The experience of the U.S. Great Depression suggests parallels between 1920s mortgage lending and the recent financial crisis

Bank lending was at the heart of the Global Financial Crisis when it began in 2008, with the collapse of subprime and ‘piggyback’ loans having detrimental effects. Using newly-discovered archival documents and a newly-compiled dataset from 1934, Natacha Postel-Vinay looks at the lessons of the Great Depression. She writes that the prevalence of ‘second mortgages’ (loans which supplemented regular mortgages due to borrowing limits) led to higher rates of foreclosure. This, in combination with a protracted foreclosure process, helped to severely weaken the liquidity of banks in the 1930s, contributing to their failure.