BUSINESS

Rep. Brad Miller: Government Should Buy Distressed Loans Directly From Banks, Following FDR's Example

04/26/2010 05:12 am ET | Updated May 25, 2011

As part of its initial legislative barrage on the economic crisis, the Roosevelt administration created the Home Owners' Loan Corporation ("HOLC") in June of 1933, just three months after entering office. The HOLC purchased distressed mortgages from banks, and then negotiated new, more affordable mortgages with the homeowner. Before it ran out of capital in 1935, the HOLC purchased a little more than one million mortgages, or about one in six of the urban home mortgages. (There was a similar program for farm mortgages).

Homeowners applied to the HOLC to buy their mortgage, so the HOLC was able to pick and choose salvageable mortgages. HOLC mortgages required less equity than banks required (20 percent instead of 35 percent) and had lower interest rates (five percent instead of eight percent). The HOLC was indulgent of late or missed payments, and patiently worked with struggling borrowers to prevent default.

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