By Mandelman
You may not be aware, but in 1933, the Roosevelt administration introduced the Home Owners Loan Corporation (“HOLC”), whose purpose was to buy and refinance distressed mortgages from banks using government bonds that offered federal guarantees on principal, interest and taxes paid by the lenders, in order to modify the loans for borrowers and protect them from foreclosure and repossession.
Yes, you read that right.
President Roosevelt did what he did to address the aftermath of our long since forgotten housing bubble and crash of the late 1920s. To give you an idea of the scale of the program, mortgage purchases amounted to 8.4% of 1933′s US GDP.
During the 1920s, Florida was ground zero for the boom and bust. When the real estate bubble collapsed, foreclosures started to rise, homeowner and bank balance sheets weakened and the stock market crash followed. Deteriorating levels of supervision by the banking regulators contributed to the increase in easy finance that fueled the boom, as well.
You don’t say.
During those years, most loans were interest-only with 5-year terms. The borrowers would make interest only payments each month, and then repay the principal amount borrowed at the end of the loan by taking out a new loan. Home prices dropped as lenders no longer had appetite for the risk involved in lending and foreclosures started rising fast.
Between 1922-1925, overall mortgage lending increased by 55%. The commercial banks, insurance companies and the savings and loans, grew at 76%, 79% and 62% respectively. The most common types of loans at commercial banks were those with balloon payments… short-term, non-amortized loans. After the market dropped, foreclosures steadily rose, increasing every year before the shock of the Great Depression.
So, numerous academics have identified that collapse in home prices as a key factor leading up to the Great Depression.
Is any of this starting to sound the least bit familiar?
To make the loans affordable for borrowers, the HOLC extended the terms of the loans to being 15 year fully amortized mortgages, converted to relatively lower fixed rates of 5 percent when most loans were 6-8 percent… and in roughly 800,000 instances out of 1 million loans, wrote down principal balances to 80% of the appraised value of the homes.
The mortgages were subsequently sold at a profit and the program was brought to an end in 1951, when it became what we know …read more
Leave a Reply