You are probably familiar the concept of a mortgage - it provides the means to purchase a home and involves repaying the borrowed amount plus interest. Have you ever thought about how and why mortgages began in the first place? The history of mortgages is a fascinating one. Here's a somewhat condensed overview of how promises to borrow have evolved into what we know as mortgage loans.
Origins of Mortgages
The roots of mortgages can be traced back to ancient civilizations. Historians have traced the origin of mortgage contracts to the reign of King Artaxerxes of Persia, who ruled modern-day Iran in the fifth century B.C. The Roman Empire formalized and documented the legal process of pledging collateral for a loan. A “mortgagor” (lender) would make an agreement with a "mortgagee" (borrower) and was an exchange of property with a pledge to repay over time. The Latin term “Mortuum Vadium” means dead pledge (in reference to pledging to the lender you would repay your debts) morphed into “Mort Gage,” Norman French for “dead” and “pledge.” The English word we know today as mortgage was a mashup of these two words.
This concept of trading a long-term pledge for the exchange of property happened in maritime law, civilizations of Europe and early Americas. Over time this "pledge to repay" practice evolved into the modern mortgage we now know in the United States.
When Did Mortgage Loans Begin in the United States?
English colonization and early settlers in the United States didn't immediately bring in the practice of mortgages, but in the 19th century, mortgages were commonly given to farmers.
Before the 1930's the mortgages were small and generally amounted to half, at most, of the home's value and were short term with payments due twice a year, maturing in under 10 years. Before the Great Depression began in 1929, homeowners would renegotiate their mortgages every year. Once the government intervened during the crash of ‘29 and the economic downfall, the mortgage process changed. During this time, 1 in 10 homes faced foreclosure - about 1,000 homes per day. Once America went into the Great Depression, the banking system collapsed, and housing market crumbled and housing prices fell.
The Great Depression led the federal government to respond by creating new agencies to help stabilize the housing market and helped kickstart the industry. Government institutions that backed mortgages—including the Home Owners Loan Corporation, the Federal Housing Administration, the Federal National Mortgage Association, and FDIC—were major players in early mortgage loans. In 1938 Congress established the Federal National Mortgage Association, more commonly known as Fannie Mae. Fannie Mae made fixed-rate long-term mortgage loans viable though securitization, which means they sell debt to investors using the proceeds to purchase long-term mortgage loans from banks. This creates a reduced risk for banks and helped encouraged longer-term mortgage lending.
The next shift was spurred by World War II, which brought many major changes to the American economy and society. A big housing and mortgage change happened between 1949 and the turn of the new century, as the U.S. became an economic powerhouse, jobs were abundant and communities were growing across the country. The move out to the suburbs created a major housing boom. The debt-to-income ratio rose from 20 to 73 at that time. The GI Bill after the war included provisions for soldiers to purchase homes and the emergence of the VA mortgage insurance program.
After the civil rights movement, the mortgage industry responded to the change in the late 1960's by implementing the Fair Housing Act. The Truth in Lending Act was also established to help consumers understand fees associated with their loans and required lenders to be transparent about fees.
Fluctuating, high mortgage loan rates in the 1980's brought about the adjustable rate mortgage, or ARM. The ARM was created in the early 1980's when lenders were financially affected because homeowners were often repaying their loans between 8%-10%, while the lender’s cost for money was more than 15%. While ARM's are a common practice outside of the United States, Americans typically prefer longer term, fixed rate loans.
In 1999, Fannie Mae began efforts to make home loans more accessible to those with lower credit and savings than lenders typically required. The idea was to help everyone attain the American dream of homeownership. By the fall of 2008 borrowers were defaulting on these subprime mortgages in high numbers; the collapse of the financial markets and the global Great Recession ensued.
Over the years, mortgages have evolved, from stringent down payment requirements to today's more accessible financing options. While regulations have increased, the industry's learnings have informed the best practices in lending that we see today. The process today is more transparent, fair and dependable than in our country's history. About 61% of Americans today have mortgages, with fixed rate long term loans being the predominate type. If you're considering homeownership, initiating the mortgage process is key to starting your search and understanding what you can afford to purchase.
Here is a brief timeline of milestones in the mortgage industry:
Late 1800s: Balloon Mortgages and Increased Housing Demand
The late 19th century saw a surge in housing demand due to mass immigration, leading to the introduction of balloon mortgages. Homebuyers were required to make substantial down payments, often with short amortization periods and a large balloon payment at the end of the loan term.
1920s: The Great Depression and Mortgage Defaults
The 1920s witnessed a rise in affordable, interest-only mortgage payments, which, while appealing, resulted in an increase in loan defaults. The Great Depression of 1929 further reshaped the mortgage landscape, highlighting the need for reform.
1933: The New Deal and Mortgage Relief
President Franklin D. Roosevelt's New Deal introduced the Home Owners' Loan Act, providing relief for mortgage debt and enabling mortgage refinancing to alleviate the foreclosure crisis.
1934: Federal Housing Administration (FHA) and Affordable Financing
The establishment of the FHA aimed to improve housing standards and make home financing more accessible. This initiative introduced lower down payment requirements, longer loan terms, and FHA-insured mortgages.
1938: The Founding of Fannie Mae and Fixed-Rate Loan Terms
Fannie Mae, initially focused on purchasing FHA-backed mortgages, played a pivotal role in introducing fixed-rate loan terms, contributing to market stability.
1940 – 1960: Post-World War II Homeownership Surge
The end of World War II saw a surge in homeownership, supported by low-interest VA loans for veterans, leading to a significant increase in homeownership rates.
1968: Legislative Reforms for Fair Housing and Lending Transparency
The passage of the Fair Housing Act and the Truth in Lending Act marked a turning point, aiming to combat discrimination and ensure transparency in lending practices.
1970: The Emergence of Freddie Mac and Mortgage Market Stability Efforts
Freddie Mac was established to stabilize the mortgage market through the purchase and resale of mortgage loans, addressing the challenges posed by fluctuating interest rates.
1975: Home Mortgage Disclosure Act for Borrower Protection
The Home Mortgage Disclosure Act mandated lenders to maintain records of lending practices, promoting transparency and safeguarding borrowers from discriminatory or predatory practices.
1980s: Introduction of Adjustable-Rate Mortgages
The 1980s witnessed mortgage rates as high as 18.6% and as low as 9% (which is high by today's standards). The introduction of adjustable-rate mortgages offered borrowers flexibility in response to interest rate fluctuations.
1990 – Early 2000s: Efforts to Increase Homeownership Rates
Initiatives such as subprime lending and innovative mortgage products aimed to boost homeownership rates, but their impact contributed to the subsequent housing crisis.
2008: The Housing Crisis and Regulatory Impacts
The housing crisis, fueled by unqualified borrowers and lack of regulation, resulted in widespread defaults and the Great Recession, prompting government intervention. (The 2015 movie, The Big Short, is a great depiction of what happened during this time!)
2020 – Present: COVID-19's Impact on the Mortgage Industry
The COVID-19 pandemic brought about economic challenges, leading to fluctuating mortgage rates and heightened demand amidst a competitive housing market.