What We Can Learn About Overcoming Foreclosures from The Great Depression
By Gina PogolMortgage Credit Problems Columnist
Anonymous Asks: What was the Great Depression like in terms of foreclosures and families, and how were these problems solved?
Gina Says: Prior to the Great Depression, there was almost no government involvement (like FDIC or Federal Reserve) in residential mortgage lending. There was no federal deposit insurance or regulation. Fewer than half of America's families owned their own homes. For those lucky enough to be considered for residential financing, down payment requirements of fifty percent were the norm. Most mortgage loans were short-term, sometimes as short as five years, and were set up as balloon mortgages. Many were interest-only loans. Yes, the same kind of interest-only loans that got many people into trouble in this century.
The programs and policies today appear to have been formed from lessons taught by our first housing crisis. In the beginning of the Great Depression, unlike today, the Fed actually CUT the money supply, raising interest rates and choking off investment. Money was least available when it was most needed. The first victims of the wave of foreclosures than began running across the country were farmers--unable to start next year's crops or buy equipment, these traditional family businesses went first. They were soon followed by the less agricultural-centered portion of the population.
Depression solutions finally helped. According to a study at UC Berkeley, the Home Owner's Loan Corporation (HOLC) was formed by the government and took over mortgages of those in distress (similar to today's bailouts), "the HOLC refinanced the total amount due into a loan amortized for 15 years at 5% interest , compared to 6-7% interest rates available in the private sector, and the HOLC loan had no prepayment penalties. Borrowers were given the option to pay only interest for the first three years of the mortgage."
While 7% doesn't seem like an exceptionally high rate (although that's about where it was a few years ago), keep in mind that during the Depression, the US economy was actually experiencing deflation. An equivalent would be the 2008 economy at 4.2% inflation, with mortgage rates being over 12%!
The HOLC interest rate was eventually dropped further to 4.5%, which is similar to today's rates. Interestingly, after all the bailing out, HOLC managed to turn a profit in the end. Whether today's efforts will be so rewarded is yet to be seen. But given our past history, there seems little reason to believe that our taxpayers will take a bath. And there could be a nice profit in our future.
That Berkeley study is interesting. You can find it HERE
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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