The New Deal’s mortgage relief program offers an effective alternative to the Obama administration’s failed strategy.
Continued high unemployment is unfortunately not the only bad piece of economic news that the nation has had to face this summer. It now appears as if the level of home foreclosures will continue at an alarming pace, with many economists now predicting that the number of Americans likely to lose their homes in 2010 will exceed one million — a figure that would surpass the more than 900,000 homes lost to foreclosure in 2009.
With so many homes at risk, the current housing crisis certainly rivals that which struck the nation in the wake of the 1929 crash, when the housing industry all but collapsed. Indeed by the end of 1933, housing starts had fallen to one tenth of pre-1929 levels, and the number of urban homes that were either in delinquency or in foreclosure was running at a staggering fifty per cent.
The New Deal response to this crisis was immediate and effective. In June of 1933, FDR signed the Homeowners Refinancing Act, which established the Home Owners Loan Corporation (HOLC), a new federal agency whose chief purpose was to refinance existing home mortgages that were in default and at risk of foreclosure. The HOLC also assisted mortgage lenders by providing them with additional capital and by refinancing problematic loans. By the close of 1935, when the program had come to an end, the HOLC had refinanced approximately twenty per cent of all the urban mortgages in the United States — over one million homes — and had lent out roughly $3.5 billon (an estimated $750 billion in today’s dollars).
Equally important, the HOLC’s strategy of buying out existing mortgages and replacing them with new ones based, not on the typical short-term mortgage agreement of the time (usually 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 twenty-five and thirty years, would eventually become standard practice and help revolutionize the mortgage industry. The HOLC obtained its financing by borrowing from the Treasury and from capital markets, and by the time it had closed its books in the early 1950s, it had turned a small profit.
Given the relatively poor showing to date of the Obama administration’s Making Home Affordable Program — a voluntary effort that pays lenders to modify bad loans — and the growing fear among some economists that a continuation of the mortgage crisis may drag the US back into recession, perhaps it is time to consider a more direct federal response to the crisis along the lines of a new HOLC. Today’s mortgage market is of course much more complex than that of the 1930s, but the essential problem — keeping struggling families in their homes — is the same. A new HOLC might be a far more effective and efficient means of providing relief to the millions of Americans in danger of losing their piece of the American dream. It would also help stabilize our fragile economy and might even prevent us from slipping back into a recession. For all of these reasons, providing direct federal assistance to struggling home owners is not just good social policy, it is also sound economic policy that, from the perspective of those families who are but weeks away from losing their most precious financial asset, cannot be implemented soon enough.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.