Learning From the Last Great Mortgage Mess

We’ve had the good fortune over the last few years here at the blog to bring you occasional nuggets from University of Arizona economist Price Fishback, whose research on the Great Depression often offers powerful insights about our current economic situation.

Price’s latest contribution to the blog, this time jointly with Ken Snowden from UNC-Greensboro, discusses the Home Owners’ Loan Corporation, which bought and refinanced 1 million severely delinquent loans between 1933 and 1936.  Did things works out well or poorly?  You’ll have to read on to find out.  And if you like what they’ve written, keep an eye out for their soon-to-be-released book (with Jonathan Rose as a third author).

 

Learning from the Last Great Mortgage Mess
By Price Fishback and Ken Snowden

For the past four years, the U.S. has faced a housing crisis that shows no signs of ending.  The situation was similar in June 1933 when the Home Owners’ Loan Corporation was created to address the nation’s last severe mortgage crisis.  Some have suggested that a new HOLC could help resolve the current crisis, but their characterizations of the HOLC have been incomplete.  Our goal here is to summarize recent research that provides a fuller picture of the HOLC and its impact on housing markets in the 1930s.        

Between 1933 and 1936 the HOLC bought and then refinanced one million severely delinquent mortgages, representing roughly one-tenth of the nation’s nonfarm owner-occupied homes.  The total amount refinanced was $3 billion, or about 20 percent of the outstanding mortgage debt on one- to four-family homes in 1933.  A program of similar proportions in 2011 would refinance 7.6 million loans worth $2 trillion. 

(Photo: iStockphoto)

The typical HOLC borrower was more than two years behind on the original mortgage and property taxes and could find no private lender to refinance the outstanding mortgage.  Despite these problems, nearly all HOLC borrowers had been considered good credit risks just a few years earlier when they contributed down payments of 33 to 50 percent of the property’s value.  These borrowers ran into difficulties between 1929 and 1933 when the unemployment rate spiked above 20 percent and real GDP fell 30 percent.  

The HOLC was promoted primarily as a means of aiding these home owners.  Yet the corporation provided as much, or more, relief to mortgage lenders.  It served as a “bad bank” by purchasing the worst 20 percent of loans held by private lenders in 1933 at nearly the full value of the debt owed them. Recent research has shown that in nearly half of the HOLC loan purchases, the price paid covered the principal on the original loan plus all of the interest payments and real estate taxes missed by the borrower. In the rest of the cases, the price covered all but some of the missed interest payments, but the HOLC tried to limit the amount of hair cuts in order to encourage lender participation.  


JOHN B

Interesting post.

Two big differences from today:

1. Most homeowners had a real investment in their homes. No 100% mortgages. That encouraged homeowners to try to work it out and stay long term.

2. The patience built into the program. Unlike today where politicians and the media keep asking "are we there yet?". it was a long term program. The fact that they gave people a chance to make it work helped over time the government incur only minor losses.

Ray

So...what happened to the housing market under HOLC in the 30s? Is there an appetite for a program of the necessary size today? Were the HOLC beneficiaries underwater like today's borrowers or simply delinquent? Do the HOLC recipients really provide a good comparison with today's borrowers given the large down payments in the 30s vs the no-money-down subprime loans of modern times? Furthermore, were the same debt-to-income policies in force in the 30s?

I don't usually like to complain about free content but I expected more analysis after reading the introduction. The text is simply a recounting and enumeration of facts without interpretation. Perhaps that is what the authors were going for but it left me perplexed.

Tim

I bought right at the peak. I stayed within my means, but the loan officers and even the real-estate agent was really trying to push me to buy bigger. Also really pushed to get into getting an ARM. I knew what I wanted and had a price in mind.

But in hindsight its almost criminal that they pushed so hard on things they knew very well that I could not afford. Luckily I understood the numbers behind everything. Can see why a less educated person would buy into more than they could afford. It was pitched like it was no big deal.

Dargy Bagehot

Sounds like fraud to me. but, Where's the investigations? Nah. We can't do that. It might help people.

Oh, and yeah, HOLC or any other government programs that might actually allow renegotiation of principal are also a horrible and dangerous idea that could lead to helping people. Better to liquidate labor, liquidate real estate. Purge the rotten-ness out of the system. We will all lead more moral and humble lives (except for those on the other end of the trade).

John B. Chilton

Relevant and just appeared. I support the Fed on this one, but would prefer the legislature had acted so that it wasn't necessary.

http://blogs.wsj.com/economics/2012/01/10/senate-republicans-criticize-fed-on-housing-advocacy/

Extinct Species

Wow! I took econ courses taught by Dr. Snowden back in the 80's. A first rate and entertaining teacher. Nice to see him get the ink.

Gkm

Some may say the Fed is over-reaching. I say they're taking over. But don't worry - they have your best interests in mind so long as you serve the banking interests.

Joseph Cooper

Thanks for discussing the important facts of refinancing a mortgage. Refinancing a mortgage at a lower interest rate isn't always the right decision.