The Great Depression 1929-1932 Headlines; Interest Only Mortgages
by Kevin DeMeritt, Sep 15, 2005
(Posted here by Wes Penre, Sep 19, 2005)

Gold CentralI have attached the 1929 through 1932 headlines from the papers during the great depression, the similarities to the events going on today are  astonishing. Interest only loans were very popular during the twenties,  they disappeared during the great depression, only to reappear in the  past five years or so. The foreclosures are at the highest level that  they have ever been in the history of this country, and growing every  day. Please read the below article for further insight to the above statements.

It's a good thing many of today's investors aren't back in elementary  school. In no time, they'd be diagnosed with ADD-Attention Deficit  Disorder-handed a Ritalin prescription and told not to return until they  popped a few pills.

Whys that? Because today's investors have notoriously short attention spans.

Case in point: Many look at the current real estate market certain it  "has never been like this" and "will just keep booming indefinitely."  Unfortunately, it's just this kind of "historical shortsightedness"
that's led to the downfall of too many investors.

Not to say that history always repeats itself /precisely/. Each age has  its own brew of conditions, excesses and personalities. And that puts a  unique stamp on current events. For the most part, though, the past does  tend to repeat. And that's because man is a cyclical creature who can't  help making the same mistakes.

Especially when it comes to money.

Where am I going with this? Well…to the housing bubble.

*Interest-Only Mortgages, Then and Now*

Interest-only mortgages? ARMS? Stratospheric valuations?

These are strictly 2005 phenomena, right?

Not exactly. Although Interest-only mortgages sound so 21st Century  sophisticated, they didn't debut anywhere near 2005. The truth is, they actually showed up before the most pivotal economic event of the last hundred years.

That's right, the Great Depression. A recent article in the Wall Street Journal had this to say: "Interest-only mortgages were the *standard mortgage in the 1920s*, but they disappeared during the Great
Depression, and for good reason ... the drop in real-estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since."

Like stocks, real estate was a speculative favorite of the Roaring Twenties' investor. To control as much real estate as was humanly possible-to leverage their money to the hilt-these "can't lose" investors needed a mortgage device to accommodate their aggressiveness. And interest-only mortgages filled the bill.

IO loans provided easy entry into a house: You simply paid the mortgage interest, which freed the rest of your money for other investments. That part of the loan usually lasted five years or so, at which time you'd
either refinance or stay with the original terms of the agreement. Those terms called for a reversion to a fully amortizing loan, except now on a somewhat accelerated basis.

In other words, in the initial years of an IO loan, your money only went toward /controlling/ the property. Not /owning/ it.

So what happened to these and other mortgages after the first Black Monday hit on October 28th, 1929? Three things:

    * First, just to survive, people withdrew their money from the banks
      en masses.

    * That meant banks severely curtailed their lending, and that
      included refusing to refinance any mortgages-especially
      interest-only-that came due. /And that was in addition/ /to
      calling loans in early/.

    * Without the possibility of refinance-and with all that lost income
      from all those lost jobs-Americans faced foreclosure, also en masses.

But that was yesterday, right? It has no actual bearing on today. None whatsoever.

*Unless You Start Noticing The Eerie Similarities*

Since real estate remains the sole surviving mania of the wild 90s, it stays the focus of investors. And that's led banks, like Wells Fargo, to continue focusing on real estate investors.

Back in 2001, Wells Fargo was the first to resurrect the interest-only mortgage. To hear the bank tell it, it wasn't because people were desperate. "Actually, it's almost the converse of that. Many borrowers want to take their additional cash flow and invest it one way or another," observed Brad Blackwell, the national sales manager for Wells Fargo Home Mortgage.

Interestingly enough, borrowers are virtually waiting in line for these IO and adjustable rate mortgages. In fact, these mortgages made up 63 percent of all loans originating in the second half of 2004.

*Echoes of 1929?*

*"Having" Versus "Owning"*

Maybe at the end of a prolonged cycle of prosperity, common sense sneaks out the side door and financial insanity takes up permanent residence.

Financial educator, Ruth Hayden calls this insanity "Yuppie Money."

"Yuppie money is, 'How far can we leverage out? How far can we cash flow? How much stuff can we have? You know, we can get a much bigger car with a lease, we can get a much bigger house if we're not paying off principal, we can have much nicer furniture, we can take much nicer trips.' It's all about the stuff."

Maybe there were Yuppies in the Roaring Twenties, too. Maybe they, too, thought nothing would ever change their world, and that they could just invest their way to some sort of materialistic Nirvana.

But we all know how that turned out. And it seems obvious that today's "Yuppies" haven't learned the critical difference between merely "having" and "owning" from their ancestors.

"When we hit the bear market after the bull market, a lot of my Yuppie-moneyed people collapsed," Hayden continued. "They had maxed out on margin loans, house equity, credit cards and lines of credit, and now for the first time had to look at their lifestyles."

But that's still not the woodshed beating Americans got in October of 1929. Unfortunately, that may yet be ahead of us.

*Real Estate Yesterday Is Real Estate Tomorrow*

Here are some 2005 similarities to the real estate picture in the Roaring Twenties:

    * People are overbuying and overextending. In the last three years,
      the monthly mortgage payments for a median-value home jumped from
      $804 to $1,016. That's up over 26%. /Yet incomes grew only 10.5%/.
      A similar "throw caution to the wind" overextension is what got so
      many people in trouble after the 1929 Crash.

    * According to an article on, "The Housing Afford
      ability Index shows the percentage of American households that can
      afford a median home. A year ago, that index stood at 57. Now it's
      50 and falling. *This means that only one out of two families in
      the country can now afford an average dwelling.* In superheated
      markets, the situation is far worse: A mere 17% of California
      families can afford that same house."

      This is what's accounting for the popularity of interest-only and
      adjustable-rate mortgages, where monthly costs are /temporarily/
      lower. "People see the low monthly payment, and that is all they
      care about," observed one mortgage professional. This same
      shortsightedness is what led to so many foreclosures in the 1930s.
      Speaking of that…

    * The housing boom has "a dark side-a sharp rise in foreclosures
      that is destroying the single greatest generator of personal
      wealth for most Americans. Foreclosure rates rose in 47 states in
      March, according to, an on line foreclosure
      listing service. The rates in Florida, Texas and Colorado are more
      than twice the national average. Even in New York City and Boston,
      where real estate markets are white-hot, foreclosures are rising
      in working-class neighborhoods," wrote Michael Powell of the
      Washington Post,

      "Should the nation's housing bubble deflate, as many economists
      and federal officials expect, the foreclosures could prefigure a
      national crisis," he continues, "Americans now shoulder record
      levels of housing debt-*more than 8 percent of homeowners spend at
      least half of their income on their mortgage."*"Should the
      nation's housing bubble deflate, as many economists and federal
      officials expect, the foreclosures could prefigure a national
      crisis," he continues, "Americans now shoulder record levels of
      housing debt-*more than 8 percent of homeowners spend at least
      half of their income on their mortgage."*

Needless to say, foreclosures were so prevalent in the 1930s that the word itself was hated and avoided. Some states even passed "foreclosure moratoriums" to put the breaks on this mounting disaster.

*Housing Collapse and Gold?*

That article also told of the sale of "$1 million trailers in a mobile home park in Malibu." And that was just for the trailers, not the land they sat on.

*No greater evidence exists that the housing boom is about to end!* Even so, when housing does go south, will anything be around to hedge it?

Maybe, in the larger picture, the question ought to be, "What will give battered investors confidence in these scary times?" And the answer, historically, has always been gold.

Maybe we were born knowing we should turn to gold when things turned bad. Maybe it's in our genes, because that's what happened in the 30s. Just four years into the Great Depression, *gold had risen nearly 70%*.

Of course, Washington had confiscated the precious metal in 1933. Maybe it instinctively knew enough to turn to gold, too.

But man truly is a cyclical creature. With some gold in our portfolios, though, our cycles can turn to boom instead of bust.

Kevin DeMeritt <>
September 15, 2005

The Great Depression 1929-1932 Headlines:

September 1929
There is no cause to worry. The high tide of prosperity will continue.”
- Andrew W. Mellon, Secretary of the Treasury.

October 14, 1929
“Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board.”
– New York Times

October 29 1929

Stock market crash

December 5, 1929
“The Government’s business is in sound condition.”
– Andrew W. Mellon, Secretary of the Treasury

December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”
– Associated Press dispatch.

January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.”

– News item.

January 21, 1930
“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed  the tide of employment had changed in the right direction.”

– News dispatch from Washington.

January 24, 1930
“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed!  Progress in all lines by the early spring forecast.”

– New York Herald Tribune.

March 8, 1930
“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.”

– Washington dispatch.

May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”
– President Hoover

June 29, 1930
“The worst is over without a doubt.”
– James J. Davis, Secretary of Labor.

August 29, 1930
“American labor may now look to the future with confidence.”
– James J. Davis, Secretary of Labor.

September 12, 1930
“We have hit bottom and are on the upswing.”
– James J. Davis, Secretary of Labor.

October 16, 1930
“Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.”

– Charles M. Schwab.

October 20, 1930
“President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President’s special committee on unemployment.”

– Washington dispatch.

October 21, 1930
“President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter.

– Washington dispatch.

November 1930
“I see no reason why 1931 should not be an extremely good year.”

– Alfred P. Sloan, Jr., General Motors Co.

January 20, 1931
“The country is not in good condition.”

– Calvin Coolidge.

June 9, 1931
“The depression has ended.”

– Dr. Julius Klein, Assistant Secretary of Commerce.

August 12, 1931
“Henry Ford has shut down his Detroit automobile factories almost completely. At least 75,000 men have been thrown out of work.”

– The Nation.

July 21, 1932
“I believe July 8, 1932 was the end of the great bear market.”

Dow Theorist, Robert Rhea.



Last Updated: Sunday, September 18, 2005 04:43:58 PM

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