An interesting research piece was done well before the current housing crisis by Price Fishback, William Horrace, and Shawn Kantor for the NBER in 2001, “The origins of modern housing finance: The impact of federal housing programs during the Great Depression”. This is a good economic history of the housing policy in the 1930’s. Two programs were the core of housing policy during the New Deal.
One program was FHA insurance which still exists today to promote home ownership. The development of GNMA was an effective program for promoting home ownership. These Federal programs revolutionized housing finance by making it national through the packaging of loans. The insurance reduced the premium associated with the risk of default.
The second policy program was the Home Owners' Loan Corporation which was used to refinance or restructure mortgages which were ready to or in default. The program was used to support restructuring of delinquent mortgages facing foreclosure. This was not a guarantee program. It was a program to forestall default and reduce the chance an excessive amount of the housing stock flooding the market and further depressing prices. The objective of the researchers was to see whether the HOLC was able to stop defaults based on refinancing the mortgages and reduce the plunge in housing prices. The evidence on the effectiveness of these programs was mixed. The default rate was by any measure high for the mortgages taken on by the HOLC so it is hard to measure whether the defaults were less then without the corporation. These were mortgages on the brink. But, the program delayed housing from coming on the market during the height of the Depression; consequently, there was less chance of the further feedback of declining home prices forcing more foreclosures. The program was short with lending only extending to 1933, but the portfolio of over 1 million loans had a long-term impact. Many of the defaults were delayed until the 1940’s. So in a sense, the program was effective. Unfortunately, the authors of the research do not have enough evidence to conclude that HOLC was a complete success.
The concept of a HOLC for the 21st century may be an effective way of delaying some of the foreclosures in the market and may be an alternative to the setting up a moratorium for foreclosures. Alan Blinder provides a nice peice on this type of program in an NY Times editorial.
One program was FHA insurance which still exists today to promote home ownership. The development of GNMA was an effective program for promoting home ownership. These Federal programs revolutionized housing finance by making it national through the packaging of loans. The insurance reduced the premium associated with the risk of default.
The second policy program was the Home Owners' Loan Corporation which was used to refinance or restructure mortgages which were ready to or in default. The program was used to support restructuring of delinquent mortgages facing foreclosure. This was not a guarantee program. It was a program to forestall default and reduce the chance an excessive amount of the housing stock flooding the market and further depressing prices. The objective of the researchers was to see whether the HOLC was able to stop defaults based on refinancing the mortgages and reduce the plunge in housing prices. The evidence on the effectiveness of these programs was mixed. The default rate was by any measure high for the mortgages taken on by the HOLC so it is hard to measure whether the defaults were less then without the corporation. These were mortgages on the brink. But, the program delayed housing from coming on the market during the height of the Depression; consequently, there was less chance of the further feedback of declining home prices forcing more foreclosures. The program was short with lending only extending to 1933, but the portfolio of over 1 million loans had a long-term impact. Many of the defaults were delayed until the 1940’s. So in a sense, the program was effective. Unfortunately, the authors of the research do not have enough evidence to conclude that HOLC was a complete success.
The concept of a HOLC for the 21st century may be an effective way of delaying some of the foreclosures in the market and may be an alternative to the setting up a moratorium for foreclosures. Alan Blinder provides a nice peice on this type of program in an NY Times editorial.
http://www.nytimes.com/2008/02/24/business/24view.html The government would take terms that were at lower market rates but would save the expenses of going through foreclosure and fire sale at this most sensitive time.
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