The first mention of a mortgage in historical documents was in 1190, in English common law. The essential notion of a mortgage was described at that time. The creditor kept the property title, and the debtor was able to recover the money through a sale of the property.
50% down payments
Toward the end of the 19th century and into the beginning of the 20th century, immigrants coming into the United States started to need mortgages in order to be able to become homeowners. At that time, though, you had to have quite a bit of money to buy a house – even with a mortgage. The standard format was a 50% down payment and five years of amortization (paying off a debt with regular payments). In other words, the entire house would have to be completely purchased in just five years. To make matters worse, the payments throughout the five years were interest-only, culminating in a huge balloon payment, including the full principal of the loan, at the end.
The modern mortgage got its start in the 1930s. It was not banks but insurance companies that changed the playing field. The impetus was the Great Depression, in which housing prices dropped 25% and homeowners became unable to afford the balloon payment at the end. Refinancing was not possible at that point with banks. In those days, only 4 in 10 households were homeowners. However, foreclosure had struck 1 in 10 of those who did own by 1935.
New Deal & Federal Housing Administration
To address these issues, the New Deal from President Franklin D. Roosevelt contained five changes:
- Glass-Steagall made it unlawful for banks to use the stock market or other high-risk areas to invest the funds of their depositors.
- Bank deposits became insured through the Federal Deposit Insurance Corporation.
- Mortgage insurance was provided via the Federal Housing Administration.
- A mortgage secondary market was initiated through the Federal National Mortgage Association (Fannie Mae).
- 1 million defaulted mortgages were purchased from banks by the Home Owners’ Loan Corporation. The mortgages were reinstated as fixed-rate, long-term home loans.
World War II to the 21st Century
To stimulate the housing market following World War II, the GI Bill included the VA mortgage insurance program. Mortgages were extended to a maximum term of 30 years, and great rates were provided to service members.
Financial instruments were introduced to the US mortgage market in 1968 by the Government National Mortgage Association (Ginnie Mae), as an effort at standardization and stability. Home ownership was advocated in 1970 by creation of the Federal Home Loan Mortgage Corporation (Freddie Mac). As overseen by the Federal Reserve, the 1980s saw a return of the adjustable rate mortgage (ARM). Almost 43% of the complete mortgage market was composed of government mortgages in 2003.
Getting your own mortgage
Fast-forward to today, and you can still benefit from how the 20th century made home loans highly accessible and, when performed ethically, consumer-friendly. At Ted Bougie – First Equity, we pride ourselves on making the loan process simple, straightforward and fast. See our commitment.