Mortgages are a part of our everyday lives – something we wouldn’t normally think about as far as their origin. You’d probably be surprised to learn how far back the history of home mortgages goes. But no matter how many years old this system is, the basics have never changed – the high value of real estate puts it beyond the reach of most people. So the only way to buy property is to borrow money. And that’s what they did as far back as the year 1190.
The beginnings of a mortgage system have been found, as mentioned, as early as 1190. English common law included a law that would protect a creditor by giving him an interest in his debtor’s property. According to this law, the mortgage was a conditional sale. Although the creditor held title to the property, the debtor could, in the event the debt wasn’t paid, sell the property to recover his money.
The history of the actual word “mortgage” is very interesting. In the word “mortgage”, the “mort”- is from the Latin word for death and “gage” is from the sense of that word that means a pledge to forfeit something of value if a debt is not repaid. So mortgage is literally a dead pledge. It was dead for two reasons, the property was forfeit or "dead" to the borrower if the loan wasn’t repaid, and the pledge itself was dead if the loan was repaid.
The great jurist Sir Edward Coke (1552-1634) says of the word “mortgage”: It seemeth that the cause why it is called mortgage is, for that it is doubtful whether the Feoffor will pay at the day limited such summe or not, & if he doth not pay, then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever, and so dead to him vpon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant, &c. A pretty old English way of saying the same thing, but interesting to note that the principle hasn’t changed throughout the years.
Here’s another interesting piece of trivia: originally, ownership rights extended from the center of the earth to the sky. Of course, now they’re generally limited to surface rights only.
As pioneers moved from Europe to settle in America, they brought their systems with them. As land ownership increased, so did the need for mortgages; so much so that by the early 1900s, they were already widespread and readily attainable.
However, not everybody could get a mortgage. In those days, those seeking to buy property were often required to pay a 50% down payment on a 5-year mortgage. So, to buy a $10,000 house (wouldn’t that be nice today), the borrower had to have a $5,000 down payment and pay interest for 5 years. At the end of that 5 years, the unpaid (and unchanged) balance of $5,000 would have to be either paid or refinanced.
This system continued through to the Great Depression, when lenders had no money to lend, and borrowers had no money to pay. The whole system collapsed with thousands of foreclosures. Mortgages were just not available.
Roosevelt’s election as President of the United States brought with it a turn towards a more consumer-friendly nation. He wanted to stimulate the economy by making it easier for people to buy. His government introduced laws and institutions designed to make this happen. Under these new laws, the securities and banking industries were kept under tight supervision, which in turn revolutionized the way mortgage loans were structured and made available to average Americans.
In 1934, the Federal Housing Administration (FHA) was created to insure mortgage lenders against losses from default. Now that the risk had been taken away from them, lenders were more willing to give people mortgages. The FHA also developed the 30-year fixed-rate loan program, providing homeowners lower payments and more stability.
So the system was working. However, lenders didn’t always have enough money to lend. And loan terms and interest rates were set according to the local economy, which varied around the country. More money, and a more consistent plan was needed.
In 1938, to make this money available, the government established the Federal National Mortgage Association (FNMA), better known as Fannie Mae. It bought FHA-insured loans and sold them as securities on the financial markets. This kept the pool of mortgage-lending funds full, in effect, creating the secondary mortgage market.
Another advantage of Fannie Mae was the introduction of more fair and efficient mortgage-lending practices. Now that lenders were going to a central source for their money, loan terms, interest rates and underwriting guidelines became similar. And lenders had to follow Fannie Mae’s guidelines and restrictions if they wanted to sell their loans to the secondary market.
World War II dramatically changed the mortgage scene. War veterans were coming home and entering the workforce. They became avid consumers who wanted to buy – the economy boomed. And with it, so did the demand for mortgages.
In 1944, the Veterans Administration, in a similar program to the FHA, was given the right to guarantee mortgage loans made by private lenders, but this time, to veterans. This program enabled veterans and active military personnel to buy homes without making down payments. The demand for housing was incredible. This triggered a massive economic boom which was heard far into the real estate market. The mortgage industry had come a long way towards becoming efficient and stable.
In 1938, the Canadian government, not to be left out, introduced the National Housing Act (NHA). In 1954, they followed the United States’ example by insuring mortgage loans. The Bank Act was also amended to allow Canada’s chartered banks to lend money for mortgages. Everybody was recognizing the growth the housing market was contributing to the economy.
Then, throughout North America, as baby boomers entered the workforce, including women, double-income families became the norm. They wanted larger, more expensive homes to fit their income and lifestyles. More mortgages were needed.
So in 1970, U.S. Congress chartered the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac, to increase the supply of mortgage funds available to commercial banks, savings and loan institutions, credit unions and other mortgage lenders, thus making more funds available to more Americans.
In the 1950s and 60s, most mortgages were 20-30 years. However, in the 1970s, interest rates rose rapidly, and the system had to adjust. Mortgages were reduced to 1, 3 or 5 year-terms, although even the 5-year mortgages were rare in the early 1980s when interest rates climbed to more than 21%. By 1998, the 5-year mortgage rate had fallen to an average of 6.99% and the 1-year rate to 6.5%. Banks, forbidden to lend mortgage money before 1954, had written about 63.6% of the more than $381 billion worth of mortgages that were outstanding in the third quarter of 1998.
So you can see the amount of money floating around in the mortgage industry today. And with that amount of money at stake, you can understand why the credit business is so important – for both sides. The credit bureaus monitor your credit report; you monitor the information the credit bureau has on you. So, credit monitoring ties in very closely with the history of home mortgages.
The home mortgage industry is constantly changing, constantly looking for ways to expand homeownership among lower-income and moderate-income families and individuals. One of the latest developments in the last few years has been the reverse mortgage, where a homeowner borrows against the value of a house to receive a line of credit or monthly payments. New programs are constantly being created.
There are all kinds of possibilities when it comes to ways to create cashflow. The mortgage industry is looking for new ones every day. There are thousands of financial programs available for every consumer in every financial situation. There’s a right program for you. And now that you’re familiar with the history of home mortgages, you can see that some things never change – you still want that property – and you still need that “dead pledge”.
Gareth Marples is a successful freelance business writer providing valuable tips and advice for consumers. His numerous articles offer moneysaving tips and valuable insight on typically confusing topics.