Mortgage history

Mortgage system origins date back as early as 1190s. English common law from that time period protected a creditor by giving him an interest in his debtor's property. According to this law, the mortgage was considered a conditional sale between two parties.

The creditor held the title to the property and the debtor had an option in the case the debt wasn't paid on time to sell the property thus recovering the invested money. At the beginning, ownership rights extended from the center of the earth to the sky, according to the perception off Earth at the time.

Sir Edward Coke, great jurist from England lived from 1552 to 1634 and gave the first popular definition of the term mortgage. It is derived from French words mort, meaning "dead," and gage, meaning "pledge". A "dead pledge" was used when a certain doubt existed whether or not the mortgagor will actually pay the debt. If the mortgagor didn't pay on time, the pledge was considered dead and the mortgagee could sell the land to settle the debt.

First mortgages in USA
Increased migration from Europe to America brought mortgages to the continent as well. More population growth meant a need for more land ownership and for mortgages. By the early 1900s mortgages were widespread, commonly used and available. Property buyers were however required to pay a 50% down payment as a part of the contract. This practice held form for decades until the Great Depression came.

The Great Depression and the New Deal in the 1930s changed United States housing policies and real estate financing models. First step was the establishment of the Federal Home Loan Bank system in 1932, followed by the United States Housing Act of 1934 which created the Federal Housing Administration. In 1938 the money was made available to general public through newly established Federal National Mortgage Association also known as Fannie Mae. It bought Federal Housing Administration insured loans and sold them as securities on the financial markets. The practice kept pool of mortgage lending funds full, creating the secondary mortgage market in process. The introduction of more efficient mortgage lending practices resulted in lenders going to a central source for their money, which created similar loan terms, interest rates and underwriting guidelines on the market.

Veterans Administration loan program
World War II dramatically changed the United States economy and mortgage market. American soldiers returned home and entered the workforce. In 1944, the Veterans Administration loan program gave the right to guarantee mortgage loans made by private lenders to majority of veterans. This program enabled veterans and active military personnel to buy homes without making down payments.

Most of them wanted to buy a property and the economy boomed on a housing bubble. Main purpose of these programs was to broaden borrower qualifications for home mortgages. The new roles of mortgage bankers and mortgage brokers were to arrange mortgage loans for borrowers who could not get traditional bank financing and both sold loans to investors.

Freddie Mac and the subprime mortgage crisis
Next important phase of the mortgage market development came with baby boomers generation. As they entered the workforce throughout United States double income families became the standard. People incomes increased and lifestyles changed in a manner that larger, more expensive homes became accessible through mortgages. In 1970, United States Congress chartered the Federal Home Loan Mortgage Corporation also 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 even more Americans.

A rise in mortgage interest rates that began in the summer of 2005 showed the housing market fundamental weakness. In 2006 and 2007 loan quality problems started a tightening of credit standards on mortgages, particularly for newer and riskier products. As lenders cut back, housing activity began to falter again in spring 2007, accompanied by rises in delinquencies and foreclosures.

In the absence of home price growth, many households found it hard to refinance their adjustable rate mortgages. The subprime mortgage crisis arose from joining under one product of American subprime and American regular mortgages, which was then sold in a market from prime loans. These products were believed to be asset backed securities, therefore a potential risk seemed minor. As the housing bubble burst, property valuations plummeted and the rate of return on investment could not be truly estimated confidence in these instruments collapsed. Most of the borrowers began to default in large numbers and securities became almost worthless toxic assets.

Written by:
Bojan Baretic, MA in Economics

Table of contents
1) Mortgage history
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1) Subprime mortgage crisis
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