I think it imperative that we see the housing crisis for what it really is.  Not since the Great Depression has housing been in such a mess.  Between 1925 and 1933, housing prices fell by 30%.  We are seeing much the same thing now.

Domestic home prices are already down 5 percent from their peak 14 months ago.  It seems to me that we should be doing some basic thinking about changes in our real estate institutions.  It is no longer business as usual, and if something doesn’t change in the lending industry, we will be in for even bigger woes.

The Great Depression gave us a real lesson in how we should be looking at things.  Revolutionary changes were made in real estate institutions during that great event in American history.  If those changes hadn’t been there back then, we would be in even more trouble today.

In 1932, the National Association of Real Estate Boards, working hand in hand with Congress, created the Federal Home Loan Bank System.  This system, based on the Federal Reserve System, set up 12 regional banks.  The Federal Home Loan Bank Board was created to monitor these banks.  These 12 banks then became a special lender of last resort for real estate, discounting mortgages in the process.

Also in 1932, near the end of the Hoover administration, Congress modified bankruptcy law to allow insolvent wage earners to file to protect themselves from eviction from their homes.  To this day, individuals and businesses alike have access to important bankruptcy arrangements to protect themselves.

The Home Owners Loan Corporation was created in 1933, under the Roosevelt administration.  The HOLC sponsored loans, assisting those who had trouble making payments.  Their focus was on replacing short term loans, which ran typically for five years with a large balloon payment at the end of term.  They went with a more sensible 15 hear longer term mortgage, that were fixed-rate and self-amortizing.  In 1934, Congress created the Federal Housing Administration. The FHA insisted that new mortgages be 20 years in term, and were to be self-amortizing.

Congress is now taking a long look at bankruptcy laws.  Hopefully, they will make changes to Section 1322 of Chapter 13 of the bankruptcy law.  This would effectively stop the courts from adjusting the terms of a first mortgage.  The Bush administration is working with the FHA Secure bailouts, and Congress would like to see more fundamental changes to bankruptcy law, bringing them up to date.

These things will certainly help.  We have gone through troubling times before, and plans were put into place to insure that people losing their homes could get some relief.  Let’s hope we learned something from the Depression, and don’t go through those times again.