MORTGAGE RELIEF LEGISLATION

MORTGAGE RELIEF LEGISLATION is legislation meant to help borrowers. Since the early nineteenth century the relationship between mortgagor and mortgagee in the United States has undergone substantial modification—not continuously, but as the result of emergency measures taken at times of widespread financial distress arising from economic or natural causes. The alterations were usually to the apparent advantage of the borrower and thus are referred to as relief for mortgage debtors, or, when statutory, simply as mortgage relief legislation.

Because the states govern real property law (including mortgage law), they have passed most mortgage relief. The major episodes of mortgage debtor relief followed periods of farm mortgage distress in the late nineteenth century and in the period between World War I and World War II, especially in the 1930s.

One feature of the Plains states settlement of the 1870s and 1880s was a large-scale overextension of farmer indebtedness, primarily in land mortgages. When farm incomes deteriorated and land values declined in subsequent years, mortgage debt became very burdensome to the borrower. As a result, many borrowers found themselves forced into delinquency, default, and finally fore-closure or some other form of distress transfer. The inevitable agitation for debtor relief included demands for inflation of the money supply (such as the Free Silver movement) and for public regulation of business monopolies. Two kinds of mortgage relief legislation, in the narrow sense, emerged from this period of farm mortgage distress: the establishment of statutory periods of redemption that continued after foreclosure sale and the requirement of appraisal of mortgaged property prior to sale and the prohibition of sale at less than a specified proportion of the appraised value. Such legislation resulted from criticism of sales at unreasonably low prices and deficiency judgments based on those sales.

A similar period of farm mortgage distress occurred in the 1920s, primarily in the High Plains region. There, after agriculture expanded rapidly during the World War I years, farm income deteriorated and farm land value declined; numerous foreclosures and other distress transfers of mortgaged farms resulted. After 1929 the Great Depression—in conjunction with severe drought in some areas—made mortgage distress a national concern. As a result of the extent and severity of the problem in both rural and urban areas, mortgage relief legislation reached a peak in the 1930s.

Although debtors and creditors reached voluntary adjustments, in which creditors gave debtors more time to repay and refinance their loans, these remedies proved insufficient in the face of the economic catastrophe of the 1930s. The states were the first to take legislative action. By early 1936, twenty-eight states had passed mortgage relief legislation in one or more of the following forms: moratoria on foreclosures, extensions of redemption periods, and restrictions on the use of deficiency judgments. A moratorium halted foreclosure proceedings for a temporary period identified as an economic emergency. Legislation extending the period of redemption specified a definite period during which the debtor continued to have the right to redeem the mortgaged property. These new laws restricted the use of deficiency judgments in any of several ways. For example, they might establish a minimum sales price, require creditors to use an appraised "fair value" rather than a sales value as a base for figuring the amount of deficiency, and limit the time within which a deficiency judgment could be executed. Courts generally upheld state mortgage relief legislation as long as it afforded relief only on a temporary basis, dependent on the existence of the economic emergency; did not impair the integrity of the mortgage indebtedness contract; and assured creditors appropriate compensation in the form of rental payments during the period of relief. The U.S. Supreme Court made the key decision on constitutionality in Home Building and Loan Association v. Blaisdell, 290 U.S. 398 (1934), when it upheld the Minnesota Moratorium Act of 1933.

State mortgage relief legislation did not fully solve the mortgage distress problems of the 1930s, partly because the measures were not enacted until after much of the damage had been done. More important, the problem of mortgage distress was only part of the much larger problem of general economic depression. In the mortgage relief area, as in so many others, the federal government took over from the states the search for solutions. In 1935 the Court declared unconstitutional an attempt at a federal moratorium, the Frazier-Lemke Farm Bankruptcy Act of 1934; but in 1937 it approved an amended version. The federal farm-credit agencies took the more effective action of refinancing mortgage loans—a policy that benefited lenders by providing welcome liquidity while enabling debtors to escape foreclosure. The federal government took similar steps in the field of urban mortgage finance.

When World War II pulled the nation out of the general economic depression and into prosperity, the farm sector returned to relative well-being. No widespread mortgage distress calling for mortgage relief legislation occured in the postwar period. Farm ownership transfers by foreclosures, assignments, bankruptcies, and related defaults averaged twenty-two per thousand farms annually from 1929 through 1938, and peaked at thirty-nine per thousand in 1933. Such distress transfers averaged about 1.5 per thousand farms annually from 1950 through 1974.

In the 1980s and 1990s, farms fell upon hard times again, with huge numbers forced to foreclose. A more conservative federal government encouraged large-scale "factory" farming and did not protect smaller farmers with mortgage relief legislation. In 1996 President Bill Clinton signed the Farm Credit System Reform Act of 1996, which aimed to lower costs for farmers and ranchers. However, small farmers continued to go bankrupt at very high rates.

BIBLIOGRAPHY

Government Sponsorship of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Washington, D.C.: U.S. Dept. of the Treasury, 1996.

Rucker, Randal R., and Lee J. Alston. "Farm Failures and Governmental Intervention: A Case Study of the 1930s." American Economic Review 77 (1987): 724–731.

Wallison, Peter J., and Bert Ely. Nationalizing Mortgage Risk: The Growth of Fannie Mae and Freddie Mac. Washington, D.C. AEI Press, 2000.

Glenn H.MillerJr./d. b.