History of foreclosures and bank REOs dating back to the 1930s

Real estate is not immune to market conditions. If the foreclosure story is anything to go by, real estate, just like mere mortals, is affected by the constant ups and downs of the economy. The history of foreclosures in the United States dates back to the early 1930s. The Great Depression hit the US with the resounding crash of the Wall Street Crash of October 1929. Sweeping like an unstoppable wave, it swept through the US economy, crushing the jobs, housing and banking markets. The coincidental sandstorm and dry season hitting the US with a vengeance added to the farmers’ misery. The resulting fallout ushered in a decade of high unemployment, low profits, deflation, and, yes, Bank REO posted the first highs in US history.

The unemployed and cash hemorrhaging farms were unable to finance mortgages and thousands of homes and farms were foreclosed on. Both homeowners and farmers pledged their assets as collateral for the loans. Desperation and loan rates skyrocketed, wages and incomes dried up, and many had no choice but to sell their homes and farms to handle the debts incurred. At rates similar to those seen in the current recession, almost 0.73 percent of all homes in the US ended up as bank REOs. While some attempts were made to curb foreclosure in the agricultural sector with the passage of the first major farm legislation, the Agricultural Adjustment Act of 1933, it was only a drop in the bucket. Most went under anyway, ended ad Bank REO and more to boot, federal government control of agriculture brought more headache than good in the long run.

Farm and home properties alike were unable to escape the wrath of foreclosure and ended up as an REO of the bank in the end. With increasing trends, mortgage lending peaked at about 1,000 foreclosures a day in 1933. Foreclosure rate growth exceeded 1 percent per year from 1931 to 1935, with 10 out of every 1,000 homes falling victim to collectors and banks. While hard data on exact delinquency rates for the 1930s are unclear, records indicate that the number of foreclosed homes in the 1930s was close to 217,250.

Hard times and a failing economy lead to the birth of the first known Bank REO auctions, the so-called “penny auctions.” Trying to save costs, the banks set out to sell the purchased property, land and equipment expecting to earn hundreds and most likely thousands of dollars. However, things don’t always work out and banks had no choice but to sell for mere pennies of actual value. Similar to the Bank today, the REO bank did not make money from the sales, but simply removed the properties from their asset listings. The real winners were the parties who bought the Bank REO penny auctions to do with them what they would do after title transfer, be it housing, rental, or resale.

History teaches us a valuable lesson once again. Whatever the underlying circumstances, there is always a way to reach an agreement and make money. Fortune favors the brave. And the informed.