Many U.S. states imposed temporary moratoria on farm and nonfarm residential mortgage foreclosures during the Great Depression. This article describes the conditions that led some states to impose these moratoria and other mortgage relief during the Depression and discusses the economic effects. Moratoria were more common in states with large farm populations (as a percentage of total state population) and high farm mortgage foreclosure rates, although nonfarm mortgage distress appears to help explain why a few states with relatively low farm foreclosure rates also imposed moratoria. The moratoria reduced farm foreclosure rates in the short run, but they also appear to have reduced the supply of loans and made credit more expensive for subsequent borrowers. The evidence from the Great Depression demonstrates how government actions to reduce foreclosures can impose costs that should be weighed against potential benefits. (JEL E44, G21, G28, N12, N22)
Federal Reserve Bank of St. Louis Review, November/December 2008, 90(6), pp. 569-583.
Nearly 1 percent of U.S. home mortgages entered foreclosure during the first quarter of 2008, and almost 2.5 percent of all home mortgages were in foreclosure at the end of the quarter.1 The high number of home mortgages in foreclosure or at risk of foreclosure has prompted calls for government action. On July 30, 2008, President Bush signed the Housing and Economic Recovery Act of 2008 (H.R. 3221), which, among other provisions, included a $300 billion increase in Federal Housing Administration (FHA) loan guarantees to encourage lenders to refinance delinquent home mortgages. Congress also has considered, among other proposals, directing the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac) to refinance subprime mortgages, and creating a new federal agency to acquire and refinance delinquent mortgages.2
The creation of a new federal agency to purchase delinquent mortgages would mimic a similar agency, the Home Owners' Loan Corporation, which was established to refinance delinquent mortgages during the Great Depression. Mortgage delinquency rates rose sharply during the Depression. By one estimate, approximately half of all U.S. urban home mortgages were delinquent as of January 1, 1934 (Bridewell, 1938, p. 172). The Home Owners' Loan Corporation was established in 1933 and over the subsequent three years purchased and refinanced more than 1 million delinquent home loans. Additional steps by the federal government to ease mortgage market pressures during the 1930s included the creation of the Federal Home Loan Bank System to mobilize funds for home lending, the introduction of FHA mortgage insurance, and the creation of Fannie Mae to purchase FHA-insured loans.3
State and local governments also responded to the rise in mortgage foreclosures during the Depression, mainly by changing state laws governing foreclosure. Several states enacted temporary foreclosure moratoria. Others made permanent changes that limited the rights or incentives of lenders to foreclose on mortgaged property. Recently a number of U.S. states have considered similar steps to reduce mortgage foreclosures. During the first six months of 2008, the state legislatures of Massachusetts, Minnesota, and New York considered legislation to impose moratoria on foreclosures, and legislation for a national moratorium was introduced in the U.S. Congress.
Foreclosure moratoria are controversial. Although moratoria can benefit some borrowers and temporarily reduce foreclosures, critics argue that moratoria reduce the supply of loans and increase costs for future borrowers.4 Despite similar arguments made during the Great Depression, 27 states imposed moratoria at the time to reduce the number of mortgage foreclosures.5 Today, the growing sentiment for using moratoria to reduce the current number of foreclosures prompts a retrospective …