A House Built With a Milestone

By Kirstin Downey
Washington Post Staff Writer
Saturday, June 24, 2006

Looking to buy the "perfect small house"?

There's a house for sale right now in Arlington that once won exactly that title, prominently trumpeted in 1938 on the news pages of The Washington Post. The paper heralded it as a "liveable arrangement" with two bedrooms, one bath, a dinette kitchen, indoor heating, a fireplace and a laundry room. It's been expanded a bit, but it's a snug little place at 5411 11th Rd. North in Arlington's Lacey Forest neighborhood. It's more than just a house, however. It's a slice of American economic history.

The house's design was displayed on the floor of the U.S. Senate; builders sought to replicate it across the country. First lady Eleanor Roosevelt is believed to have attended the dedication when it was unveiled to the public. And it was the first time in America that the federal government agreed to insure a home purchase with just a 10 percent down payment. Previously, private lenders had required 40 percent down payments, and even the government required 20 percent down.

In some ways, the house is a direct product of the Great Depression. Before then, the federal government had followed a strict hands-off policy on housing, relying entirely on the private market to make loans and build. The system had worked pretty well, at least for the affluent, though it had its marked ups and downs during cyclical recessions, even some called "panics." Many people pioneered their land and built their homes themselves with the help of neighbors and relatives.

But real estate boomed in the 1920s, hitting a record construction level in 1925, as lending standards were loosened. Real estate agents told buyers that prices would rise forever, that they had never fallen. People bought the largest houses they could get, stretching to make the payments by using the three-year or five-year interest-only loans that were customary. Those loans cost less each month because borrowers didn't need to make any payments toward the principal on the loan.

Consumers felt confident they would be able to refinance at the end of the loan term, and lenders felt secure because on many of the loans, the debt represented only about 50 percent of the value. But what they overlooked was that many people had taken out other loans as well, sometimes two or three, to make up the difference between the primary loan and the purchase price. They had in fact financed their down payments.

"The system was full of holes," wrote Julian H. Zimmerman, commissioner of the Federal Housing Administration, in 1959, describing the housing market in the 1920s. "Juggling several mortgages was difficult even when the going was good; but when things got rough in the late '20s it became impossible."

Workers lost their jobs; then they lost their homes to the banks that held the loans. About one in six mortgages in America went into foreclosure. Even people who remained employed found they couldn't find buyers for their homes at any price. No lender wanted to refinance short-term loans now seen as risky. President Herbert Hoover watched the downward spiral with horror, immobilized.

Within a month after President Franklin Delano Roosevelt took office in 1933, the Home Owners Loan Corp. was established. The federal agency helped homeowners stave off foreclosure by refinancing about one-fifth of the nation's outstanding residential mortgages, all of them in default. The Home Owners Loan Corp. was successful and was liquidated later at a slight profit.

Amid a surplus of houses and a paucity of buyers, the real estate market languished. To stimulate the housing and lending industries and help renters and moderate-income people buy homes, the Roosevelt administration developed a new kind of insurance program that would cover the losses lenders suffered if homeowners defaulted on their loans. In June 1934, the National Housing Act was passed, creating the Federal Housing Administration loan insurance program. It permitted borrowers to purchase homes with 20 percent down, financed with low-interest, fixed-rate loans to be repaid over 20 years, with mortgages not to exceed $16,000. Adjusted for inflation, that would be a loan value of about $228,000 today. The government in effect promised lenders they would be reimbursed for any losses; home buyers paid a little extra money each month as insurance to cover that expense.

The system worked. The fixed-rate loan for a 20-year or 30-year period became the national standard.

The first house financed under the new FHA program was in New Jersey, and thousands more began cropping up across the nation. The financial losses to the program were so small -- only 35 houses were lost to foreclosure in its first three years, out of 229,300 mortgages insured -- that legislators decided to permit an FHA expansion to cover houses purchased with only 10 percent down payments, too.

That amended housing law was enacted in 1938, and the Arlington house was the first structure financed and built under the revised housing act. It was viewed as such an important event in the housing industry that the National Retail Lumber Dealers Association's members made touring the house a priority item for builders visiting the nation's capital for the group's annual conference in May 1938. Many built similar houses elsewhere.

The expansion of the FHA program had its critics. Real estate agent Charles E. Lane, chairman of a New York housing committee, told a Fifth Avenue business audience that he disapproved because the expansion would encourage people to buy homes who were not in a "proper economic position" to do so, according to the New York Times. His concerns were echoed by others, who called a 10 percent down payment "too narrow a margin of safety for the mortgagee," according to another Times article in 1938. But by May 1938, a record $96 million in mortgages were initiated in a single month, including about 40 percent that involved 10 percent down payment loans.

Just this week, in a Senate hearing room, government officials and business leaders talked about how important the FHA program has been to the housing industry, and to homeowners, in America.

The FHA has helped millions of people "achieve the American dream of homeownership," said Regina M. Lowrie, president of Gateway Funding Diversified Mortgage Services in Horsham, Pa., speaking on behalf of the Mortgage Bankers Association. "It has worked," she said.

Lowrie and some federal officials are pushing for changes in the FHA program to make it more attractive to borrowers. Now buyers are asked to make a 3 percent down payment; supporters of the change want to scale back the down payment almost entirely. They also want the FHA to be able to insure more expensive homes. But some senators noted with skepticism that people earning as much as $130,000 would be covered -- and they questioned whether it is appropriate for the government to be insuring the homes of people who make more than twice the nation's median income.

So it seems relevant to look back at the little Arlington house. It's notable for how much smaller it is than what people think they need today. Even though over the years it has been expanded with a half bath, a sun room and an enlarged family room, it's still a two-bedroom rambler with almost no back yard.

Nancy West, who is selling the house on behalf of her aging mother, who moved there in 1978, can't prove that Eleanor Roosevelt visited. But the issue of small and affordable housing was much on the president's wife's mind at the time. In May 1938, she acted as a judge in a national small-home architectural competition sponsored by the Ladies Homes Journal magazine. She hoped to spawn construction of houses for what she called the "middle third" -- not the wealthiest or the poorest, but the middle-income people for whom housing was often too expensive.

Back then, the Arlington house was seen as a worthy residence for a man on the move. It was purchased by Frank Carnahan, secretary of the Lumber Dealers Association, as his personal home.

Later it was sold to a pair of schoolteachers and then to Nancy West's parents, Alan B. Prosise, a real estate appraiser and former World War II prisoner of war, and his wife, Dorothy, an artist and homemaker.

The house, which is listed for sale with Christian Manachi of AIREC Realty in Vienna, is priced at $625,000, too high to qualify for the FHA program. With a 10 percent down payment, buyers would need to earn at least $90,000 to qualify for the mortgage with today's five-year interest-only loans, and about $180,000 to qualify on traditional, more conservative lending terms with a 30-year fixed-rate mortgage.