Causes, Consequences and Implications for Reform
Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr
Chapter 2: The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s
Kenneth A. Snowden, Jr. INTRODUCTION The residential mortgage crisis that triggered the Panic of 2008 is more severe, in terms of rates of foreclosure and decreases in home prices and residential wealth, than any since the Great Depression. We should look back to the 1930s for more than benchmarks of misery, however, since it provides an opportunity to examine the origins, impacts and consequences of one severe mortgage crisis as we live through another. In this chapter I identify four elements that shaped the 1930s crisis and define its long-run impact on the nation’s mortgage market: 1. The crisis was preceded by a decade during which the nation’s residential mortgage debt grew at an unusually rapid pace while financial innovation reshaped the mortgage market itself. Three innovations of the 1920s figure prominently – high-leverage, affordable home mortgage loans, private mortgage insurance and two early forms of securitization. Each of the intermediaries that brought innovations to the market in the 1920s suffered prolonged liquidations during the 1930s. These complex processes were publicly-managed but not publicly-financed. Federal emergency measures, including a publicly-financed ‘bad bank’ (the HOLC), strengthened institutional portfolio lenders while the innovators of the 1920s were liquidating. Additional regulatory change created institutional structures within which these portfolio lenders dominated the residential mortgage debt for the next four decades. Proposals were offered to incorporate each of the innovations of the 1920s into new federal programs. One effort – for high-leverage, insured mortgages – succeeded in the form of the FHA loan program; 51 2. 3....
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