Sunday, January 4, 2009

Redefaults on Modifications: History Repeats Itself

The 50%+ redefault rate on loan modifications in this downturn continues to make news (most recently Naked Capitalism and Housing Wire). In Crabgrass Frontier: The Suburbanization of the United States Kenneth Jackson writes about the Home Owners Loan Corporation (HOLC), a loan program signed into law by FDR on June 13, 1933. This program provided a lot of assistance:

Between July 1933 and June 1935 alone, the HOLC supplied more than $3 billion for over one million mortgages, or loans for one-tenth of all owner occupied, non-farm residences in the United States.

$3B was a lot of money back then. To put it in perspective, it represented about 2.5% of the GDP for 1933 and 1934. An equivalent amount would be about $677 billion today. In the 2nd quarter of 2008 there were roughly 75,715,000 owner occupied housing units in the US, so a program similar in scope today would be about 7.5 million mortgages. This is a pretty good sized sample.

How did things go? Again, from Jackson:

…in some states over 40% of all HOLC loans were foreclosed even after refinancing.

I wrote about why this happens here.