Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s

Abstract

Foreclosures led to severe disruptions in home mortgage lending during the recent Great Recession and the Great Depression of the 1930s. It is difficult to measure these impacts in the modern market where origination, funding and servicing are separated within complex lending structures, but during the 1930s local building & loans (B&Ls) combined all three functions. We measure the impact of foreclosures on new mortgage lending using a panel of all B&Ls in 4 states. The foreclosure overhang explains about 30 percent of the drop in new mortgage lending by B&Ls as the housing crisis intensified between 1930 and 1935.

Reassessing the magnitude of housing price declines and the use of leverage in the Depressions of the 1890s and 1930s

“…Nevertheless, it was severe, and historical accounts emphasize that it led to large disruptions in the real estate sector, following a major urbanization boom in the 1880s. Indeed, in writings by economists studying real estate markets in the 1930s, the experience of the 1890s is typically referenced as the last time that the real estate market had been in the 1950s summarized by Snowden (2014), Field (2014), White (2014), Gjerstad and Smith (2014), Fleitas et al (2018), Fishback et al (2020), Rose (2017), andSnowden (2010).…”

The U.S. Postal Savings System and the collapse of building and loan associations during the Great Depression

“…The competition between postal savings and B&Ls may even have prevented a quick return to normal conditions after the banking panics had subsided. B&Ls were the nation's leading residential mortgage lenders in the United States and their trouble during the Great Depression is often linked with further problems in local mortgage markets (Fishback et al, 2019). While the framers of the postal savings system intended the redeposit system to prevent funds from flowing out of local areas, the funds moving out of B&LS and into postal savings were not typically offset by additional lending by commercial banks receiving redeposits.…”

“…They digitized the annual amount of deposits in each post office from the Annual Reports on the Operation of the Postal Savings System . The data on B&Ls come from Fishback et al (2019). They digitized the name, location, and annual balance sheet of each B&L from the state banking and insurance reports of New York, North Carolina, and Wisconsin between 1920 and 1935.…”

“…The literature on postal savings banks has focused on the patterns of usage (Kemmerer, 1917; Schewe, 1971; Sprick Schuster et al, 2020) or on postal savings' response to commercial bank failures (Davidson & Ramirez, 2016; Kuwayama, 2000; Sissman, 1936). Similarly, the literature on B&Ls has focused on their popularity at an aggregate‐level (e.g., Bodfish, 1931, 1935; Clark & Chase, 1927) or the role they played in the success of the mortgage market during the 1920s and 1930s (Courtemanche & Snowden, 2011; Fishback et al, 2013; 2019; Fishback, Troesken, et al, 2011; Fleitas et al, 2018; Rose, 2014).…”

Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s

“…The appendix provides a full description of our data sources, which are annual reports by state and federal regulators. The data and replication files can be found in Fishback et al (2020).…”