Building Home. Eric John Abrahamson
own experience in fire insurance dating back to the age of thirteen. In any case, Adams was impressed.
He asked Howard if he could find underwriting for his proposed venture. Howard boasted, “Of course.”40
Actually, he had no idea if the men who had taken control of National American would go along with this novel concept. Alternatively, he could approach one of the big East Coast insurance firms. Still concerned that his youth was a problem in face-to-face negotiations, he turned to the Northern Assurance Company of England. Conducting the deal by mail, he convinced the Brits and at least one other company to back him. The companies made him their general agent for Southern California and offered him the usual 15 percent commission on each premium, plus 25 percent of the company's profits on any policies he wrote.41 For Howard, this structure turned out to be lucrative. With a greater volume of business, his loss ratio rose to 8 percent, but this was still far below the industry average of 40 to 45 percent.42 Since he shared in the profits on policies written with low loss ratios, he was soon making good money for a twenty-three-year-old entrepreneur.
A year after his initial conversation with Morgan Adams, Howard was summoned back to Mortgage Guarantee. Aware of Howard's success and seeking to bring his business in house, Adams offered Howard a job and a salary of $10,000 a year ($135,000 in 2011 dollars), “which is a lot of money for someone your age.” Howard replied, “Go jump in the lake.” Offended by Ahmanson's impertinence, Adams canceled all of Mortgage Guarantee's policies with H.F. Ahmanson & Co. Undeterred, Howard borrowed $15,000 from a banker friend, made deals with four other mortgage lenders, and was soon back in business.43
Ahmanson continued to innovate in ways that threatened his more established competitors. Most fire insurance companies wrote policies for residential and commercial property. Commercial property had a higher risk, but it was also more competitive, so insurers subsidized discounts for businesses by charging excessive fees to home owners. Ahmanson focused exclusively on residential policies and cut his rates accordingly. Competitors complained that this was “unfair” competition, but they soon followed suit. One prominent Los Angeles insurance agent later quipped, “Residential premiums in this area have gone down by as much as 45 percent since that joker came over the ridge.”44
Howard recognized another unfilled niche in the insurance market in 1933 when a 6.4 magnitude earthquake slammed the Long Beach area, killing 115 people and causing forty million dollars’ worth of property damage. Many mortgage lenders were forced to take a loss when borrowers failed to pay back loans on properties without earthquake insurance. To meet this market need, Howard developed a special “single-interest” policy defined to cover only the lender if a mortgaged property was damaged by earthquake. Cleverly, Howard wrote the policy so that it required the lender to foreclose to activate the insurance. He reasoned that rising land values in the Los Angeles area guaranteed that much of the loss on the structure would be mitigated by the appreciated value of the land. Thus his insurance risk was minimal.45
Ahmanson refused to write commercial insurance. He preferred the inherent diversification of risk that came from writing many small policies as opposed to the concentrated risk associated with a major liability for a corporate account. Also, corporations always wanted to negotiate their premiums. Ahmanson didn't like negotiating over prices, whether he was buying or selling. Home buyers weren't in a position to bargain. Ahmanson preferred it that way.46
Innovation and self-confidence fueled Ahmanson's success. To impress potential clients and customers, he happily cultivated an image of wealth. He drove a Pierce Arrow automobile and, like his father, dressed in elegant suits. As he traveled around the state to meet with lenders, he would roar into town, slam on the brakes, and come to a stop in a cloud of dust in front of the local bank or building and loan. The manager would look out his plate-glass window and see Ahmanson just getting out of his car. Then Howard would go inside to get the lender's insurance business.47
On the road, Ahmanson stayed at the best hotels—the Palace in San Francisco and the Del Monte in Monterey. At Christmas, he sent lavish gifts to his clients. The child of one manager of a savings and loan remembered, “We all sat around the Christmas tree and opened the gift from Howard Ahmanson. It was always the best gift the family ever got. So I knew the name of Howard Ahmanson long before I ever met him.”48 Established downtown businessmen like Morgan Adams marveled at Ahmanson's acumen and salesmanship. Ahmanson's son would later say that, like Lyndon Johnson, Howard had the ability to see into the heart of whomever he needed to win over and to manipulate him on the basis of his deepest longings and fears.49 Yet he was midwestern enough to use these insights, together with hard work, to satisfy the customer as well as himself. In the years before the start of the Great Depression, his charm and diligence made him successful, and his attention to the world around him made him cautious.50 But his “chicken feed” strategy also alerted him to a fundamental transition taking place in the mortgage industry.
THE CHANGING WORLD OF THE BUILDING AND LOAN
Home ownership was on the rise in the 1920s. Across the country, a building boom was under way and potential home owners needed mortgages. To find these loans, many turned to the kind of hometown building and loan immortalized by Jimmy Stewart in It's a Wonderful Life.
As an institution, the building and loan was also rooted in the rise of cooperative financial institutions in Europe and the United States in the late eighteenth and early nineteenth centuries. An increase in wage labor and the concentration of urban populations during the Industrial Revolution created a demand for financial institutions to serve wage earners new to the market economy. Without productive assets of their own, these wage earners needed to save cash to insure themselves against personal disaster or provide for the construction of a home. Commercial banks did not offer general savings accounts for workers.51 Mutual self-help cooperatives were organized to promote thrift among the working class.52
After the Civil War, in a period of rapid economic expansion, building and loans became increasingly popular in the United States, particularly in capital-poor regions like the Midwest and Far West.53 Most were small and local and run by part-time managers who often had other sources of income. The average institution included about 314 members who owned an average of $303 worth of stock.54 Some served only a single neighborhood or a tight-knit ethnic or religious group.
The building and loan represented a revolution in mortgage finance to the working and middle classes. Prior to this time, home buyers who sought financing from institutional lenders generally had to provide at least 50 percent of the cash needed for the transaction and faced a large balloon payment for the remaining principal after only a few years. The building and loan offered members a way to protect their savings, earn interest on their balances, and access mortgage capital.
Lending money for first mortgages on residential property proved to be a remarkably safe investment, and it paid a relatively high return to the investor. Even during the financial crisis of 1893, building and loans enjoyed a low rate of failure. As a result, they became attractive to a variety of local investors, ranging from workers putting aside small savings each week to widows and merchants with capital to invest. Unlike commercial banks, thrifts offered fixed-rate loans with longer terms (up to twelve years) and higher loan-to-value ratios (60 to 75 percent). These institutions gave millions of Americans their first real chance to own a home. By the mid-1890s, they held nearly a quarter of all the residential mortgage debt extended by financial intermediaries in the United States.55
The spirit of mutualism and thrift that had characterized the building and loan represented a pragmatic, cooperative solution to the lack of mortgage capital available to the middle class. With success, thrifts also reflected a widespread reaction to the negative aspects of large-scale capitalist enterprise that worried many Americans at the end of the nineteenth century. Cooperatives seemed to be more aligned with the idea of community.56
A CORPORATE THREAT
An increasingly integrated national economy, however, posed a series of fundamental threats to the local, mutual ethos of the building and loan. The resolution of these threats would pave the way for a substantial and abiding role for government