Learning From the Last Great Mortgage Mess

Although HOLC refinancing did not appreciably decrease homeowners’ debts, they benefited greatly from its generous loan terms.  The HOLC charged 5 percent interest rates on 15-year amortized loans written for up to 80 percent of the property’s value.  Borrowers could also opt for a 3-year moratorium on monthly principal payments.  In all of these dimensions, HOLC loans dominated the terms on loans that were available in the private market given the strict underwriting standards of the time.  The HOLC could assist borrowers while bailing out for lenders, therefore, because it offered much lower rates, much longer terms and much higher loan to value ratios than had been originally written into the existing delinquent loans.  

When servicing the loans it refinanced, the HOLC was slow to foreclose and cautious not to depress local home prices when it disposed of foreclosed properties.  The HOLC, nonetheless, ended up having to foreclose on 20 percent of its mortgage portfolio. Despite the high number of foreclosures, the HOLC showed a small surplus of total income over expenses in government accounts when it liquidated in 1951.  The U.S. Comptroller General concluded that the program actually earned modest losses of roughly 2 percent on its $3 billion loan portfolio, however, after all costs of capital were considered in the government accounting process.  The size of the government subsidy to housing markets was actually much larger, because the interest expense to the HOLC would have been much higher had the interest and principal on its bonds not been fully guaranteed by the Federal Government. Had the interest rate on HOLC bonds been one percent higher, the total subsidy would have been about 12 percent of the value of the $3 billion loan portfolio. 

We have each independently worked with co-authors to estimate the impact of HOLC lending activity on local housing markets between 1935 and 1940. Both studies found that the typical amounts loaned by the HOLC in roughly 2500 small counties led to sizeable benefits by preventing a 3 percent drop in the home ownership rate and a 20 percent drop in housing prices within that county.  HOLC lending, on the other hand, had no significant impact on the recovery in homebuilding.  We emphasize that these impacts were estimated for counties outside the nation’s largest cities because data limitations in these dense urban markets precluded estimation of HOLC impacts. 

Finally, the beneficial impacts that we have estimated for the HOLC at best only limited the damage during the last great housing crisis.  Between 1930 and 1940, housing prices still fell by an average of 45 percent and non-farm homeownership decreased by nearly 5 percent.  The HOLC, therefore, ameliorated but did not fully resolve the mortgage crisis of the 1930s.  The historical record suggests that proposals for a modern HOLC should take into account both the success and limitations of the original program.