This contract also made it difficult to assess the health of financial institutions, as lenders booked the loans as short-term exposures when the risk was actually much longer term. One contemporary source called the contract “a menace.”8 After the Great Depression, fully amortizing loans with maturities of 15 years or longer became the standard.
Federal policy appears to have been a key factor in this transition. First, the Home Owners’ Loan Corporation – a sort of precursor to today’s Making Home Affordable program – purchased distressed mortgages and modified them into loans that amortized for 15 years or longer.9 Second, the newly created Federal Housing Administration sold insurance on 20-year fully amortizing loans.