President Franklin Roosevelt’s solution to the mortgage crisis in the 1930s is a good model for a scheme to solve the current problem of endless foreclosure listings. Although there are marked differences between the Great Depression and the current crisis, there are also similarities that support the study of what Roosevelt did to contain mortgage defaults during his time.
In the 1930s, house prices dropped as drastically and as fast as how prices dropped today. House construction then declined by 90 percent from their peak to its lowest level. Unemployment rates though were much higher during Roosevelt’s time.
To head off further mortgage defaults and long foreclosure listings, Roosevelt launched the Federal Housing Administration under the National Housing Act of 1934 to insure mortgage loans and stabilize the housing market. He also launched the Home Owners’ Loan Corp. (HOLC) to acquire delinquent mortgages and then sell them to homebuyers at more affordable payment terms.
Under the HOLC program, the short loan terms of three to five years originally offered by the banks were extended to 20 years and large periodic payments were converted to affordable monthly amortizations. The HOLC program worked. HOLC ran its buy-and-sell operations from 1933 to 1936 and closed in 1951 when all the mortgages it acquired were retired. The program was successful because it lowered the default rate by an overwhelming 90 percent, averting further defaults and foreclosure listings. The federal government even earned profits for the taxpayers because it bought the mortgages below their market values from bankers who were too willing to sell them to the government because there were no other buyers.
Other precedents that could be studied for developing solutions to foreclosure listings are the mortgage defaults in the 1980s in Texas and in the 1990s in California. These default models show that homeowners will try their best to avoid foreclosure if they have larger equities in the properties they are occupying.
One key factor that will enable Obama’s $75 billion program to reduce foreclosure listings is consumer confidence. If the program lifts the consumer spending index to higher levels, the country can begin to recover. If foreclosure listings are shortened, the inventory of bargain properties will thin out and then home prices will rise. When home prices rise, the housing market stabilizes, lifting the confidence of Americans to spend and help rejuvenate the declining economy.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.