The housing crisis in 1933, and today

Question: I know that the New Deal created the Home Owners’ Loan Corp. I have been eager to read an article by someone who has looked at the way that mortgage crisis was handled ... and compared it to government efforts in our present crisis. If you are familiar with anything written on this subject I would appreciate your informing me where to find it. If you are not aware of anything, I might suggest that you would be an excellent person to explore it. —M.N.

Answer: Actually, you’re in luck. I do know of one such study; it was done a few years ago by Alex Pollock, a resident fellow at the American Enterprise Institute in Washington and the former president of the Federal Home Loan Bank of Chicago.

Pollock looked back to 1933, when Congress created the Home Owners’ Loan Corp. as a temporary fix “to relieve the mortgage strain and then liquidate.”

While the current mortgage meltdown and resulting — or corresponding, depending on your point of view — housing bust has been described as the worst since the Great Depression, it is nothing when compared to what happened in ‘33, when a financial and economic collapse occurred that is all but impossible to imagine today.

Back then, about half of all mortgage debt was in default. Unemployment reached 25%, thousands of banks and savings and loans had failed and annual mortgage lending had fallen by some 80%. New residential construction had dropped by 80% as well.

The prelude to the crisis might sound familiar. It was a period of grand economic growth and overconfident lending and borrowing. The 1920s featured interest-only loans, balloon payments, an assumption of ever-rising prices and the firm belief in the easy availability of a string of refinancings.

And then came the crash, the defaults, and the markets froze.

By comparison, only 2.95% of mortgages as of Oct.1, 2007, when Pollock wrote his paper, were labeled seriously delinquent, meaning roughly 1.5 million loans 90 days past due or in foreclosure. That’s risen to 9.11%, as of the second quarter this year, according to the latest figures from the Mortgage Bankers Association. Read more on foreclosures drop, but delinquencies rise, in MBA's second-quarter report.

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