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Government Response to Home Mortgage Distress: Lessons from the Great Depression

Federal Reserve Bank of St. Louis Working Paper No. 2008-038A

32 Pages Posted: 27 Oct 2008  

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Date Written: October 24, 2008

Abstract

The Great Depression was the worst macroeconomic collapse in U.S. history. Sharp declines in household income and real estate values resulted in soaring mortgage delinquency rates. According to one estimate, as of January 1, 1934, fully one-half of U.S. home mortgages were delinquent and, on average, some 1000 home loans were foreclosed every business day. This paper documents the increase in residential mortgage distress during the Depression, and discusses actions taken by state governments and the federal government to reduce mortgage foreclosures and restore the functioning of the mortgage market. Many states imposed moratoria on both farm and nonfarm residential mortgage foreclosures. Although moratoria reduced farm foreclosure rates in the short run, they appear to have also reduced the supply of loans and made credit more expensive for subsequent borrowers. The federal government took a number of steps to relieve residential mortgage distress and to promote the recovery and growth of the national mortgage market. The Home Owners Loan Corporation (HOLC) was created in 1933 to purchase and refinance delinquent home loans as long-term, amortizing mortgages. Between 1933 and 1936, the HOLC acquired and refinanced one million delinquent loans totaling $3.1 billion. The HOLC refinanced loans on some 10 percent of all nonfarm, owner-occupied dwellings in the United States, and about 20 percent of those with an outstanding mortgage. The Great Depression experience suggests how foreclosures might be reduced during the present crisis.

Keywords: Mortgage foreclosures, foreclosure moratoria, Home Owners Loan Corporation, Great Depression

JEL Classification: G21, G28, N22

Suggested Citation

Wheelock, David C., Government Response to Home Mortgage Distress: Lessons from the Great Depression (October 24, 2008). Federal Reserve Bank of St. Louis Working Paper No. 2008-038A. Available at SSRN: https://ssrn.com/abstract=1289440 or http://dx.doi.org/10.2139/ssrn.1289440

David C. Wheelock (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

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