Clinton: Resurrect the HOLC, and Buy Up Bad Mortgages

Former Democratic presidential candidate and New York senator Hillary Rodham Clinton pushed Thursday for a wide-spread government purchase and modification of troubled mortgages in the name of protecting borrowers and restoring credit markets, according to an op-ed published in the Wall Street Journal. Clinton, who along with most Deomcrats has long advocated so-called “affordability modifications,” said that the nation’s current financial crisis will not be solved until homeowners are kept in their homes. Read the full op-ed. “The solutions we pursue cannot simply stabilize the markets,” she wrote. “We must also deal with the interconnected economic challenges that set the stage for this crisis — and reverse the failed policies that allowed a potential crisis to become a real one.” The senator suggested that the government revive the Depression-era Home Owners’ Loan Corporation, a New Deal government agency which purchased mortgages from failed banks and modified terms to allow borrowers to keep their homes. “The original HOLC returned a profit to the Treasury and saved one million homes,” Clinton said. “We can save roughly three times that many today.” For those looking for a history lesson, the Home Owners’ Loan Act of 1933 created the HOLC. The government agency issued bonds to lenders in exchange for acquiring defaulted residential mortgages; the HOLC would then refinance the mortgages into a “sustainable” mortgage. At the time, mortgages were amortized over much shorter horizons, so in most cases the HOLC merely extended loans to fully amortized, longer-term loans — 20 to 25 years, similar to the 30-year mortgage commonly known in modern mortgage markets. The idea was that lenders would at least have a marketable bond earning them interest, even if that interest was less than the mortgage; the option was clearly better than a non-performing asset. But some scholars have argued that what made the program work was a simple modification path for most troubled borrowers (i.e., simply lengthen the term) that didn’t put home prices at further risk of decline, and that no such simple path exists for many of today’s troubled borrowers. Clinton’s op-ed didn’t delve into that sort of debate, of course; it spoke in general terms, as most politicians do. “If we do not take action to address the crisis facing borrowers, we’ll never solve the crisis facing lenders,” she said. “These problems go hand in hand.” Congress is expected to pass some form of bailout package, including as-of-yet unknown provisions surrounding mortgage relief, sometime this weekend. But it’s clear that politicians are reaching back to the last great financial crisis our country has seen in a search for solutions.