Mortgages. They make the American Dream a possibility for millions of families across the nation. Who doesn’t have hopes of owning a home someday? That’s where a mortgage steps in to help.
A mortgage, unlike credit card debt, is seen as a good life decision. It helps individuals or families borrow money from a qualified lender to purchase real estate property. In light of the fact that most people don’t have the funds to purchase a home right away, a mortgage is a huge asset. The mortgage lender loans out the money in good faith the mortgage will be paid. In short, mortgages help with the housing market, making the buying and selling of homes more feasible to a large demographic.
But have mortgages always looked the way they do today? Let’s take a look!
The history of mortgages
You’re in for a fascinating story filled with its own twists and turns. We have much ground to cover but don’t worry. We’ll divide it up into chunks throughout the article for an easier digest.
In spite of some of the low or shady moments in mortgage history, it’s proven to be a reliable and helpful aid to middle-class families in gaining housing.
As we know it today, the mortgage’s evolution can be largely attributed to changes that arose in the 1930s. But we’ll get into that later.
The dead pledge
Now, what on earth can we be referring to with such a heading? No, we’re not talking about some zombie movie.
It’s not as bad as it sounds.
To tell the tale of mortgage history, we must begin with the definition of the word mortgage and its etymology. The word “mortgage” comes from the Latin words mort and gage.
Mort means death or dead and gage means pledge. So together, mort and gage mean death pledge.
Spooky? Not so.
In essence, the death part means the pledge gets the death knell once the loan is paid off. It’s not an indefinite pledge of payment.
Mortgages in ancient civilization
As the old saying goes, there’s nothing new under the sun. Here’s what we were able to find regarding mortgages in ancient civilization.
Code of Manu
We’ll start in India. It’s there that scholars have found an account of mortgage law in the “Code of Manu.” It’s an ancient script, penned and formulated by the Hindus. The code cries out against shady mortgage practices.
The Jewish influences on Greek and Roman approach to mortgages
Throughout history, you’ll see people speaking out against unfair mortgage practices such as charging exorbitant interest rates. In Dante’s Inferno and in ancient Jewish texts — which date back further than the Code of Manu — you’ll find that abusive lenders have a place in Hades or hell.
Ancient Greek and Roman thought on mortgage can be traced back to religious Jewish texts. From there, the Greeks and Romans the concepts and later influenced English common law. We’ll get into that in the next section.
Mortgages in English Common Law during the middle ages
Mentions of mortgages in the English common law writings date back to 1190 A.D. In these writings, you’ll find that basic mortgage procedures are laid out. There is a description of various facets of the mortgage process — how parties involved are protected and what can be done with the property while it’s still under a loan.
How the mortgage worked back then
According to the Encyclopedia Britannica,
“The modern Anglo-American mortgage is the direct descendant of a form of transaction that emerged in England in the later Middle Ages. The mortgagor (debtor) conveyed the ownership of land to the mortgagee subject to the condition that, if the mortgagor repaid a debt he owed the mortgagee by a certain time, the mortgagee would reconvey the land to the mortgagor. If the mortgagor failed to repay the debt by the time that was specified in the mortgage, the land became the mortgagee’s absolutely.”
The encyclopedia entry goes on to state that this type of loan held various names throughout the medieval period (and ancient civilization just before that.)
Taking the western world by storm
It’s a fascinating bit of history if you ask us. From this point in history, the concept of mortgages moved throughout the western world, contributing to the mortgage’s appearance and stay on American soil. The form may have changed and the details surrounding how it fleshes out in practice. But the main gist remains the same. A mortgage allows a person to borrow money in order to become a property owner.
Mortgages in America: the early 1900s
Because of the increasing number of immigrants coming to the United States, America saw a need for more mortgages. This enabled the new dreamers to acquire housing sooner rather than later.
Interestingly, even then, mortgages looked different than they do today. For example, the borrower was required to put 50% down up front and grapple with a five to ten-year loan. This meant the borrower had to be on good footing already. And he didn’t want to apply for the mortgage unless he was certain that paying it off in five (or ten) years was possible.
Additionally, interest would be paid during the five or ten-year term. And at the end of five or ten years, he’d have to pay up the loan. Otherwise, he’d lose the property at the end of that loan period. Not an encouraging thought for the struggling family.
It wasn’t a big risk for the bank. But for the aspiring property owner? That’s a different story.
Of course, the scope of mortgages looks much different today. Aren’t you glad to hear that?
There’s still risk involved. But you have more time and more help to reach your housing goals. And the requirement to put 50% down up front isn’t in place! But enough of today. Let’s keep on our trail of the past.
While the mortgage described above did its job and did help many families acquire homes, it’s a far cry from what we have today. Read on, friend.
Mortgages and the Great Depression
Here’s where the modern American mortgage reaches a turning point. Pay attention. This is where all the big changes come about that make mortgages what they are today. It’s a fascinating look at how big decisions can change the face of history, our history.
When the Great Depression hit, the lenders had no money to loan out to the people. This made for a harried mess.
Roosevelt’s New Deal for America
In facing the challenges of the Great Depression era, it was clear that the real estate and mortgage markets came into dire straits. Housing costs fell by 25%. And the way of doing mortgages up to that point was not working for the American family. At one point, 10% of homes were in foreclosure.
Roosevelt thought that something had to be done. As things were, the banks wouldn’t even allow for refinancing. The mortgage market was destabilized.
Enter the New Deal.
The purpose of the regulations
Regarding the New Deal, we find big calls in regulations. The aim of the regulations was to cultivate more activity on the part of the consumer. To proponents of the New Deal, the hope was to encourage economic growth in America while holding the financial industries accountable.
Prior to the New Deal, the homeowners were able to renegotiate mortgages every year. But they also had to grapple with constantly changing interest rates and down payments that were a bit on the high side of things among other variables.
Whatever your opinions on the politics of Roosevelt, one cannot deny that it had its impact on the financial system and industry of America. Certainly, it’s a game changer in the world of mortgages.
Five big changes
Worthy of note, there were five big changes brought about by the New Deal.
First, there was the Home Owners Loan Corporation. The corporation took it upon itself to buy one million mortgages that were defaulted. These mortgages were bought from the bank. After the purchase, the corporation changed the loans over to being long-term and fixed-rate.
Second, the Federal National Mortgage Association came on the scene to set up another market for mortgages.
Third, Glass-Steagall ensured that banks were stopped from investing funds into uncertain investment opportunities — such as the stock market.
Fourth, the Federal Deposit Insurance Corporation stepped in to insure bank deposits. This was done as a protective measure.
And finally, the Federal Housing Administration came about to provide insurance on mortgages.
We can attribute today’s more affordable home ownership to the changes brought about by these institutions. As a result of the New Deal, the loan terms were prolonged and monthly costs were reduced.
Say hello to the Federal Housing Administration (FHA)
One of the biggest game changers in mortgage history is the Federal Housing Administration (FHA.) The FHA took away the risk involved in lending — a risk that made lenders hesitant in loan agreements.
Before the FHA, four out of ten Americans owned homes. That means most of the American populous at the time was renting.
Thanks to the FHA, people began to qualify for loans per their economic situation, or in other words, based on the likelihood that they could pay it off. This is in contrast to “qualifying” based on having the right connections.
Another key change was the length of a loan. As a result, 30-year loans are a current mortgage option for the American people.
Finally, construction quality became important to the loan qualification process. This prevents people from stepping into a loan agreement that would outlast the home. If the home does not meet the qualifiers, the loan is not given.
Indeed, mortgages have come a long way since their beginnings. There’s more accountability and more options for the everyday American.
Different types of mortgages
Now let’s look at the different types of mortgages that have been part of the financial market.
In today’s society, you’ll find various mortgages available to those who wish to buy a property. You’ll find these loans are helpful and geared toward particular needs.
Here’s the breakdown.
Fixed rate loans
This type of loan is almost self-explanatory. The interest rate doesn’t become unpredictable. It’s static, it doesn’t fluctuate. It’s good news for the borrower, allowing them the ability to plan future payments.
Even if you have a 30-year loan on your hands, the interest remains the same throughout that period.
Also called variable-rate mortgage or tracker mortgage, the adjustable rate mortgage (ARM) carries an interest rate that rises from time to time. This adjustment on the rate for the ARM varies. The benefit is that an ARM carries lower rates, allowing you to build equity in a timely fashion. But after an initial period, the interest begins to rise.
For an interest-only home loan, you’re looking at a five to seven-year term where you only pay the interest part of the mortgage.
Once the term is complete, borrowers then pay off the loan or begin paying off the principle of the loan. Some even decided to refinance their home instead.
Negative amortization loans
A negative amortization loan is also known as a graduated payment mortgage. In such a loan, the payment per period is less than the interest that was charged on the loan.
If a payment is less than the period’s interest charge, deferred interest results. Whatever the deferred interest comes out to is augmented to the loan’s principal balance.
As time goes on, the principal balance grows rather than diminishes.
In a balloon payment, you’re making the entire payment at the end of a loan term. During the loan term, you’re paying the interest of the loan.
No money down loans
A down payment is usually expensive and a common reality when it comes to acquiring a mortgage.
For the individual who wishes to benefit from a no down payment loan, there needs to be proof that he or she doesn’t have enough income to repay a loan.
They must have a minimum credit score of 620, sometimes higher.
Go into a mortgage prepared
We hope you enjoyed that brief history lesson on mortgages. There’s always more than what we could encapsulate within the confines of a blog post.
Now how about putting your best forward and becoming a homeowner?