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Government response to home mortgage distress: lessons from the Great Depression

  • David C. Wheelock

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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-038.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-038
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  1. Alston, Lee J, 1984. "Farm Foreclosure Moratorium Legislation: A Lesson from the Past," American Economic Review, American Economic Association, vol. 74(3), pages 445-57, June.
  2. J. E. Morton, 1956. "Urban Mortgage Lending: Comparative Markets and Experience," NBER Books, National Bureau of Economic Research, Inc, number mort56-1, December.
  3. Kahn, Charles M & Yavas, Abdullah, 1994. "The Economic Role of Foreclosures," The Journal of Real Estate Finance and Economics, Springer, vol. 8(1), pages 35-51, January.
  4. Rucker, Randal R & Alston, Lee J, 1987. "Farm Failures and Government Intervention: A Case Study of the 1930' s," American Economic Review, American Economic Association, vol. 77(4), pages 724-30, September.
  5. Jaffe, Austin J & Sharp, Jeffery M, 1996. "Contract Theory and Mortgage Foreclosure Moratoria," The Journal of Real Estate Finance and Economics, Springer, vol. 12(1), pages 77-96, January.
  6. C. Lowell Harriss, 1951. "History and Policies of the Home Owners' Loan Corporation," NBER Books, National Bureau of Economic Research, Inc, number harr51-1, December.
  7. Leo Grebler & David M. Blank & Louis Winnick, 1956. "Capital Formation in Residential Real Estate: Trends and Prospects," NBER Books, National Bureau of Economic Research, Inc, number greb56-1, December.
  8. Meador, Mark, 1982. "The effects of mortgage laws on home mortgage rates," Journal of Economics and Business, Elsevier, vol. 34(2), pages 143-148.
  9. David C. Wheelock, 2008. "The federal response to home mortgage distress: lessons from the Great Depression," Review, Federal Reserve Bank of St. Louis, issue May, pages 133-148.
  10. Alston, Lee J., 1983. "Farm Foreclosures in the United States During the Interwar Period," The Journal of Economic History, Cambridge University Press, vol. 43(04), pages 885-903, December.
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