Small Innovation - Massive Transformation

Sometimes it's the small or almost invisible innovations that can effect the most change. In 2009, few people driving around the modern American suburb would attribute this massive change of landscape from a hundred years ago to a single financial instrument. And yet, were it not for change in how banks lend money, most of the suburbs we have today would still be farmland and forest.

Before the 1930’s less than 40% of the population owned their home – as few could manage a loan with a large down payment and a balloon payment at the end of a short term. It was accepted wisdom that most of the middle class would never be able to acquire enough capital to purchase a home and therefore the more experienced banker would focus on lending to their wealthy customers. The Great Depression, however, prompted the government to make a change to the very nature of home ownership.

To help relieve unemployment and stimulate the economy, the US government passed the National Housing Act of 1934 and the Federal Housing Administration (FHA). Though criticized by many bankers, this act actually helped create an astonishing amount of new business for them. The FHA, through its mortgage insurance programs, made possible the amortization of mortgage loans with regular monthly payments and smaller down payments.

The self-amortized home mortgage, established in the 1930’s, then expanded through the use of securitization in the last decades of the 20^th century to grow the amount of home owners from 40% to 70% of the population. Although there have been abuses of the home mortgage system, most notably in the last several years – this innovation forever changed home ownership – and in the process helped create the modern suburbs, a massive home building industry, an expansion of automobile use, and many other innovations that are now accepted as normal.

A small innovation led to a massive transformation of the American landscape, industry, and culture. Now that we face another large economic crisis, the "Great Recession", will we create another small innovation that can transform our world? It seems very likely.