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Historical Perspectives on Mortgage Default Recidivism

Most troubling, perhaps, is that we seem incapable of learning from our past. We have had at least one other period of extended strategic mortgage defaults, during the bailout program of the Great Depression, when the federal government's Home Ownership Lending Corp. purchased some 1 million mortgages from banks and rewrote them on more generous terms. About 200,000, or 20 percent, of those new mortgages defaulted despite the better terms. And HOLC's mortgage officers were clear what was behind the massive string of nonpayment: They classified about 65 percent of these defaults as resulting either from borrowers' "noncooperation" with HOLC or their "obstinate refusal" to pay even though, in the estimation of the loan officers, the borrowers could afford the loans. The problem grew as word spread that the government would only foreclose on people reluctantly and take years to throw people out of their homes. Most of these non-paying borrowers simply lived rent free at the government's expense.

The experience of HOLC may explain why our current mortgage bailout efforts have resulted in such high rates of default, with as many as 40 to 50 percent of those who have gotten more favorable terms from some government-subsidized mortgage bailout programs failing to pay off their new mortgages. As the folks at Experian and Wyman note, "Strategic defaulters are likely to take advantage of loan modification programs, and try and stay in their homes as long as possible while making as few payments as possible. They should have a high propensity to re-default."