History Repeats Itself

During the 1920’s and 1930’s, mortgage brokers and bankers were pushing some pretty sketchy home financing deals: 50% LTV, 3 – 5 year maturities – semi-annual payments, little or no amortization of principal, and second mortgages with brutal repayment terms and massive prepayment penalties or renewal fees.

Renewal fees were especially treacherous. Each year (or two or three), the mortgage had to be “renewed” (renegotiated) and homeowners often ended up in foreclosure after their “renewal.”

This was the typical scenario: $3000 Home / 50% LTV = $1500 Mortgage / 6% for 5 years / No amortization / Semi-Annual Payments / Payment = $300.81 = $50.14 per month (3.34% of the mortgage amount).

Then Sears entered the housing market and offered a wide variety of mortgages and terms with annual interest rates ranging from 6% - 7% and up to 15 year amortizations (15 year only an option if your home was built over a basement.)

There was a 75% LTV, with 25% including the lot and sweat-equity, There was a 2½% down payment due with order, and monthly payments began four months after the house shipped.

The loan application contained three financial questions: How much cash do you have to put in the deal? How much can you pay each month? What is your vocation?

This was a typical scenario: $3000 Home / 75% LTV = $2,250 Mortgage / 6% for 15 years / Full amortization / Monthly Payment = $18.99 (0.8% of the mortgage amount).

The Depression triggered the greatest deflation ever experienced in this country. It caused new home starts to fall by 90 percent from 1925 to 1933. Funds available for mortgage loans began to disappear as unemployed people started drawing on their saving accounts to replace lost income. Banks and S&Ls tried to generate cash by refusing to refinance mortgage loans coming due. Home values plummeted as desperate borrowers tried to salvage something to sell out.

The federal government eventually stepped in to save the home building industry and created the Federal Home Loan Bank (FHLB) System (1932), the Federal Deposit Insurance Corporation (FDIC) (1933), the Federal Savings and Loan Insurance Corporation (FSLIC) (1934), the Home Owners Loan Corporation (HOLC) System (1934), the Federal Housing Administrations (FHA) (1934), the Federal National Mortgage Association (Fannie Mae) (1938), and the Veterans Administration Home Loan Guarantee Program (1944).

Does any of the above historical data sound familiar – interest only loans with 5 year terms, low doc loans?

Of course, we are not facing a worldwide depression, but it shows that we have been through this before and we will get through it again. That crisis changed the home building and lending industry. It led to the formation of the Urban Land Institute, the National Association of Home Builders, and the National Association of Realtors.

I’m excited to see what new programs and safeguards result from the current situation (notice I didn’t use the word “crisis”). This time we have the NAHB and the NAR working for us.

Chuck Miller GMB CGB MIRM CMP MCSP CSP
President / Builder – Chuck Miller Construction Inc. (208) 229-2553
www.chuckmillerconstruction.com