The History of Mortgages in America

Mortgage, an instrument that made the American dream of owning a home a reality for many. Did you know the concept of borrowing money for a home wasn’t commonplace until recently? Interested in learning about the history of mortgages in America and how it evolved over the years to what we know today? Let’s get to it!

How It All Started

Before we dive into the nitty-gritty of mortgages, let’s understand what the term means and where it came from? A mortgage is a Latin word composed of two smaller words. “Mort” meaning death and “gage” meaning pledge, so essentially mortgage is a death pledge, strange right? Well, in other words, a mortgage refers to the end of the pledge once the loan is paid off. Easy!

It wasn’t until the 1930s when the concept of a mortgage was introduced. Up until that time, less than 40% of the American population were homeowners. If you couldn’t buy a home outright, you were pretty much out of luck. But thanks to the advent of mortgages in the 1930s, things started to change for the better. 

Initially, a mortgage was a private affair with no federal oversight or insurance, and it was in the form of a large balloon payment. It required a 50% down payment upfront, and the remainder to be paid off lump-sum in a very short span of 5 to 10 years. This was an unattainable goal for most. 

The Era of Great Depression

The time of the great depression crumbled the American economy, its financial institutions, and especially the mortgage industry. At the time, as most mortgage lenders failed, the mortgage delinquencies rose to a whopping 50%, and the housing prices plummeted by 25%. Homeowners couldn’t afford their lump-sum loan payments anymore, and nearly 1000 homes were lost to foreclosure every day as banks wouldn’t allow refinancing. 

The Onset of the New Revolutionary Deal 

As you may already know, the mortgage sector and the real estate industry were in a dire situation back then. Recognizing the need for stringent rules and regulations, President Franklin D. Roosevelt proposed five critical changes to the housing market. 

1. The federal housing administration introduced mortgage insurance.
2. One million defaulted mortgages were bought out by the Homeowner’s Loan Corporation and were reinstated as 30-year and 15-year fixed-rate loans. 
3. Government-sponsored enterprises such as Fannie Mae and Freddie Mac created a secondary mortgage market by insuring mortgages and selling them as securities as a way of funding the US housing sector. (More on Fannie Mae and Freddie Mac shortly) 
4. The federal deposit insurance corporation insured the bank deposits.
5. The introduction of the Glass-Steagall Act prohibited banks from investing in the stock market.

These regulations transformed the face of the mortgage industry, and it started to look similar to what it is today. Mortgages became affordable and long-term, making the monthly mortgage payments a viable option for many. This change skyrocketed American homeownership from merely 44% to 62% between 1940 to 1960, and the development of FHA and VA loans further encouraged more Americans to pursue homeownership. 

Formation of Fannie Mae in 1938

The Federal National Mortgage Association or the Fannie Mae was created to raise capital for borrowers by acquiring insured loans and selling them as mortgage-backed securities in the financial markets. This system created a secondary mortgage market that attracted global investors to pour money into the starved US economy. 

Between the 1940s to 1950s

The federal government formed the Veterans Administration (VA) to support American soldiers returning home post World War II to acquire homes at affordable prices with zero down payment. The VA insured mortgage loans to protect lenders against borrower default, and this system created a huge surge in the housing and mortgage sectors, further strengthening the US economy. 

Formation of Freddie Mac in the 1970s

Over time, the housing demands of the American population grew bigger, which called for larger loan amounts. However, the mortgage sector couldn’t keep up with the increasing demands, during which the US Congress established the Federal Home Loan Mortgage Corporation or the Freddie Mac to raise funds for the mortgage lenders to support their borrowers. 

Further, Freddie Mac provided 30-year fixed-rate mortgages at low-interest rates to protect borrowers from rising interest rates over time. In the 1970s and the 1980s, the interest rates jumped to over 20% and continued to stay there until the 1990s, when the interest rates fell to under 7%. 

Introduction of the Adjustable Rate Mortgage

The concept of an adjustable-rate mortgage was introduced in the 1980s, which gave the borrowers an option to utilize low-interest rates during the life of their loans. Needless to say, this was a substantial benefit for borrowers when the interest rates fell from 20% to under 5% in the 1990s.

Then Came the 1990s

As the high interest rates prevented more and more Americans from buying homes, the federal government proposed sub-prime lending to boost its homeownership. This model increased the rate of American homeownership to 70%. However, sub-prime mortgages made millions of unqualified candidates homeowners, and the market value grew from $35 billion to $125 billion.

Introduction of the Financial Safety and Soundness Act of 1992

To oversee the mortgage industry, the Federal Housing Enterprises Financial Safety and Soundness Act created the Federal Housing Enterprise Oversight to monitor the operations of Fannie Mae and Freddie Mac. It set forth a minimum capital standard for both government agencies, but the set capital standard was too low that required tax dollars to help these enterprises during the recession. 

The Great Recession

Until the great recession of 2008, the mortgage industry had a successful run. Many factors contributed to the recession, such as lack of liquidity, sub-prime lending, the housing bubble of 2006, and so on. When the housing bubble exploded in 2008, it caused record-breaking price drops primarily due to sub-prime lending and a significant lack of regulations. 

The Mortgage Industry Today

There are several mortgage options available today that can be tailored to fit the borrowers’ needs. These are fixed-rate mortgage, adjustable-rate mortgage, reverse mortgage, FHA loan, interest-only loan, balloon loan, no money down loan, exotic sub-prime loan, to name a few. 

Today, the American mortgage industry is the biggest, most innovative, and equally complex housing finance system. The growth of the mortgage sector relies on mortgage-backed securities and any potential federal government alterations to the housing and finance industry. 

Ready to get started on your own mortgage adventure? Contact us to learn more!