Recently in the Washington Post, housing columnist Kenneth Harney took an interesting look at mortgage loans guaranteed by the Department of Veterans Affairs.
VA lending presents a puzzle. How can a program where 91 percent of borrowers make no down payment, where the average credit score is lower than at Fannie Mae and Freddie Mac, and where total debt for some borrowers exceeds 50 percent of monthly income, have such a relatively low default rate?
When the column appeared Aug. 19, the latest 90-day default rate for VA lending was 2.2 percent, less than half the rate at the Federal Housing Administration. So what’s the VA's secret? According to Harney, "Michael Frueh, the VA program's acting director, says the key to the agency's quiet success is its almost paternalistic emphasis on servicing its 1.5 million borrowers—moving early and quickly to intervene at the slightest hint of payment problems."
The VA's track record, and its desire not just to help veterans buy homes but to see that they stay in them, ties into a somewhat obscure historical precedent. During the Great Depression, which was the last time that housing prices took a sharp downturn across the entire country, mortgages serviced by the federal government performed a lot better than one might have expected.
While on the staff of the Congressional Oversight Panel for TARP, I researched a Depression-era program called the Home Owners Loan Corp. The goal was to see if the federal government's response to the foreclosure crisis of the 1930s held any lessons for policymakers today.
Under the HOLC, the government bought distressed mortgages from private lenders, refinanced them to lower the monthly payments, and became a major loan servicer in the process. Over time, default rates on HOLC loans fell sharply. Despite some large upfront costs, the program, which ended in the 1950s, lost far less money than was expected. An improved economy helped, but another consideration is the HOLC’s approach to servicing, which emphasized personal contact with distressed homeowners.
At its peak, the HOLC had about 20,000 employees and offices in 48 states. In the second and third months of delinquency, the HOLC would insert a notice with the homeowner's monthly bill. If there was no response, a form letter followed. Next came a personal letter, then a home visit. In some cases, HOLC employees helped homeowners or their relatives find jobs, or collect insurance claims, pensions or unpaid debts. HOLC employees even suggested ways for homeowners to find tenants or foster children to defray the mortgage payment. All of this stands in marked contrast, of course, to the highly automated, impersonal mortgage servicing practices of today.
A lot of ink has been spilled about the failure of recent programs like HAMP. It all may trace back to the fact that loan servicers are not, as a primary mission, concerned with matters of public welfare. As the COP concluded, "Whereas the HOLC was a purely governmental effort, HAMP, by its design, relies on private servicers to carry out public-policy aims."
The government's goal with the HOLC was to keep as many people in their homes as possible. That's also what the VA is trying to do. It's not a mission that can easily be outsourced.
