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Snowden, Kenneth A. --- "The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s" [ 2010] ELECD 691 ; in Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur (eds), "The Panic of 2008" (Edward Elgar Publishing, 2010)

Book Title: The Panic of 2008

Editor(s): Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802611

Section: Chapter 2

Section Title: The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s

Author(s): Snowden, Kenneth A.

Number of pages: 24

Extract:

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 resi-
dential 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.
2. 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.
3. 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.
4. Proposals were offered to incorporate each of the innovations ...