With the nation’s economic landscape laid to waste, it should be no surprise that home foreclosures were soaring, too: Residential real-estate foreclosures doubled between 1926 and 1929 – before the Great Depression actually began. According to a new study by the Federal Reserve Bank of St. Louis, the foreclosure rate jumped from 3.6 per 1,000 mortgages in 1926 to 13.3 in 1933. In that year, in fact, 1,000 home mortgages were being foreclosed each day.

By Jan 1, 1934, as many as half of all residential mortgages were delinquent, putting them at risk of foreclosure.

Clearly something had to be done, elected officials believed. In an attempt to slow that surge, 27 states changed key laws in a way that created a temporary moratorium on foreclosures. Still other state and municipal governments passed permanent measures that made it tough for aggrieved lenders to foreclose on properties whose mortgages were delinquent.

With the benefit of hindsight, it’s not at all clear that the benefits of these moves outweighed the costs – many of which were unintended, says Daniel C. Wheelock, a St. Louis Fed economist and the author of the new research study, “Changing the Rules: State Mortgage Foreclosure Moratoria During the Great Depression.” The study appears in the November/December issue of the St. Louis Fed’s Review magazine, which covers national and international economic developments – especially when there’s a monetary impact.

“Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties,” Wheelock wrote. “One immediate effect of mortgage-relief legislation during the Depression was reduced [disclosure rates on farms, which were being hit even harder than the residential real estate sector]. However, over the longer run, foreclosure moratoria and other changes in mortgage laws may have made loans costlier or more difficult to obtain” for future borrowers.

Indeed, the study shows that future borrowers had to face a marketplace where loan capital was in short supply and interest rates were sky high. Lenders made loans tough to get – and then charged a lot for them via high interest rates – because they needed to compensate for the very real possibility that these new laws would restrict their ability to foreclose on delinquent loans.

Fast-forward 74 years, to 2008. Nearly 1% of U.S. home mortgages entered foreclosure during the first quarter; by the time that three-month stretch came to an end, nearly 2.5% of all U.S. mortgages were in foreclosure.

And the news keeps getting worse. In the July-September quarter, 18% of all properties with a mortgage were “underwater” – that is, worth less on the market than what the owner owed on the loan, data supplier First American CoreLogic Inc. told BusinessWeek. It gets worse. That statistic represents more than 7.5 million properties, and another 2.1 million mortgages were within 5% of shifting “upside down.”

All told, nearly a quarter (23%) of U.S. mortgages were underwater or were in a near-negative-equity position. Nevada (48%) and Michigan (39%) led the nation with the highest percentages of negative equity, followed by Florida (29%), Arizona (29%), California (27%), Georgia (23%), and Ohio (22%).

In late July, U.S. President George W. Bush signed the Housing and Economic Recovery Act of 2008, whose provisions included a $300 billion increase in Federal Housing Administration loan guarantees – which were designed to induce lenders to refinance delinquent home mortgages.

A foreclosure-prevention mentality took hold, with loan modification plans and programs such as Hope for Homeowners becoming increasingly common, HousingWire.com reports. Such states as Massachusetts, as well as some local cities, have sought to put foreclosure moratoriums in place; federal legislators, too, have tried to get in the act.

A tentative Bush Administration plan aimed at keeping as many as 3 million homeowners who are behind on their mortgages from losing their houses will be difficult to administer, and could end up costing the country hundreds of billions of dollars more than the plan’s architects expect, a Money Morning contributing editor and credit-crunch expert says.

R. Shah Gilani, a retired hedge-fund manager and Money Morning contributing editor who is emerging as an expert on the worldwide financial meltdown, noted that the plan was apparently still that – a plan. Even so, he said that “any bailout plan that directly addresses foreclosures is political posturing that will ultimately be overwhelmed by inevitable economic realities.”

The plan – which would be part of the $700 billion banking-system rescue package the government approved early this month – would cost $40 billion to $50 billion, with the money being used to cover future losses on loans that are deemed eligible for federal support.

The New York Times carried the first reports of the Bush Administration’s new housing rescue proposal last Thursday. According to the newspaper report, this program would be the most sweeping and direct government initiative aimed at home-loan borrowers since the financial crisis started last year.

Unfortunately – at least with respect to the contentions made by the St. Louis Fed study – this program is a classic foreclosure-moratorium initiative.

As proposed, the federal government would incur half the loss on a home loan if the mortgage company that controls the loan agrees to lower the borrower’s monthly payment for at least five years. On any given loan, the mortgage company would reduce the payment borne by the homeowner by writing off part of the loan balance, reducing the loan’s interest rate or changing other loan terms, sources told The Times.

In this case, the devil truly will be in the details: Trying to take a massive rescue plan – and matching the benefits up with individual homeowners – may be just too much to ask, Money Morning’s Gilani says.

“Who will be eligible, how will that be determined, what will happen when prices continue to fall and mortgage holders eventually walk away” are just some of the tough questions a workable plan would have to answer, Gilani said. Plus, “is the government going to shackle them to their mortgages the same way they’re shackling taxpayers to all these other ill-begotten bailout schemes?

When it comes to the idea that money from the federal government’s Troubled Assets Relief Program (TARP) may be used to manage a bailout of troubled mortgages, all options are still on the table, and the plans under consideration have been stuck in the negotiating room for some time, HousingWire reported.

In a story earlier this week, The Wall Street Journal suggested that “disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush Administration’s last attempt to forestall sliding home prices.”

According to another HousingWire report, one plan that may be gaining some support is the idea of a federal subsidy for troubled borrowers. On Sunday night, a source near the Pennsylvania office of U.S. Sen. Robert P. Casey, D-Pa., provided the housing news service a copy of a memo that’s said to have sparked some of the ongoing negotiations now taking place.

The memo outlines the mechanics of a mortgage bailout that would cost as much as $441 billion, relying primarily on a three-year subsidy for troubled borrowers that would be repaid in five years, with interest. At that point, the participants would likely be able to sell their homes or refinance the mortgages at amounts that would enable them to repay the loan.

The subsidy plan reportedly represents the thoughts of Assured Guaranty Ltd. (AGO) Chief Executive Officer Dominic J. Frederico, who had been asked by legislators to provide his thoughts a few weeks earlier.

Other proposals are being studied, as well.

No matter what shape or form they take, however, Wheelock, the economist, warns that there will be a price to pay. There’s something to be said for allowing the marketplace to work – and an operational free market includes defaults and foreclosures, with the end result being that only the strongest borrowers remain in the end.

It’s a lesson we should have learned during the Great Depression, Wheelock says.

Wrote the St. Louis Fed economist: “The [foreclosure] moratoria reduced … foreclosure rates in the short run, but they also appear to have reduced the supply of loans and made credit more expensive for subsequent borrowers. The evidence from the Great Depression demonstrates how government actions to reduce foreclosures can impose costs that should be weighed against potential benefits.”

Source: Study of Great Depression  Shows Intervention Postpones Foreclosures, But Causes Mortgage Rates to Spike

–The Fed is trying to soften the blow of falling asset prices by making it possible for homeowners to refinance into longer-term loans at lower rates, and then ride out the bear market in housing and credit. In other words, the Fed has kicked the dollar to the curb. It’s on its own now.

–That doesn’t mean the dollar won’t really from time to time. As a proxy for economic growth, there will be times in the coming years, let’s call them false dawns, where the U.S. economy appears to be emerging from the slump, or is at least growing faster than Europe’s sluggish economy. But the long-term trend for the dollar index is lower highs and lower lows. For gold and oil, it’s just the opposite, higher highs and higher lows.

–Speaking of highs and lows, our friend Dr. Joanne Nova at GoldNerds.com read our note yesterday about the challenges of deep-water drilling. But drilling deep is a challenge anywhere, even on land.

–”Here’s another perspective on the difficulty of drilling Brazil’s new oil field a full 10km below the surface,” Joanne writes. “Did you know the deepest hole ever dug reached down to 12km, but it took 19 years to get there? The Soviets started planning the Kola Superdeep Borehole in 1962 and began drilling in 1970 reaching the record depth in 1989.

–”They initially aimed to reach 15km, but were forced to give up a few years after they set the record. Things were too hot, too strange, and too expensive. And this was not a hole designed to produce anything except interesting scientific papers. Twelve kilometers down, the rocks were under so much heat and pressure they behaved more like plastic than rock. The hole apparently kept flowing closed whenever they had to replace a drill bit. Makes production hard if the hole keeps disappearing.”

–Yes it does.

–Incidentally, Australia’s deepest on-shore drilling effort doesn’t have anything to do with oil, gas, or mining. It is energy related though. Geothermal hopeful Geodynamics (ASX:GDY) finished drilling its Habanero 3 well in early February to a depth of 4,221 metres.

–Even if you don’t get all the way through the Earth’s crust at that depth, it’s still pretty hot down there, which is the whole point. Geodynamics hopes to be operating Australia’s first commercial geothermal electric generating plant by the end of this year, with a capacity of 50 megawatts per year.

–We know a bit about the project and the share because we tipped it in the Australian Small Cap Investigator. The credit crunch has not been kind to small-cap stocks in general or alternative energy stocks in particular. But if you look at these stocks in terms of their ability to generate future earnings, there is a lot to like. The assets should produce growing cash flows, and who doesn’t like that?

–We showed a chart a few weeks ago demonstrating that GDP growth and electricity are pretty well correlated. A growing economy needs its energy doesn’t it? Australia’s economy is growing and so are its energy needs.

–Perhaps that’s why Citigroup reckons Origin Energy (ASX:ORG) will grow its earnings by 16% a year for the next five years, according to Rebecca Keenan at Bloomberg. And perhaps that’s why Britain’s BG Group Plc. offered to buy Origin for $12.9 billion. That represented a 40% premium on yesterday’s closing share price of $10.47. Proving that markets can sometimes be pretty darn efficient, Origin is up 37% in early trading.

–As a trade, we might even consider shorting or buying puts. After all, Origin hasn’t accepted the bid yet. But our interest isn’t in trading these events, it’s in anticipating them. BG’s bid is based on asset quality and earnings growth. It’s a stock picking story, not a China narrative, although the two are related. Take iron ore.

–”Right now, I think this is the best stock picker’s market in resources that we’ve seen for quite some time,” says fund manager James Bruce in today’s Financial Review. He could not be more right.

–He was referring to today’s breaking news that China’s first-ever hostile takeover of an Australian company-Sinosteel’s $1.37 billion bid for Midwest (ASX:MIS)-looks like it will go through. Midwest is in a trading halt this morning, suggesting an announcement could be forthcoming.

–Sinosteel raised its bid for Midwest from $5.60 a share to $6.38 a share. This seemed to please the board of Midwest, which had been holding out for $7 a share. It probably doesn’t hurt that, as Michael Vaughan reports in today’s Financial Review, Sinosteel agreed to support the issue of 15 million options to two Midwest directors.

–The exercise price on the options is $1.46. With the bid at $6.38, that means those 15 million options are worth about $73.8 million. That’s a nice pay day, if you can get it. We’ve always said that owning your own business is the only real way to get wealthy.

–”China was busy last night,” writes Diggers and Drillers editor Al Robinson. “It closed the net around one little iron miner, and took stakes in a couple of others. It looks like Chinese steel mills are focusing on the leaders in the second tier of iron companies. By that, we mean the companies outside of BHP, Rio Tinto and Fortescue who have the best-developed assets.

–The “other” company which Sinosteel appears to have set its sights on is Murchison Metals (ASX:MMX). Al has more details over at Money Morning. The entire mid West region of Western Australia is ripe for this sort of Sino-Japanese financing and takeover. The ore in the region is a little lower quality than the famous hematite of the Pilbara. The infrastructure doesn’t exist yet, either, to move that ore from mine to port and on to points North.

–On that score, keep your eyes on May 9th . That’s the deadline for proposals to be submitted to the WA government for building out the iron ore infrastructure in the mid West. There are two major proposals, one backed by China and one essentially backed by Japan.

–In the meantime, if you want to catch up on who the junior producers are in the mid West, you may want to introduce yourself to the Geraldton Iron Ore Alliance. Don’t be shy. She’s friendly.

–There are seven firms in the alliance. Mount Gibson (ASX:MGX), MidWest (ASX:MIS), Gindalbie (ASX:GBG), Murchison (ASX:MMX), GoldenWest Resources (ASX:GWR), Royal Resources (ASX:ROY), Asia Iron Holdings (not listed), and Atlas Iron Limited (ASX:AGO).

–Who will win? This is where we reach the limits of the free security analysis we provide in the DR. The heavy lifting and deeper digging goes on at Diggers and Drillers. We will tell you that valuing the companies comes down to looking at the quality of their assets and their ability to finance projects without a lot of debt.

–Better hurry, though. “The Chinese invasion of corporate Australia is continuing apace with Chinese Iron and Steel Group announcing plans to lift its stake in outback prospector Apollo Minerals to 19.9pc, just short of the 20pc level that would require it to mount a full takeover under Australian law,” according to David Litterick in Britain’s Telegraph.