FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 569
Changing the Rules: State Mortgage Foreclosure
Moratoria During the Great Depression
David C. Wheelock
Many . states imposed temporary moratoria on farm and nonfarm residential mortgage fore-
closures during the Great Depression. This article describes the conditions that led some states to
impose these moratoria and other mortgage relief during the Depression and discusses the economic
effects. Moratoria were more common in states with large farm populations (as a percentage of total
state population) and high farm mortgage foreclosure rates, although nonfarm mortgage distress
appears to help explain why a few states with relatively low farm foreclosure rates also imposed
moratoria. The moratoria reduced farm foreclosure rates in the short run, but they also appear to
have reduced the supply of loans and made credit more expensive for subsequent borrowers. The
evidence from the Great Depression demonstrates how government actions to reduce foreclosures
can impose costs that should be weighed against potential benefits. (JEL E44, G21, G28, N12, N22)
Federal Reserve Bank of St. Louis Review, November/December 2008, 90(6), pp. 569-583.
the Federal Home Loan Mortgage Association
(Freddie Mac) to refinance subprime mortgages,
and creating a new federal agency to acquire
and refinance delinquent
The creation of a new federal agency to pur-
chase delinquent mortgages would mimic a similar
agency, the Home Owners’ Loan Corporation,
which was established to refinance delinquent
mortgages during the Great Depression. Mortgage
delinquency rates rose sharply during the
Depression. By one estimate, approximately half
of all . urban home mortgages were delinquent
as of January 1, 1934 (Bridewell, 1938, p. 172).
The Home Owners’ Loan Corporation was estab-
lished in 1933 and over the subsequent three years
purchased and refinanced more than 1 million
delinquent home loans. Additional steps by the
N early 1 percent of . home mort-gages entered foreclosure during thefirst quarter of 2008, and almost of all home mortgages were
in foreclosure at the end of the The high
number of home mortgages in foreclosure or at
risk of foreclosure has prompted calls for govern-
ment action. On July 30, 2008, President Bush
signed the Housing and Economic Recovery Act
of 2008 (. 3221), which, among other provi-
sions, included a $300 billion increase in Federal
Housing Administration (FHA) loan guarantees
to encourage lenders to refinance delinquent
home mortgages. Congress also has considered,
among other proposals, directing the Federal
National Mortgage Association (Fannie Mae) and
1 The stock of mortgages in foreclosure during a given quarter
includes mortgages that entered foreclosure during that quarter
and foreclosures that began in previous quarters that have not yet
been completed. These data are from the Mortgage Bankers
Association (Haver Analytics).
2 Fannie Mae and Freddie Mac are the two main government-
sponsored enterprises that purchase and securitize home
mortgages.
David C. Wheelock is an assistant vice president and economist at the Federal Reserve Bank of St. Louis. The author thanks Lee Alston,
Carlos Garriga, and Rajdeep Sengupta for comments on an earlier version of this article. Craig P. Aubuchon provided research assistance.
© 2008, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the
views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced,
published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts,
synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.
federal government to ease mortgage market
pressures during the 1930s included the creation
of the Federal Home Loan Bank System to mobi-
lize funds for home lending, the introduction of
FHA mortgage insurance, and the creation of
Fannie Mae to purchase FHA-insured
State and local governments also responded
to the rise in mortgage foreclosures during the
Depression, mainly by changing state laws govern-
ing foreclosure. Several states enacted temporary
foreclosure moratoria. Others made permanent
changes that limited the rights or incentives of
lenders to foreclose on mortgaged property.
Recently a number of . states have considered
similar steps to reduce mortgage foreclosures.
During the first six months of 2008, the state leg-
islatures of Massachusetts, Minnesota, and New
York considered legislation to impose moratoria
on foreclosures, and legislation for a national
moratorium was introduced in the . Congress.
Foreclosure moratoria are controversial.
Although moratoria can benefit some borrowers
and temporarily reduce foreclosures, critics argue
that moratoria reduce the supply of loans and
increase costs for future Despite simi-
lar arguments made during the Great Depression,
27 states imposed moratoria at the time to reduce
the number of mortgage Today, the
growing sentiment for using moratoria to reduce
the current number of foreclosures prompts a
retrospective look at other episodes, such as the
Great Depression, when moratoria were used to
limit mortgage foreclosures. This article summa-
rizes the main types of mortgage foreclosure laws
enacted by . states during the 1930s. Further,
it examines why some states elected to impose
foreclosure moratoria but others did not. Finally,
it summarizes empirical evidence on the costs of
foreclosure moratoria borne by borrowers.
MORTGAGE DISTRESS DURING
THE GREAT DEPRESSION
The Great Depression was a cataclysmic
event. Between 1929 and 1933, . personal
income declined 44 percent, real output fell by
30 percent, and the unemployment rate climbed
to 25 percent of the labor force. . real estate
markets were already showing signs of distress
before the Great Depression began. The number
of nonfarm residential real estate foreclosures
doubled between 1926 and 1929. With the onset
of the Depression, the number of foreclosures
rose still higher, from 134,900 in 1929 to 252,400
in The foreclosure rate, shown in Figure 1,
increased from per 1,000 home mortgages in
1926, the first year data are available, to a high of
per 1,000 mortgages in 1933. In that year, on
average 1,000 home mortgages were foreclosed
every day (Federal Home Loan Bank Board, 1937,
p. 4). Many more homes were at risk of foreclo-
sure—as many as half of urban home mortgages
were delinquent on January 1, 1934 (Bridewell,
1938, p. 172).
The Great Depression also sharply increased
farm mortgage foreclosures, which were unusually
high throughout the 1920s and 1930s; an average
of more than 100,000 farm mortgages entered
foreclosure each year from 1926 to 1940. Figure 2
shows that the farm foreclosure rate was especially
high from 1932 through 1934, peaking at nearly
39 foreclosures per 1,000 farms in
The sharp increase in mortgage distress dur-
ing the Great Depression was the result of precip-
itous declines in income and real estate values
following a period of rapid growth in mortgage
debt A rising level of debt does
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570 NOVEMBER/DECEMBER 2008 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
3 These and other federal government responses to mortgage distress
during the Great Depression are described in Wheelock (2008).
4 For example, see Sloan (2008).
5 The federal government also enacted a moratorium on farm mort-
gage foreclosures during the Great Depression. The Frazier-Lemke
Farm Bankruptcy Act of 1934 authorized federal courts to grant a
five-year moratorium on foreclosure and to scale down a farmer’s
debt to the current value of his property. The act was declared
unconstitutional by the Supreme Court in 1935. Subsequently,
Congress enacted the Frazier-Lemke Farm Mortgage Moratorium
Act of 1935, which modified and limited the terms of the mora-
torium. The constitutionality of the latter act was upheld by the
Supreme Court in 1937.
6 Historical Statistics of the United States, Earliest Times to the
Present: Millennial Edition (2006), series Dc1255.
7 Alston (1983, Table 1) reports average annual foreclosure rates of
per 1,000 farms for 1913-20, for 1921-25, for 1926-40,
for 1941-50, for 1951-60, for 1961-70, and for 1971-80.
8 See Alston (1983) and Wheelock (2008) for discussion on the
growth of farm and nonfarm mortgage debt, respectively, during
the 1910s and 1920s.
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FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 571
0
2
4
6
8
10
12
14
1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941
Foreclosures per 1,000 Mortgages
Figure 1
Nonfarm Real Estate Mortgage Foreclosure Rate, 1926–1941
0
5
10
15
20
25
30
35
40
45
1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
Foreclosures per 1,000 Mortgages
Figure 2
. Farm Foreclosure Rate, 1926–1941
not necessarily pose a problem for borrowers,
provided their incomes and wealth are sufficient
to make loan payments. However, between 1929
and 1932, personal disposable income and non-
farm residential wealth fell percent and
percent, respectively, whereas the value of non-
farm residential debt fell a mere percent. As
shown in Figure 3, nonfarm residential mortgage
debt increased sharply relative to nonfarm resi-
dential wealth during the 1920s and continued
to rise until 1932. Moreover, falling house prices
meant that homeowners who were having diffi-
culty making their mortgage payments were
increasingly unlikely to sell their homes for more
than the outstanding balances on their loans.
Moreover, many home mortgages were short-
term, nonamortizing loans that typically were
refinanced on Refinancing usually
was easily accomplished during the 1920s, when
household incomes and property values were
generally rising, but next to impossible during
the Depression. Falling incomes made it increas-
ingly difficult for borrowers to make loan pay-
ments or to refinance outstanding loans as they
came due. The failure of thousands of banks and
other lenders made refinancing difficult even for
good borrowers; customer relationships were
severed and the costs of credit intermediation
rose (Bernanke, 1983). The mix of falling house-
hold incomes and property values and short-term,
nonamortizing loans resulted in soaring mortgage
delinquency and foreclosure
Farmers faced similar problems. . farm
income fell from $ billion in 1929 to $ bil-
lion in 1932. At the same time, farm mortgage
9 Mortgage lending terms varied considerably across lenders. Savings
and loan associations typically made long-term, amortizing mort-
gage loans. However, banks and life insurance companies often
made short-term, nonamortizing (or only partly amortizing) loans.
See Morton (1956) for more information about the mortgage market
and loan characteristics during the 1920s and 1930s.
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572 NOVEMBER/DECEMBER 2008 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
0
5
10
15
20
25
30
35
40
1896 1901 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951
Percent
Figure 3
Nonfarm Residential Mortgage Debt as a Percentage of Nonfarm Residential Wealth
SOURCE: Grebler, Blank, Winnick (1956, table L-6).
10 As discussed in Wheelock (2008), federal agencies created during
the 1930s to rescue and reform the mortgage market encouraged
the use of long-term, amortizing mortgage loans—so-called conven-
tional loans. Nonamortizing, unconventional loans have become
more common in recent years, however, which some analysts con-
tend has contributed to the increase in mortgage loan delinquencies
and foreclosures since 2006.
debt outstanding rose from 40 percent of the value
of farm land and buildings in 1930 to 50 percent
in Hence, sharply falling incomes made
it increasingly difficult for farmers to pay the
interest and principal on their outstanding debts,
but falling property values made it less likely
that farmers could sell their properties for more
than the outstanding balance on their mortgages.
The result was a sharp increase in farm mortgage
delinquencies and foreclosures.
FORECLOSURE RELIEF
LEGISLATION
The first attempts to reduce foreclosures dur-
ing the Great Depression focused on encouraging
lenders and borrowers to renegotiate loan terms
through mediation boards and other voluntary
arrangements. However, the clamor for compul-
sory foreclosure moratoria grew louder as the
Depression worsened and the number of foreclo-
sures rose. On February 8, 1933, Iowa became
the first state to enact a moratorium on mortgage
foreclosures. Over the subsequent 18 months, a
total of 27 states enacted legislation to limit or
halt foreclosures (Skilton, 1944, p. 78).
Mortgage Law
Mortgages and similar loan contracts often
are used to finance the purchase of homes, farms,
and other real The mortgage contract
specifies the terms under which the borrower is
obligated to make regular payments of principal
and interest to retire the loan. If at some point the
borrower fails to make the contracted payments,
the loan agreement and laws of the state in which
the property is located determine the actions the
lender may take to enforce the loan contract. The
mortgaged property serves as the security or col-
lateral for the loan, and if the borrower defaults on
the mortgage contract, the lender may foreclose
on the property against which the loan was made,
subject to the state’s laws governing foreclosure.
State laws governing the foreclosure process
vary. For example, foreclosure may be judicial or
nonjudicial. Under judicial foreclosure, the lender
sues the delinquent borrower in court for non-
performance. Typically, judicial foreclosure results
in the public sale of the mortgaged property under
court supervision, with the proceeds used to sat-
isfy the outstanding mortgage balance and any
other outstanding liens on the property.
Under nonjudicial foreclosure by “power of
sale,” the mortgaged property is sold without
court supervision in the event of borrower default,
again with the sale proceeds used to pay the out-
standing balance of the mortgage and any other
liens. Some states permit strict foreclosure, which
grants the lender unconditional title to the mort-
gaged property in the event of borrower default.
The laws of some states grant statutory
redemption periods during which a borrower
(mortgagor) may regain ownership of a property
after foreclosure sale by payment of the foreclosure
sale price, interest, and taxes. Generally, redemp-
tion is permitted from six months to one year
after the foreclosure sale. During the Depression,
several states modified their laws to extend or
enhance the rights of mortgagors to redeem fore-
closed property.
Finally, some states allow deficiency judg-
ments in which a mortgage holder is granted a
lien against other assets of the borrower when the
proceeds from a sale of the mortgaged property
do not cover the outstanding mortgage
During the Depression, several states enacted
reforms that limited the rights of lenders to seek
deficiency judgments against borrowers.
Examples from the Great Depression
The diversity of foreclosure proceedings
across . states during the 1930s was noted in
a 1936 federal government study:
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FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 573
13 If the value of a property exceeds the outstanding loan balance, the
borrower generally benefits from refinancing the loan or selling the
property and paying off the outstanding loan balance rather than
losing the property through foreclosure. Hence, the proceeds from
most foreclosure sales are less than the outstanding mortgage balance.
11 Historical Statistics of the United States, Earliest Times to the
Present: Millennial Edition (2006), series Da1295 (farm income)
and series Da579 (debt as a percentage of land and building value).
12 Deeds of trust are used to finance real estate purchases in some
states. Unlike a mortgage, a deed of trust involves an independent
trustee who holds a power of sale in the event of default and who
conveys the property to the borrower once the deed of trust is paid
in full. See McDonald and Thornton (2008) for basic information
about the mortgage market and mortgage finance.
A general survey indicates that in twenty-eight
states foreclosure is by action in court. Ten
states use unregulated power of sale. Five states
use regulated power of sale, and the remaining
states have various other methods. Thirty-one
states provide a redemption period ranging
from four months in Oregon to two years in
Alabama. Seventeen states have no redemp-
tion period, but, of these, eight use foreclosure
in court which requires months to complete.
(Central Housing Committee, 1936, p. 2)
During the Depression, many states enhanced
borrower redemption rights, limited deficiency
judgments, or made other changes that favored
borrowers, and several states imposed moratoria
on foreclosures. The specific details of moratoria
legislation varied widely. A few states imposed
blanket moratoria that temporarily prohibited
most foreclosures of farm and nonfarm home mort-
gages contracted before a specified date. How ever,
most states limited their moratoria to specific
situations. For example, some states granted relief
only for borrowers who were current in the pay-
ment of interest and taxes but delinquent in the
payment of loan principal. For example, a New
York statute enacted in 1933 specified that “No
action for the foreclosure of a mortgage on real
estate solely on account of default in payment of
principal…shall be brought before July 1, 1937”
(Central Housing Committee, 1936, p. A-18).
Foreclosures were permitted, however, against
borrowers who had ceased to pay interest and
taxes, as well as principal.
Several states directed their state courts to
grant moratoria in deserving cases, but little
guidance was provided to the courts about how
to determine which borrowers deserved relief.
For example, in Iowa, the court was authorized
to grant a borrower’s request for relief from pend-
ing foreclosure unless “good cause is shown to
the contrary” (Skilton, 1944, p. 82). Similarly,
an Arizona statute specified that “In pending or
future real estate mortgage foreclosure suits, the
court may order a two-year continuance unless
good cause to the contrary is shown” (Central
Housing Committee, 1936, p. A-3). Not surpris-
ingly, the extent to which courts granted relief to
delinquent borrowers varied widely, even within
a state. Many courts determined that it was point-
less to grant relief to borrowers who had no hope
of refinancing their mortgage or making payments
or who did not act in good faith toward their
lender (Skilton, 1944, pp. 98-106). In addition,
courts often required borrowers to pay rent or
interest to the lender, as well as taxes, as a con-
dition for halting foreclosure proceedings.
In conjunction with a foreclosure moratorium,
several states extended the period during which
a mortgagor could redeem his property after fore-
closure. Again, however, any extension of the
redemption period was often left to the court’s
discretion. In Kansas, for example, “the period
for redemption on real estate may be extended
for such additional time as the court shall deem
it just and equitable” (Central Housing Committee,
1936, p. A-10). In a few states, the legislation was
more specific. For example, North Dakota legis-
lation specified that “The period within which a
mortgagor or judgment debtor may redeem from
a mortgage foreclosure or execution sale of real
estate…is extended for a period of two years”
(Central Housing Committee, 1936, p. A-21).
Several states also modified their statutes to
limit deficiency judgments. Some states restricted
judgments to the difference between the outstand-
ing loan balance and a “fair” or “reasonable”
value of the mortgaged property, rather than the
difference between the loan balance and the price
received at a foreclosure sale. For example, a
1933 Idaho statute specified that “no deficiency
judgment may be entered in any amount greater
than the difference between the mortgage indebt-
edness, plus the cost of foreclosure and sale and
the reasonable value of the property” (Central
Housing Committee, 1936, p. A-7). Other states
permitted courts to invalidate foreclosure sales
for less than fair value. Most states left the deter-
mination of fair value to the discretion of a local
appraisal board or court rather than attempt to
define “fair value” in statutes.
Several states imposed new limits on the
length of time that a lender could seek a defi-
ciency judgment after a foreclosure sale. For
example, Iowa and Ohio enacted legislation
limiting deficiency judgments to two years after
a foreclosure sale (Skilton, 1944, p. 130). Other
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574 NOVEMBER/DECEMBER 2008 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
states abolished the right of lenders to seek defi-
ciency judgments altogether. For example, a 1935
Montana statute specified that “Deficiency judg-
ments are abolished in all actions for foreclosure
of mortgages for balance of purchase price of real
property” (Central Housing Committee, 1936,
p. A-16).14
WHICH STATES ADOPTED
MORATORIA AND WHY?
The 27 states that adopted foreclosure mora-
toria during 1933 and 1934 are listed in Table 1,
and the geographic distribution of states with
moratoria is shown in Figure 4. Moratoria were
especially common among states in the Midwest
and Great Plains, but they also were imposed by
several states in the Northeast and Far West. Fore -
closure moratoria were less common in New
England, the Southeast, and Mountain
Foreclosure moratoria generally applied to
both farm and nonfarm residential mortgages.
However, the pressure for foreclosure moratoria
was particularly intense in midwestern states
where farm foreclosure rates were especially high
(Figure 5). Moratoria were less common in states
with relatively low farm foreclosure rates, though
a few, including New Hampshire, Pennsylvania,
and Vermont, also imposed moratoria.
Alston (1984) investigates why some, but not
all, states imposed foreclosure moratoria during
the Depression. He estimates a logit regression
model that includes a state’s farm foreclosure rate,
percentage of farms mortgaged, and percentage
of farm mortgages held by federal land banks as
explanatory variables. Alston argues that a state
was more likely to impose a moratorium the
higher its farm foreclosure rate, the higher its
percentage of mortgaged farms, and the lower
the percentage of mortgages held by federal land
banks (which were less likely to foreclose than
other lenders).16 He finds that the farm foreclosure
rate had the strongest impact on a state’s decision
to impose a moratorium.
As noted previously, moratoria were adopted
in a few states with relatively low farm foreclosure
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FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 575
14 See Central Housing Committee (1936), Poteat (1938), or Skilton
(1944) for additional information about the provisions of moratoria
and other legislation affecting the rights of mortgagors and lenders
enacted in different states during the Depression.
15 The source for Table 1 and Figure 4 is Skilton (1944, p. 78), which
lists 27 states as having had a moratorium. Other sources omit
Oregon, where a moratorium was authorized by a joint resolution
of the state legislature, rather than by statute (Poteat, 1938), or omit
both Oregon and Arkansas (Alston, 1984).
16 The Federal Farm Loan Act of 1916 established 12 regional federal
land banks to increase the supply of farm mortgage loans. See
Table 1
State Mortgage Moratoria during the Great
Depression
States imposing States not imposing
moratoria moratoria
Arizona Alabama
Arkansas Colorado
California Connecticut
Delaware Florida
Idaho Georgia
Illinois Indiana
Iowa Kentucky
Kansas Maine
Louisiana Maryland
Michigan Massachusetts
Minnesota Missouri
Mississippi New Jersey
Montana New Mexico
Nebraska Nevada
New Hampshire Rhode Island
New York Tennessee
North Carolina Utah
North Dakota Virginia
Ohio Washington
Oklahoma West Virginia
Oregon Wyoming
Pennsylvania
South Carolina
South Dakota
Texas
Vermont
Wisconsin
SOURCE: Skilton (1944, p. 78).
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576 NOVEMBER/DECEMBER 2008 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
No Mortgage Moratoria
Mortgage Moratoria
Figure 4
States Imposing Foreclosure Moratoria During the Great Depression
Less Than 10 Foreclosures per 1,000 Farms
10 to 20 Foreclosures per 1,000 Farms
20 to 30 Foreclosures per 1,000 Farms
More Than 30 Foreclosures per 1,000 Farms
Figure 5
Average Farm Foreclosure Rates, 1929–1932
rates, and some states with high farm foreclosure
rates did not impose moratoria. According to
Skilton (1944), some states imposed moratoria in
response to high numbers of nonfarm home mort-
gage foreclosures. Unfortunately, state-level data
on nonfarm real estate foreclosures are not avail-
able for the early 1930s to test directly the impact
of nonfarm foreclosures on moratoria adoption.
Nevertheless, regional differences in farm fore-
closure rates and the adoption of moratoria suggest
that nonfarm foreclosures or other considerations
may have influenced the decision to impose
moratoria in some states.
Some evidence on why states imposed fore-
closure moratoria is reported in Table 2, which
presents a replication of Alston’s (1984) logit
model and some alternative specifications. The
dependent variable in this set of cross-sectional
regressions is a dummy variable, set equal to 1
for states that adopted a moratorium during
1933-34 and to 0 otherwise. The Appendix pro-
vides complete definitions and data sources for
the variables included in the regressions.
Model 1 replicates Alston’s model and shows
his main result: the higher a state’s farm foreclo-
sure rate, the greater the likelihood the state
would adopt a foreclosure Model 2
includes the percentage of owner-occupied non-
farm homes as an additional explanatory variable.
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FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 577
17 The coefficient estimates in Model 1 differ slightly from those
reported in Alston (1984). Unlike Alston, I treated Arkansas and
Oregon as having had moratoria, based on Skilton (1944), and used
the farm foreclosure rate for 1932, rather than the average farm
foreclosure rate for 1932 and 1933, as an explanatory variable.
Table 2
Regression Results
Model
Variable 1 2 3 4
Intercept – – – –
() () () ()
Farm foreclosure rate ** * –
() () () ()
Mortgaged farm percent
() () () ()
Federally held farm debt – – –* –
() (–) () ()
Owner-occupied nonfarm homes
() () ()
Foreclosure rate × farm population *
() ()
Midwest – –
() ()
South – –
() ()
West – –
() ()
Log likelihood – – – –
Probability > chi-square
NOTE: Standard errors are indicated in parentheses; statistically significant coefficients are in bold. *Indicates significance at the 90
percent confidence level; ** indicates significance at the 95 percent confidence level.
See the Appendix for data definitions and sources.
Presumably, the demand for moratoria legislation
was greater where a high percentage of homes
were mortgaged and, hence, at risk of foreclosure.
Unfortunately, state-level data on the percentage
of homes carrying a mortgage are not available
for the 1930s. However, if owner-occupied homes
were no less likely to be mortgaged than rented
homes, a higher percentage of owner-occupied
homes might reflect a greater demand for a fore-
closure moratorium. Accordingly, I expect a pos-
itive coefficient on this variable. Consistent with
expectations, the coefficient estimate in Model 2
for the percentage of owner-occupied homes is
positive, though not statistically significant.
Model 2 also includes regional dummy vari-
ables. The coefficient estimates for the regional
dummies indicate that relative to the Northeast
(the omitted region), states in other regions of
the country were less likely to adopt foreclosure
moratoria. Stated differently, for a given rate of
farm foreclosures, states in the Northeast were
more likely to adopt foreclosure moratoria than
states elsewhere. This suggests that nonfarm mort-
gage distress had a greater influence on the deci-
sion to adopt moratoria among the more urbanized
northeastern states than it did in other regions of
the country. However, the coefficients on the
regional dummy variables are not statistically
Model 3 further refines the analysis by testing
whether the influence of farm foreclosures on
moratoria adoption was stronger in states with
relatively high farm populations. To test this con-
jecture, Model 3 includes the interaction of the
farm foreclosure rate and the percentage of state
population located on farms. The coefficient esti-
mate on the interaction term (foreclosure rate ×
farm population) is positive and statistically
significant, and the coefficient on the farm fore-
closure rate is near zero, which supports this
hypothesis. The impact of a given farm foreclo-
sure rate was greater in states with relatively
larger farm populations.
Finally, Model 4 adds regional dummy vari-
ables to the previous specification. The coeffi-
cients on the regional dummies are again negative,
suggesting a relatively low demand for moratoria
18 The test statistic for a likelihood ratio test of the hypothesis that
the coefficients on the regional dummies are jointly zero is
(p-value = ).
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578 NOVEMBER/DECEMBER 2008 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
AL
AZ
CA
CO
CT
DE
FL
GA
IA
IL
IN
KS
KY
LA
MA
MD
ME
MI
MN
MO
MS
MT
NC
ND
NE
NH
NJ
NM
NV
NY
OK
OR
PA
RI
SC
SD
TX
VA
VT
WA
WI
WV
WY
TN
UT
OH
IDAR
–4
–3
–2
–1
0
1
2
3
Figure 6
Model 1: Pearson Residuals
among states outside the Northeast. However,
the contribution of the regional dummies to the
model’s explanatory power is not statistically
For additional insights about why states
adopted (or did not adopt) foreclosure moratoria,
I examined the residuals from the logit models
reported in Table 2. The Pearson residuals for
Model 1 are shown in Figure The residuals
for states that adopted moratoria are greater than
or equal to zero, whereas those for states that did
not adopt moratoria are less than or equal to zero.
The closer a state’s residual is to zero, the more
accurately the model explains the state’s decision
to impose (or not impose) a moratorium. Thus,
the large positive residual for Louisiana indicates
that the model explains relatively little of the
state’s decision to impose a moratorium. Similarly,
the model explains relatively little of Missouri’s
decision not to adopt a moratorium. Missouri had
a comparatively high farm foreclosure rate and,
given that fact, Model 1 predicts that Missouri
would have imposed a moratorium.
Additional information helps explain the
anomalous behavior of some states. For example,
Louisiana was the last state to adopt a debt mora-
torium (in July 1934). Soon thereafter, the legisla-
tion authorizing the moratorium was amended to
grant broad authority to a state debt commissioner
to “suspend all laws relating to the collection of
fundamentally all types of debts in existence at
the time of the passage of the act” (Skilton, 1944,
pp. 83-84). In effect, the state imposed a general
moratorium on all debts, not just real estate mort-
gage debt. The breadth of the moratorium thus
might help explain why Louisiana imposed a
moratorium, despite only a modest level of farm
distress.
New York also enacted an unusually broad
foreclosure moratorium that extended to commer-
cial real estate, as well as to farm and nonfarm
residential property. According to Skilton (1944,
pp. 76-77), property management companies and
other real estate interests had considerable influ-
ence on the moratorium legislation, and “The
lobbying of real estate operators was sufficient…
to defeat Governor Lehman’s original idea that
a moratorium should be limited to farms and
homes.” Thus, like Louisiana, the breadth of the
moratorium may help explain why Model 1,
which captures only the effects of farm distress,
does not explain well the imposition of a foreclo-
sure moratorium in New York.
Differences in the prevailing state laws govern-
ing mortgage foreclosure might also help account
for the model’s failure to explain well the mora-
toria decisions of some states. For example, neither
Indiana nor Missouri adopted a foreclosure mora-
torium during the Depression, despite relatively
high levels of farm distress. However, a federal
study concluded that the demand for moratoria
was low in both states because their prevailing
foreclosure laws were already comparatively
favorable to borrowers (Central Housing
Committee, 1936).
ECONOMIC IMPACT OF
FORECLOSURE MORATORIA
Governments cause both immediate and
long-term effects when they rewrite the terms of
contracts between private parties. The immediate
impact is redistribution of wealth between the
parties of the affected contracts. The temporary
foreclosure moratoria and most other changes in
state mortgage laws enacted during the 1930s
favored borrowers over lenders. These actions
interfered with the rights of lenders to seize col-
lateral pledged by borrowers to guarantee payment
of their mortgages. Several states also enhanced
the rights of borrowers to redeem foreclosed
property and limited the rights of lenders to sue
for deficiency judgments.
One immediate effect of mortgage relief legis-
lation during the Depression was reduced farm
foreclosure rates (Rucker and Alston, 1987).21
Wheelock
FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 579
19 The test statistic for a likelihood ratio test of the hypothesis that
the coefficients on the regional dummies are jointly zero is
(p-value = ).
20 The logit models were estimated using Stata/MP . The basic
Pearson residual is the difference between the actual and model-
predicted values of the dependent variable, divided by the esti-
mated standard deviation of the predicted values. See Stata/MP
for more details about the calculation of the Pearson residual.
21 I am unaware of any research on the effects of relief legislation on
nonfarm home mortgage foreclosure rates.
However, over the longer run, foreclosure mora-
toria and other changes in mortgage laws may
have made loans costlier or more difficult to
obtain. Critics argued that foreclosure moratoria
induce lenders to restrict the supply of loans and
raise interest rates to compensate for the possi-
bility that their right to foreclose on delinquent
loans or to collect deficiency judgments will be
constrained. According to a 1936 federal govern-
ment report,
Statutes which provide a lengthy, expensive,
complicated or otherwise burdensome foreclo-
sure procedure, or which interpose a long
period of redemption before title and posses-
sion to the mortgaged property can be obtained,
have a tendency to increase interest rates and
security requirements throughout the jurisdic-
tion, since prospective lenders naturally take
into account the procedure available for realiz-
ing the debt out of the security when determin-
ing the conditions on which they will be willing
to make loans. (Central Housing Committee,
1936, p. 3)
The same report noted that in 1933-34 many
states elected to disregard such objections because
it was widely believed that “unrestricted fore-
closure of farm and home mortgages under the
circumstances prevailing at the time would have
deprived large numbers of persons of essential
shelter and protection, and would have left them
without the necessary means for earning a living.
Such wholesale evictions might have seriously
endangered basic interests of society” (Central
Housing Committee, 1936, p. 2). Hence, in many
states, the societal costs of widespread foreclosures
were viewed as exceeding the costs of reduced
loan supply and higher interest rates borne by
prospective borrowers. Furthermore, foreclosure
moratoria generally were viewed as expedients
to buy time for the economy to recover and for
the federal government to initiate programs to
refinance delinquent mortgages (Skilton, 1944,
pp. 73-77). Even lenders may have benefited from
foreclosure moratoria in the short run. Although
individual lenders had an incentive to foreclose
to recoup losses on delinquent mortgages, a high
number of foreclosures in an area could reduce
property values and thereby cause still more
foreclosures. Thus, foreclosure moratoria might
halt a downward spiral in property values and
benefit lenders as a
Although the economic and societal benefits
of lower foreclosure rates are difficult to measure,
research shows that the foreclosure moratoria of
the Great Depression did impose costs on future
borrowers. Alston (1984) investigates the impact
of foreclosure moratoria in an empirical model
of the farm mortgage market. He argues that fore-
closure moratoria encouraged lenders to reduce
the supply of loans, resulting in fewer loans made
and, possibly, higher average interest rates. Con -
sistent with this hypothesis, Alston (1984) finds
that private lenders made significantly fewer
loans in states that imposed moratoria and tended
to charge higher interest rates on the loans they
did make.
Rucker (1990) extends Alston’s (1984) study
to investigate differences in the impact of mort-
gage relief legislation on the supply of loans
offered by different types of private lenders. In
the 1930s, most farm mortgages were issued by
local commercial banks, private individuals,
insurance companies, and federal land banks.
Insurance companies tended to be larger and
more diversified and to have a lower cost of funds
than did banks and individual lenders. Their size
and cost advantages enabled insurance companies
to attract lower-risk borrowers and, consequently,
experience lower delinquency rates. Insurance
companies generally were also more willing to
grant extensions to delinquent borrowers. Hence,
the costs imposed by mortgage relief legislation
should have been lower for insurance companies
than for other private lenders. Rucker (1990)
finds that, indeed, mortgage relief legislation led
to significantly larger reductions in the supply
of loans from commercial banks and individual
lenders than from insurance Both
22 Kahn and Yavas (1994) examine the short- and long-run effects of
changes in foreclosure laws (especially how they affect borrower
and lender behavior and borrower welfare) in a simple theoretical
model of the mortgage market in which renegotiation of loan con-
tracts is possible. Jaffe and Sharp (1996) describe the economics of
foreclosure moratoria in the context of alternative legal theories
of contracts.
23 In his econometric analysis, Rucker (1990) treated legislation that
limited deficiency judgments or enhanced redemption rights for
Wheelock
580 NOVEMBER/DECEMBER 2008 FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
Alston (1984) and Rucker (1990) conclude that
mortgage relief legislation caused significant
reductions in the aggregate supply of loans in
states that enacted such legislation.
The findings of Alston (1984) and Rucker
(1990) on the effects of mortgage relief legislation
during the 1930s are consistent with other studies
that find significant effects of state mortgage laws
on local lending markets. Meador (1982), for
example, finds that loan interest rates tend to be
higher in states with lengthy or costly foreclosure
processes or those that prohibit deficiency judg-
ments. More recently, Pence (2006) finds that
mortgage loans are, on average, some 3 to 7 percent
smaller in states in which foreclosure requires a
court action than in states with nonjudicial fore-
closure processes, again consistent with the
hypothesis that the supply of loans is lower in
states in which foreclosure is more
CONCLUSION
In 2008, residential real estate foreclosure
rates are at their highest levels since the Great
Depression. Not surprisingly, policymakers are
considering actions similar to those taken during
the Depression to limit foreclosures. The federal
government responded to mortgage distress during
the Depression by creating new federal agencies
to refinance delinquent mortgages, insure and
finance newly issued mortgages, and expand
federal farm credit programs. By contrast, many
state governments imposed moratoria on foreclo-
sures, limited deficiency judgments, and enhanced
the rights of borrowers to redeem foreclosed prop-
erty. By halting foreclosures temporarily, states
hoped to buy time for economic recovery to take
hold, for household incomes and property values
to rise, and for the federal government to refinance
delinquent mortgages.
The earliest calls for mortgage relief were in
farming regions, and states with high farm fore-
closure rates were more likely to impose morato-
ria (Alston, 1984). Additional evidence indicates
that farm foreclosures had a greater impact on the
decision to impose moratoria in states in which
the farm population comprised a relatively high
percentage of total state population.
Moratoria were imposed in a few states with
comparatively little farm mortgage distress, sug-
gesting that urban mortgage distress or other fac-
tors influenced the decision to impose moratoria
in some states. For example, in New York, lobby-
ing by commercial real estate interests helped
shape legislation for a broad moratorium cover-
ing farm, urban residential, and commercial real
estate mortgage foreclosures.
In most states, foreclosure moratoria were
limited to borrowers who had some chance of
paying or refinancing their loans. Relief often was
denied to borrowers judged to have little prospect
of ever paying off their mortgage.
Foreclosure moratoria resulted in both winners
and losers. Although the rights of lenders to fore-
close on collateral or to seek deficiency judgments
were restricted, relief legislation did apparently
contribute to a reduction in farm failures (Rucker
and Alston, 1987).
At least some contemporaries recognize that
even temporary foreclosure moratoria can impose
costs on future borrowers. Alston (1984) and
Rucker (1990) find that lenders reduced the sup-
ply of loans in response to diminution of their
rights to foreclose on collateral or to seek defi-
ciency judgments. Thus, while to many observers
the economic and societal costs of widespread
real estate foreclosures were overwhelming, fore-
closure moratoria and other relief legislation
transferred at least some of those costs to future
borrowers. The evidence from the use of fore-
closure moratoria during the Great Depression
demonstrates how legislative actions to reduce
foreclosures can impose costs that should be
weighed against potential benefits.
REFERENCES
Alston, Lee J. “Farm Foreclosures in the United States
During the Interwar Period.” Journal of Economic
History, December 1983, 43(4), pp. 885-903.
Wheelock
FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 581
borrowers, as well as foreclosure moratoria, as forms of relief leg-
islation, whereas Alston (1984) focused exclusively on moratoria.
24 Pence (2006) compares bordering census tracts located in different
states and controls for a variety of borrower, policy, and other
census tract characteristics.
Alston, Lee J. “Farm Foreclosure Moratorium
Legislation: A Lesson from the Past.” American
Economic Review, June 1984, 74(3), pp. 445-57.
Bernanke, Ben S. “Nonmonetary Effects of the
Financial Crisis in the Propagation of the Great
Depression.” American Economic Review, June
1983, 73(3), pp. 257-76.
Bridewell, David A. The Federal Home Loan Bank
Board and its Agencies: A History of the Facts
Surrounding the Passage of the Creating Legislation,
The Establishment and Organization of the Federal
Home Loan Bank Board and the Bank System, The
Savings and Loan System, The Home Owners’ Loan
Corporation, and the Federal Savings and Loan
Insurance Corporation. Washington, DC: Federal
Home Loan Bank Board, 1938.
Bridewell, David A. and Russell, Horace. “Mortgage
Law and Mortgage Lending.” Journal of Land and
Public Utility Economics, August 1938, 14(3),
pp. 301-21.
Central Housing Committee. “Special Report No. 1 on
Social and Economic Effects of Existing Foreclosure
Procedure and Emergency Moratorium Legislation.”
Horace Russell, Chairman. Submitted April 2, 1936.
Federal Home Loan Bank Board. Fifth Annual Report.
June 30, 1937.
Jaffe, Austin J. and Sharp, Jeffery M. “Contract Theory
and Mortgage Foreclosure Moratoria.” Journal of
Real Estate Finance and Economics, January 1996,
12(1), pp. 77-96.
Kahn, Charles M. and Yavas, Abdullah. “The
Economic Role of Foreclosures.” Journal of Real
Estate Finance and Economics, January 1994, 8(1),
pp. 35-51.
McDonald, Daniel and Thornton, Daniel L. “A Primer
on the Mortgage Market and Mortgage Finance.”
Federal Reserve Bank of St. Louis Review,
January/February 2008, 90(1), pp. 31-46;
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Meador, Mark. “The Effects of Mortgage Laws on the
Home Mortgage Rates.” Journal of Economics and
Business, 1982, 34(2), pp. 143-48.
Morton, Joseph E. Urban Mortgage Lending:
Comparative Markets and Experience. Princeton,
NJ: Princeton University Press, 1956.
Pence, Karen M. “Foreclosing on Opportunity: State
Laws and Mortgage Credit.” Review of Economics
and Statistics, 2006, 88(1), pp. 177-82.
Poteat, J. Douglass. “State Legislative Relief for the
Mortgage Debtor During the Depression.” Law and
Contemporary Problems, 1938, 5, pp. 517-44.
Rucker, Randal R. “The Effects of State Farm Relief
Legislation on Private Lenders and Borrowers: The
Experience of the 1930s.” American Journal of
Agricultural Economics, February 1990, 72(1),
pp. 24-34.
Rucker, Randal R. and Alston, Lee J. “Farm Failures
and Government Intervention: A Case Study of the
1930s.” American Economic Review, September
1987, 77(4), pp. 724-30.
Skilton, Robert H. Government and the Mortgage
Debtor (1929 to 1939). PhD Dissertation, University
of Pennsylvania, Philadelphia, 1944.
Sloan, Steven. “Minnesota Foreclosure Measure
Draws Veto.” American Banker, June 3, 2008;
02TJH8JBQ8&queryid=982795036&hitnum=.
Wheelock, David C. “The Federal Response to Home
Mortgage Distress: Lessons from the Great
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Wheelock
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Wheelock
FEDERAL RESERVE BANK OF ST. LOUIS REVIEW NOVEMBER/DECEMBER 2008 583
APPENDIX
Variable Definitions and Data Source Information
Variable name Definition Source
Moratorium Dummy variable equal to 1 Skilton, Robert H. Government and the
for states with mortgage Mortgage Debtor (1929 to 1939).
moratorium in 1933-34 PhD Dissertation, University of Pennsylvania,
Philadelphia, 1944, p. 78.
Farm foreclosure rate Farm foreclosures per 1,000 . Department of Agriculture.
mortgages in 1932 “The Farm Real Estate Situation, 1930-31.”
Bureau of Agricultural Economics,
circular no. 209, 1931.
Mortgaged farms (percent) Percentage of farms mortgaged . Department of Commerce.
in 1930, calculated as Statistical Abstract of the United States: 1932.
(mortgaged farms/all owned Washington, DC: . Government Printing
farms) Office, 1932, Table 548, p. 589.
Federally held farm debt Percent of mortgage debt held . Department of Agriculture.
by federal land banks, Miscellaneous Publication No. 478,
calculated as (sum of amount “Farm Mortgage Credit Facilities in the United
of loans closed 1917 to 1932/ States.” Washington, DC: . Government
total farm mortgage debt Printing Office, 1942, Table 64, p. 221 and
in 1932) Table 78, p. 245.
Owner-occupied nonfarm Percentage of owned nonfarm . Department of Commerce.
homes (percent) homes in 1930, calculated as Fifteenth Census of the United States: 1930.
(sum of owned nonfarm Population, Volume VI, Table 42, p. 35.
homes/total nonfarm homes) Washington, DC: . Government Printing
Office, 1931.
Farm population Percentage of population on . Department of Commerce.
farms in 1930 Statistical Abstract of the United States: 1932.
Washington, DC: . Government Printing
Office, 1932, Table 36, p. 47.
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