Moratorium or a New Mortgage? FDR Sided With Main Street

The recent furor over the issue of mismanaged and fraudulent practices among some of the nation’s largest issuers of home mortgages has led to calls among some leading policy makers and others that it is time for the federal government to impose a nation-wide freeze on home foreclosures. While public anger over the issue continues to mount, and while Shaun Donovan, Secretary of Housing and Urban Development, has gone so far as to call the practices of some of the major banks “shameful,” there has been no indication to date that the Obama Administration would support such a move. In fact, Secretary Donovan has said repeatedly that a moratorium on foreclosures would be counterproductive and would hurt homeowners and home buyers alike. The Secretary has also said that where there is evidence of fraud or evidence that a homeowner had been denied “the basic protections or rights they have under law, we will take actions to make sure the banks make them whole, and their rights will be protected and defended.” But the general administration approach to the overall problem has been hands-off, perhaps best exemplified by Assistant Secretary of the Treasury Michael Barr’s comment that “[T]his is not a problem for Secretary Donovan to fix. This is a problem for the banks and servicers to fix.”

In many respects, then, the Obama administration’s approach to the foreclosure abuse crisis mirrors its approach to the overall housing crisis. This, like its Home Affordable Modification Program, is focused not so much on providing direct federal support to struggling families, but rather on trying to manage the problem indirectly, through the lending institutions themselves (the exact opposite approach that his administration has taken with regard to the federal student loan program).

Nearly 80 years ago, the Roosevelt Administration faced a very similar problem when an estimated fifty percent of all urban mortgages in the country in 1933 were delinquent or in foreclosure. But instead of focusing their efforts on trying to solve the mortgage crisis through the banks, the Roosevelt Administration took a far more direct approach. (The Hoover Administration’s approach to the foreclosure crisis was — like the current administration’s — based on kproviding Federal aid to lending institutions.) Guided by the principle that FDR articulated in 1932 when he said that the objective of government should be “to provide at least as much assistance to the little fellow as it is now giving to the large banks and corporations,” FDR set up the Home Owners’ Loan Corporation (HOLC), a new federal agency whose purpose was to refinance existing home mortgages that were in default and at risk of foreclosure. As has been reported here before, in its brief history the HOLC (which shut its doors within three years) managed to refinance roughly twenty percent of all the urban mortgages in the United States. It also revolutionized the US mortgage industry by offering terms not based on the typical short-term mortgage agreement of the time (a non-amortized loan of seven to ten years terminating with a balloon payment), but rather on the far more affordable amortized mortgage of between 25 and 30 years. This not only made home ownership much more affordable for families with average incomes, but it also provided the lenders with much needed relief, as the HOLC bought out the previously at-risk loans.

We should also note that the HOLC was not considered an entitlement program. Roughly half of all of the applications it received were withdrawn or rejected as homeowners were required to demonstrate a history and determination to meet their financial obligations. Equally important, by the time the program closed its books in 1951, the agency had not cost the US taxpayer any money, but had turned a small profit.

The HOLC was a highly successful and profitable federal program, which along with the other New Deal financial and regulatory reforms, helped shore up the critical US housing market and bring stability and security back into the US banking and financial system. Moreover, by offering beleaguered homeowners direct federal assistance — in essence attacking the root of the problem — it eliminated the need for a moratorium on bank foreclosures.

As we continue to struggle with this seemingly never-ending mortgage crisis, perhaps it is time we heeded FDR’s advice and shifted our attention from the large banks and corporations to the “little fellow.” If the New Deal is any guide, doing so might just make us all better off in the end.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.