Filter Results CategoriesCart
Highlight Updates

1.2.1 Before the Great Depression

Prior to the Great Depression, non-amortizing mortgages were common, frequently with maturities of only three to five years.13 Interest rates were higher due, in part, to the lack of mortgage insurance. And lenders typically required large down payments, sometimes as much as half of the purchase price.14 As a result, it was common for home buyers to take out high-rate second mortgages.15 Frequently mortgage payments were only enough to pay accrued interest, leaving the full principal balance due at maturity.16

Mortgage lending was a local business handled by local banks using deposits that typically came from their community. These banks held the loans themselves (known as holding a loan “in portfolio”) until it was paid-off, which was usually done by refinancing at maturity. Most borrowers needed to refinance every three to five years.17 Refinancing was easy during the 1920s, when incomes and property values were rising, but became more difficult—if not impossible—during the Depression.18 This led to dramatic foreclosure rates.

Footnotes

  • 13 {13} Matthew Chambers et al., Fed. Reserve Bank of St. Louis, Working Paper No. 2012-021A, Did Housing Policies Cause the Postwar Boom in Homeownership? 34–35 (Apr. 2012), available at http://research.stlouisfed.org; David C. Wheelock, Fed. Reserve Bank of St. Louis, Working Paper No. 2008-038A, Government Response to Home Mortgage Distress: Lessons from the Great Depression 4, n.5 (Oct. 2008) (explaining that banks and insurance companies often made such loans, but that savings and loan associations typically made long-term, amortizing loans), available at http://research.stlouisfed.org.

  • 14 {14} Price V. Fishback et al., The Origins of Modern Housing Finance: The Impact of Federal Housing Programs During the Great Depression 7 (paper presented at Yale Economic History Workshop, Feb. 28, 2001), available at http://economics.yale.edu.

  • 15 {15} Fred Wright, Commentary: The Effect of New Deal Real Estate Residential Finance and Foreclosure Policies Made in Response to the Real Estate Conditions of the Great Depression, 57 Ala. L. Rev. 231, 246–247 (2005).

  • 16 {16} Katherine Porter & Tara Twomey, Risk Allocation in Homeownership: Revisiting the Role of Mortgage Contract Terms, in Shared Risk, Shared Responsibility: Government, Markets and Social Policy in the Twenty-First Century (Jacob Hacker & Ann O’Leary eds., Dec. 2011); Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 6 (2008).

  • 17 {17} See C. Lowell Harriss, History and Policies of the Home Owners’ Loan Corporation 7 (1951), available at www.nber.org; Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 6 (2008).

  • 18 {18} See C. Lowell Harriss, History and Policies of the Home Owners’ Loan Corporation 7 (1951), available at www.nber.org; Peter M. Carrozzo, A New Deal for the American Mortgage: The Home Owners’ Loan Corporation, the National Housing Act and the Birth of the National Mortgage Market, 17 U. Miami Bus. L. Rev. 1, 6 (2008); David C. Wheelock, Fed. Reserve Bank of St. Louis, Working Paper No. 2008-038A, Government Response to Home Mortgage Distress: Lessons from the Great Depression 4 (Oct. 2008), available at http://research.stlouisfed.org.