Should we revive a Depression-era bailout organization?

Posted by: Peter Coy on September 21, 2007

Unless you’re one of our older readers, you probably don’t remember the Home Owners’ Loan Corp., which was set up during the Depression to rescue people from foreclosure. It refinanced something like one in five mortgages on urban private residences in the mid-1930s.Franklin Roosevelt.jpg
Homeowners got a stretched-out loan that they could afford. The original lenders got partial—not full—repayment. It stopped making loans in 1936 and was dissolved in 1951 at a small profit to the government (not sure how that supposed profit was calculated).

The Center for American Progress is proposing to bring back the agency. Here’s a piece from the online edition of The New Republic by Andrew Jakabovics, the Associate Director of the Economic Mobility Program at the Center for American Progress. someone from the center.

Here’s an article from the Center for American Progress website spelling out that idea along with a bunch of others for coping with the subprime crisis. Here’s a column on the idea by Tom Petruno of the Los Angeles Times. Here’s a Wikipedia article about the Home Owners’ Loan Corp., which says that it was “essentially a failure.”

Not vouching for any of these pieces—just putting some interesting thinking out there.

Reader Comments

Andrew Jakabovics

September 26, 2007 2:09 PM

Dear Mr. Coy:

I just saw your blog posting about the Home Owners’ Loan Corporation, and I wanted to clarify some points. First, the profitability was determined by the amount returned to the Treasury when the corporation was liquidated in 1951. Second, the Wikipedia article has a number of inaccuracies, not least of which is that HOLC was “essentially a failure.” Out of the 1 million loans issued, the HOLC ended up acquiring about 200,000 homes (82% by foreclosure, the rest through voluntary transfers). About half of all properties were acquired before 1937, which is largely attributed to relatively loose lending standards in the early days of the HOLC. After the first year or so, consistent lending standards meant the riskiest loans were rejected. Other inaccuracies in the Wikipedia piece are the types of loans offered (HOLC offered 15-year fully amortizing loans to replace the short term, interest only loans that were prevalent; 30-year loans were a later innovation) and HOLC’s bank bailout activity (it never was authorized to do so; HOLC was under the control of the Federal Home Loan Bank board, which also oversaw the home loan banks, but the only “bailout” for mortgage-issuing institutions came in the form of HOLC bonds to buy up outstanding mortgages at a loss).

Hope this is helpful.

Yours,

Andrew

Peter Coy

September 26, 2007 2:13 PM

Andrew,

Thanks for the comment and for the article you sent me that appeared in the academic journal Land Economics in 1951. My reading of that article is that the HOLC was a success. However, it's going a bit far too call it "profitable." It received a $200 million interest-free loan from the government that it took 16 years to pay back. If it had even modest interest on that loan it would have been in the red. Also helping it was a government guarantee of its debt that lowered its borrowing costs. So, even though it did wind up with a $14 million surplus at the end, which is a notable achievement, I wouldn't call it "profitable."

Dan Holbrook

September 29, 2007 2:29 PM

I reserve jusdgement on weather a bailout is necessary or warranted, but until lenders start doing everything they can do to limit losses then they should not be rewarded by subsidizing their owne stupidity. Lenders now are foreclosing on properties where they could limit their losses by looking seriously at short sales, loan modifications, forebearance, etc. I deal with lenders every day that turn down short sales and instead continue foreclosure and end up with devastating losses that drag down the value of property all around. I train Realtors to work with lenders to negotiate a better solutions and they are frustrated as well. Unfortunately the lenders lack the process, the staff and the wisdom to come up with an alternative to stem the tide of foreclosure. We need to be more stop the foreclosures and solve the problems in a unique and creative way. Together the real estate industry and the lending community can come up with a better solutions.
dholb@atvantage.com

Howard

September 26, 2008 1:24 PM

First the Democrats blindly follow Obama ... now, they are willing to blindly follow Reid, Bush and Paulson ... in a decision which could dramatically affect every American for decades. Well, thank God, Senator John McCain, Senator Shelby, and hundreds of economists don't just want to take a few people's word for it. Already, Reid has tried to tack additional pork, like Acorn, to this bailout. I didn't think I could dislike inept Harry Reid, with his 15% approval rating, any more than I already did, but this isn't about Reid being left alone to decide America's future. It will be interesting to look back at this in retrospect, to see if we really did have to RUSH this 750 Billion dollar decision ... and, who really benefitted from pushing it through so quickly. Also, what's Alan Greenspan's opinon ???

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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