especially Los Angeles, had led the nation in the development of building codes and standards along with the adoption of the nation's first zoning laws.⁶⁸ In 1917, the first single-family home standards were adopted and the legislature authorized the creation of city planning commissions.⁶⁹ In 1923, the legislature consolidated its various housing statutes, and California became the second state in the Union (after Michigan) to enact a comprehensive statewide housing law.⁷⁰ The new law delegated great power to local authorities, but this power was lightly used. Only four California counties enforced local building standards, for example, in 1938. After the war, local standards and building codes became much more prevalent in urban areas and had a substantial influence on the process and pattern of suburbanization.71

Sometimes these codes accelerated the pace of innovation; at other times they slowed it down. As contractors integrated new building products like aluminum siding and roofs, electric heat, insulated glass, and treated lumber, for example, some building inspectors were leery of these new materials. They remembered the inadequacies of “victory plumbing” products, for example, which had been substituted for conventional copper or cast iron during the war.⁷² To convince building inspectors that these new products were effective and durable, manufacturers provided product-testing data and pushed for broad and standardized revisions to building codes. These revisions made it easier for tract home builders to move from community to community replicating their construction strategies. They also decreased the lender's risk and thus lowered the costs of underwriting. For Ahmanson and Home Savings, all of these factors produced a simple but timeless equation: earn a small margin on a high volume and get rich in the process.

POLITICAL COMPETITION

Unlike most of his peers in the savings and loan industry, Howard Ahmanson had created a strategy that was deeply dependent on government initiatives. Like the legendary griffon, part lion and part eagle, who guarded the treasuries of the ancients and was the chosen emblem of H. F. Ahmanson & Co., government guarantees protected his huge store of assets from changes in interest rates and the money supply that put his peers on edge. With such security, he could bet on “the wildest cats and dogs,” tract developers willing to pay anything to get the cash they needed to build Southern California's burgeoning automobile suburbs.

Yet despite his dependence on the decisions of policy makers, Ahmanson lived at arm's length from the trade associations that lobbied on behalf of his business. While smaller savings and loans relied on the California and U.S. leagues to protect their interests and ensure that regulators maintained a balanced and profitable environment for their companies, a competitive entrepreneur like Ahmanson often found that his interests diverged from the majority in the league. Home Savings did not need regulators to intervene to manage dividend rates or giveaways, for example; it had the scale and scope to win pricing wars on its own. Focusing on growth as a way to increase profitability, Home favored more permissive licensing for branches, while smaller associations used the regulatory process as a way to impede potential competitors. As political appointees, regulators were inclined to align themselves with the interests of the largest number of industry players, represented by the league, rather than the handful of larger associations like Home Savings or California Federal. But Howard Ahmanson had his own singular source of competitive advantage in the regulatory and political arenas. He had deep pockets with lots of loose change.