February 22, 2024


Mad about real estate

The History Of Mortgages

Most of us don’t think of what the word mortgage means as what it does for us. Believe it or not, the term ‘mortgage’ has been around for a long time, dating back to approximately 1190.

It was after the conquest of 1066 in England that a group of persons formed the basis of English aristocracy and began subletting the king’s land which led to the feudal system. A lord would contract with commoners, to whom he would sub-grant the exclusive possession and use of part of the royal tenure in exchange for goods or services.

By 1190 people were granted mortgages to purchase property. With English common law a creditor was protected by being given an interest in his debtor’s property. With this law, a mortgage was a conditional sale. The creditor held the title to the property and the debtor could, if the debt wasn’t paid, sell the property to recover his money.

The word mortgage is derived from the Latin term ‘mort’ meaning death and ‘gage’ which means to pledge or forfeit something of value if the debt is not paid.  Mortgage’s literal meaning is ‘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.

As the English moved to America, they brought the system of mortgages with them. The system evolved into various forms. For many years, to buy property required a 50{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} down payment with a five-year term and interest.

Then came the Great Depression. Lenders ran out of money to lend and borrowers ran out of money to pay. The home mortgage system collapsed with thousands of foreclosures. To help stimulate the economy, President Roosevelt introduced new laws making it easier for people to buy. This was followed by the introduction of the Federal Housing Administration (FHA) in 1934. FHA was created 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. The system worked until lenders felt they didn’t always have enough money to lend. More money was needed. The FHA then began to start requiring banks give loans based on a creditor qualifying rather than simply who a person knew. FHA also began lengthening terms of loans from the traditional five to seven year loans up to 15-year and 30-year loans. Prior to FHA loans, mortgages were interest-only payments that ended with balloon payments that amounted to the entire principal of the loan, which led to  many forecsloures.

FHA also began getting involved in the quality of a home’s construction by setting quality standards. A home had to meet specific standards in order to qualify for a loan so that the loan wouldn’t outlast the building.

FHA was followed in 1938 with the establishment of the Federal National Mortgage Association of FNMA, better known as Fannie Mae. FNMA was established by the government. The institution bought FHA-insured loans and sold them as securities on the market. This helped give banks more money to lend. FNMA also introduced more fair and efficient mortgage-lending practices.

In 1944, after World War II, the Veterans Administration was given the right to guarantee mortgage loans made by private lenders to veterans. Enabled veterans and active military personnel were now able to buy homes without making a down payment. This made the demand for housing and mortgages skyrocket.

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. In 1970, the government then charted the Federal Home Loan Mortgage Corporation (FHLMC) or Freddie Mac. This organization increased the supply of mortgage funds available to commercial banks, savings and loan institutions, credit unions and other mortgage lenders.

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.

The idea of mortgages has come a long way with government institutions and private alike seeking ways to make it easier and easier for people to buy and succeed in repayment of their mortgage. While most of us don’t contemplate the meaning of a mortgage, we often forget how the concept of each individual having the opportunity to own their own property is somewhat new and has only become easier and easier as time passes.