By Jessica Wilson
Home ownership is a hallmark of American society, and for most people, their most significant source of wealth. Thus, when massive foreclosures happen, the effects ripple through the economy. The housing crisis of 2007 was a case in point.
“One reason we did these studies was that we had this huge problem in the Great Recession and it was generated by the housing markets. We had a slow recovery. Part of the reason for that was the slow recovery of the housing market,” said Price Fishback, co-author of the new book Well Worth Saving: How the New Deal Safeguarded Home Ownership and Thomas R. Brown Professor of Economics.
The recent housing crisis inspired politicians and academics to look to the past for guidance. Leaders from both parties harkened back to the New Deal days of the 1930s, and specifically, the Home Owners’ Loan Corporation (HOLC). According to Fishback, “The HOLC was a corporation created by the government. It bought a million troubled mortgages. The people involved in the mortgages were supposed to be in trouble through no fault of their own. The HOLC bought the mortgages from the lender and then refinanced them for the borrower.”
What Fishback and his colleagues discovered, though, was that no full analysis of the HOLC existed. Only one book had been written about it, and it was published in the 1950s. “This is a policy [the HOLC] that a lot of people raised as a possibility to re-invoke. But they were talking about it without understanding exactly how it worked. We wanted to provide a primer,” said Fishback.
The research team uncovered several key features of the HOLC. “What we show, is that when the HOLC bought the mortgages they paid essentially full price. They paid the value of the loan, the interest owed, the principal, the taxes. They bought the loans lock stock and barrel,” Fishback said. “It was a great deal for the lenders. The borrowers did not receive a break on the amount they owed but gained because the interest rate was cut and the loan period was extended. Further, the HOLC gave the borrower every opportunity to repay before foreclosing on the new loan. They often waited until the borrower had not made payments for 18 months before they would eventually foreclose on the refinanced loan.”
Another important point, Fishback said, is that the HOLC did not turn a profit, as many claimed, including the current presidential administration. “The HOLC lost about two percent of the loans they lent. Some people said they made money. Two percent is not too bad.”
In the end, though, the HOLC was effective. “The HOLC helped more than I anticipated. When I wrote the original article, I hadn’t fully appreciated how much it had helped. The HOLC prevented housing prices from dropping more than they already had. And they prevented home ownership rates from dropping more than they already had. They prevented sizeable drops, but they couldn’t reverse it.”
While the HOLC was effective in the 1930s, Fishback cautioned against cloning the program today. “The HOLC would have gotten a lot more lenders to do it than HAMP [Home Affordable Modification Program, the Obama administration’s program to stem the housing crisis], but it would’ve cost a lot more money. The question is whether taxpayers would have been willing to pay more money,” he said. The central purpose of the book is descriptive rather than prescriptive.
“The reason to study history is that it helps you understand past policies and how they work. But you also have to pay attention to the context of the time to see if they fit the current situation. What you need is an accurate picture so that you can draw better lessons from what was going on,” Fishback concluded.
A row of new townhouses or compendiums photo courtesy Shutterstock.