Debt dilution in 1920s America
Lighting the Fuse of a Mortgage Crisis
Bibliographic Data
| ID | 3345625 |
|---|---|
| Authors | Natacha Postel‐vinay (London School of Economics and Political Science, corresponding author) |
| Year | 2017 |
| Volume | 70 |
| Issue | 2 |
| Pages | 559-585 |
| Publication date | 2017-05-01 |
| Peer Reviewed | Yes |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | The Economic History Review (JOURNAL) |
| Journal identifiers | ISSN: 0013-0117 • E-ISSN: 1468-0289 |
| Publisher | Wiley (PUBLISHER • GB) |
| DOI | 10.1111/ehr.12342 |
| OpenAlex | W2136813871 |
| Language | EN |
| Citations received | 3 |
| References cited | 41 |
The idea that real estate could have contributed to banking crises during the Great Depression has been downplayed due to the conservatism of mortgage contracts at the time. For instance, loan-to-value ratios often did not exceed 50 per cent. Using newly discovered archival documents and data from 1934, this article uncovers a darker side of 1920s US mortgage lending: the so-called 'second mortgage system'. As borrowers often could not make a 50 per cent down payment, a majority of them took second mortgages at usurious rates. As theory predicts, debt dilution, even in the presence of seniority rules, can be highly detrimental to both junior and senior lenders. The probability of default on first mortgages was likely to increase, and commercial banks were more likely to foreclose. Through foreclosure they would still be able to retrieve 50 per cent of the property value, but often after a protracted foreclosure process. This would have put further strain on banks during liquidity crises. This article is thus a timely reminder that second mortgages, or 'piggyback loans' as they are called today, can be hazardous to lenders and borrowers alike. It provides further empirical evidence that debt dilution can be detrimental to credit
Business · Creditor · Debt · Default · Economics · Financial system · Foreclosure · Loan · Loan-to-value ratio · Market liquidity · Monetary economics · Mortgage insurance · Mortgage underwriting · Political science · Real estate · Secondary mortgage market · Seniority · Value (mathematics) · Banking stability, regulation, efficiency · Finance · Housing Market and Economics · Housing, Finance, and Neoliberalism
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| Unique citing works | 3 |
|---|---|
| Citations per year | 0,3 |
| Citation span | 2016 - 2021 (6) |
| Citation velocity | historical |
| Highly cited | No |
| Citation types | Neutral: 2 |