A History Lesson from the Great Depression in Foreclosure Management

by 17 Oct 2012

(TheNicheReport) -- Of all the lessons learned during the Great Depression of the 1930s, the Federal Home Loan Bank Act of 1932 stands as one of the most powerful examples of efficient government intervention during a time of economic crisis. The system of 12 Federal Home Loan Banks, from which Fannie Mae and Freddie Mac emerged, have provided funding for residential mortgage loans for the last eight decades –in addition to keeping the cost of home ownership within reasonable levels.

The foreclosure crisis during the Great Depression was of a greater magnitude in comparison to the avalanche of foreclosures that have piled up since around 2007. By the time the Federal Home Loan Bank Act was passed, the rate of foreclosures in the United States was about a thousand a day. At the time the radical interventionist legislation was passed, bankers criticized the federal government’s measure as being egregious and arbitrary.

The Birth of Mortgage-Backed Securities

It is interesting to note that Federal Home Loan Bank were pioneers of mortgage securitization, particularly since the reckless creation and trading of these debt instruments were at heart of the financial meltdown in 2008. In 1932, the federal banks provided funding for residential construction firms that also acted as lenders. Mortgages written in good faith were accepted as collateral and then sold to investors as securities.

Securitization of mortgage-backed debt was solely within the purview of the newly created institutions in the wake of the Great Depression. They managed to create cash flow at a time when the U.S. housing industry had thoroughly collapsed. In a historic move that would be repeated in late 2008, a mortgage moratorium was called by the chairman of the new federal banks.

The passing of the Federal Home Loan Bank Act shows that government intervention in real estate and mortgage matters can be leveraged to alleviate an ailing system. For this reason, current discussion about the Federal Housing Administration (FHA) and its need to tap a credit line from the Treasury in order to stay afloat should include a look back at the policies enacted and measures taken during the Great Depression.


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