The Economic Rationale for the HOLC
The Economic Rationale for the HOLC
This chapter examines the rationale for the HOLC from a public policy perspective. The HOLC intervened in the credit and real estate markets by refinancing some distressed loans that private lenders would not. One factor separating the HOLC from other lenders was the HOLC’s access to cheaper funding, as it could issue bonds that bore guarantees from the federal government at a time when private lenders faced unusual liquidity demands from their short-term creditors. In addition, the HOLC had the incentive to internalize, and, therefore, to reduce, the societal costs of foreclosures, unlike private lenders. The HOLC was, in short, a government-sponsored bad bank that bought troubled loans from private lenders, and then took control of restructuring and servicing the loans. Private lenders, individually or collectively, would not have modified most of these loans because they were illiquid and weighed the risks of redefault or extending unnecessary modifications more heavily than the HOLC.
Keywords: Housing policy, Economic rationale, Foreclosure, Societal costs, Redefault, Net present value (NPV) tests, Liquidity, Adverse selection, Moral hazard
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