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Great Depression holds answers
Current mortgage distress looks to past
ST. LOUIS -- While the nation's current level of mortgage distress seems reminiscent of the Great Depression, a closer examination reveals the underlying causes are far from similar, according to an economic analysis from the Federal Reserve Bank of St. Louis.
David C. Wheelock, an economist with the St. Louis Fed, wrote the analysis for the Review, the Reserve Bank's bi-monthly journal of economic and business issues.
Since the peak of U.S. housing prices in 2005, the housing market has undergone a rapid fall while mortgage delinquencies and foreclosures have risen sharply. Many analysts predict house prices will continue to fall and mortgage delinquency and foreclosure rates will remain high until 2009 or beyond.
One of the proposals to stem the tide of loan defaults and foreclosures includes creating a new federal corporation to purchase distressed mortgages from investors and convert them to 30-year fixed-rate mortgages. "The type of agency being suggested," said Wheelock, "would closely mimic one from the Great Depression called the Home Owners' Loan Corporation."
Wheelock's analysis revealed that a period of intense housing construction preceded the Great Depression. Although this growth period came to an end shortly after housing prices reached their peak in 1925, outstanding home mortgage debt continued to increase.
Well into the Great Depression, falling household incomes and property values fueled high levels of loan delinquencies and foreclosures. Many of the home loans during this period lasted no more than five years and many homeowners made little or no payment toward the principal. Falling incomes made it increasingly difficult for borrowers to make loan payments or to refinance outstanding loans as they came due. "At its worst, in 1933, around 1,000 home loans were foreclosed every day," said Wheelock.
In addition to programs aimed at providing affordable housing, the federal government took several steps to alleviate distress in the mortgage markets. During the 1930s, five major agencies were created to provide liquidity for home lenders, reduce the number of home loan foreclosures, and reform the mortgage market -- among them the Home Owners' Loan Corporation (HOLC).
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