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The prolonged resolution of troubled real estate lenders during the 1930s

  • Jonathan D. Rose
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    This paper studies how building and loan associations (B&Ls) slowly unwound their obligations following a set of financial shocks during the Great Depression, with a special focus on a group of particularly troubled B&Ls in Newark, NJ. Investors in B&Ls disagreed over whether to realize losses on foreclosed real estate holdings, and those investors favoring liquidation were unable to force action after legal developments nullified statutory withdrawal privileges. In the medium run, a market-based resolution mechanism developed in the form of a secondary market for B&L liabilities. Liability holders barred from withdrawal incurred large losses while liquidating their investments on this market. At the same time, B&Ls used the market to avoid realizing some losses by exchanging foreclosed real estate for their second-hand share liabilities. More formal resolution ultimately took place from 1938 to 1943, first consisting heavily of closures, and then of reorganizations. Reorganizations were spurred by a large scale federal intervention arranging for the creation of bad banks, liquidity injections, and liability insurance.

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    File URL: http://www.federalreserve.gov/pubs/feds/2012/201231/201231abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2012/201231/201231pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-31.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-31
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    1. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    2. Snowden, Kenneth A, 1997. "Building and loan associations in the U.S., 1880-1893: the origins of localization in the residential mortgage market," Research in Economics, Elsevier, vol. 51(3), pages 227-250, September.
    3. Price V. Fishback & Alfonso Flores-Lagunes & William Horrace & Shawn E. Kantor & Jaret Treber, 2010. "The Influence of the Home Owners' Loan Corporation on Housing Markets During the 1930s," NBER Working Papers 15824, National Bureau of Economic Research, Inc.
    4. Eugene N. White, 2013. "Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Chapters, in: Housing and Mortgage Markets in Historical Perspective, pages 115-158 National Bureau of Economic Research, Inc.
    5. Mark Carlson & Kris James Mitchener & Gary Richardson, 2010. "Arresting Banking Panics: Fed Liquidity Provision and the Forgotten Panic of 1929," NBER Working Papers 16460, National Bureau of Economic Research, Inc.
    6. Courtemanche, Charles & Snowden, Ken, 2010. "Repairing a Mortgage Crisis: HOLC Lending and its Impact on Local Housing Markets," Working Papers 10-1, University of North Carolina at Greensboro, Department of Economics.
    7. Gary Richardson, 2006. "Quarterly Data on the Categories and Causes of Bank Distress During the Great Depression," NBER Working Papers 12715, National Bureau of Economic Research, Inc.
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