AEI Scholar Touts Depression-Era Default Fix

As Bush administration officials look for more ways to shore up the housing market, a conservative scholar is suggesting that policymakers take a look at a Depression-era agency that purchased defaulted mortgages to prevent foreclosures.American Enterprise Institute resident fellow Alex Pollock stresses in a Dec. 31 paper that the Home Owners' Loan Corp. refinanced more than 1 million loans from 1933 and 1937 and was later liquidated at a profit to the government. "The fundamental idea was that the HOLC would acquire defaulted mortgages from lenders and investors, giving its bonds in exchange, and then refinancing the mortgages on more favorable and more sustainable terms," Mr. Pollock says in the paper entitled "Crisis Intervention in Housing Finance." However, the lender would take a loss on the principal of the mortgage due to a new appraisal and lower property value. The HOLC was liquidated after 18 years and the government's initial $200 million investment produced a modest return of $14 million. "As the housing and mortgage bust of 2007 continues into 2008, the lessons of the HOLC again are relevant and well worth studying," Mr. Pollock says.