Home Mortgage

History of Home Mortgages

Today mortgages are an integral part of our everyday living and many persons would not have been able to afford their own home had it not been for a home mortgage. Yet most of have never really concerned ourselves with the history of home mortgages and where it all started.

The idea of a mortgage system was first designed in the late twelfth century in England. At that time there was a law based in common law that sort to protect creditors by assigning them some interest in the property own by their debtor. Under common law mortgages are considered a conditional sale, thus the creditor has the right to sell the debtor’s title-held property in order to recover what is owed to him should the debt not be paid. 

The word mortgage has its origins from the Latin word “mort” meaning death and the word “gage’ which roughly translates to mean pledging to forfeit a valuable possession should the debt not be paid.  Therefore a mortgage can be considered a dead pledge because the property is seen as forfeited or “dead” to the borrower if he has not repaid the loan.

When the British came across to the Americas they brought with them their systems and as the ownership of land grew in America so did the number of mortgages and this lead to them being more readily available by the time the twentieth century came around. Yet getting a mortgage at that time proved to be difficult for many as the down payment required was a whopping 50% for a mortgage with a five year term.  Things became even more difficult for borrowers and lenders during the Great Depression and when Franklin D. Roosevelt was elected president he set about giving the American consumers simpler and easier opportunities to buy. This bought about certain changes to existing laws and the drafting of new ones. New institutions were also created to facilitate the presidents overall objective. These new ushered in a new era in bank and securities companies supervision by the state and this translated into changes in the ways home mortgages were designed and accessed.

When the Federal Housing Administration (FHA) was instituted in 1934 a new day had dawned on home mortgages. The FHA was responsible for insuring lending institutions against losses arising from a borrowers default. This led to lending institutions feeling more secure and the giving of mortgages to more people. A 30 year loan program at a fixed rate was then developed by FHA which gave homeowners a longer term at lower interest rate. These kinds of loans became more popular and also with their low rates and longer term they also offered borrowers a greater degree of stability. In spite of it successes this system had its flaws as oftentimes lender were short of money to lend and interest rates were based on the local economy and so was not the same across the country.

In an effort to solve the inherent problems that existed in the system the government set up the Federal National Mortgage Association (FNMA) which is more popularly known as Fannie Mae. Fannie Mae’s primary function at the time was to purchase FHA insured loans which will in turn be sold as securities on the financial markets. The effect of having Fannie Mae around was that mortgage lending funds were always available and by extension brought about a secondary mortgage market. Fannie Mae can also be credited with bringing some stricter rules to the mortgage industry as it had it own requirements that lending institutions had to meet if they wanted to sell them their loans. Thus the loan terms, rates of interest, and the underwriting was done became uniformed and similar in nature.

In 1945 when World War II ended many war veterans who returned home and joined the work force and this led to a boom in the economy and mortgage demand and lending. The Veterans Administration had started guaranteeing home mortgages that private lenders made to veterans and active military personnel.

As the demand or mortgages grew the U.S. Congress in 1970 was forced to increase the funds available for mortgages to banks and other lending institutions. This in turn made more funds available for loans to the country’s citizens. Many of the mortgages issued were for terms between 20 to 30 years but when interest rate rose sharply in the mid seventies terms were reduced to 5 years and lower.  Today a 25 year mortgage is still popular as interest rates are not particularly high and most home buyers are unable to pay a 5 year mortgage monthly payments.

Of the financial institutions that lend mortgage money, banks over the years have accounted for close to 63% of the mortgages that have been issued. Thus banks are now the primary source of mortgages.

Home mortgages will continue to be issued and will continue to be in demand as long as people desire to own their own home or are seeking to improve an existing one. Innovation in how mortgages are disbursed will continue to happen as the access to credit is very important to economic growth and development.