Most people understand the basic features of a mortgage. Basically, a mortgage allows you to borrow the money you need to buy a home, and that money is then paid back with interest to the lender. So where did mortgages come from and how have they changed over time?
When Did Mortgages Start?
Home mortgages as we know them were first introduced to the American real estate market in the 1930s, but the concept of a mortgage was introduced much earlier. Mentions of mortgages can be found in the remains of ancient civilizations, when the “mortgagor” (now called the lender) agreed to exchange property with the borrower if he promised to return it in time.
The mortgage as a concept has stood the test of time, but the mortgages you encountered 100 years ago are fundamentally different than they are today. European countries had early versions of the money lending practices that the United States later adopted, but how did these practices develop into modern mortgages? Read on to find out.
The History Of Mortgages In America: A Timeline
Late 19th century: Increase in mortgages due to increased demand for housing
The American real estate market began to change as people began immigrating to the United States in large numbers in the late 19th and early 20th centuries, leading to a rapid increase in demand for housing in affordable prices as well as mortgages.
In the early 20th century, home buyers were still required to make a 50% down payment when purchasing a home and had a payback period of only five to six years. During this period, the borrower pays only interest and makes a large payment on the remaining loan balance in the last month of repayment.
1933: The New Deal
Millions of Americans went bankrupt in the 1930s. This was because many borrowers were unable to make mortgage payments or resell their properties due to falling home prices. Banks found themselves in a similar predicament, as limited funds and resources often made foreclosures impossible.
We welcome President Franklin D. Roosevelt to the New Deal, a series of legislative programs designed to restore economic recovery and social reform. One of these programs was the Homeowners Mortgage Act, which introduced the concept of quick mortgage relief and mortgage refinancing. New mortgages with longer terms and lower interest rates were available to homeowners, making payments more affordable.
1934: The Federal Housing Administration (FHA) was established.
The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and provide access to financing for affordable housing. At a time when only 1 in 10 people can afford to own a home, this new federal agency is bringing significant changes to the mortgage industry. The agency introduced lower down payment requirements, longer loan terms of up to 20 or 30 years, and the concept of FHA loans or FHA-insured mortgages.
By backing these home loans, the FHA has benefited both borrowers and lenders by reducing risk for borrowers and making it easier to qualify for mortgages.
1938: The Founding Of Fannie Mae
A few years after the creation of the FHA, the US government took another step to stabilize the mortgage market by creating Fannie Mae, part of the National Housing Act, which purchased FHA-guaranteed mortgages to increase liquidity. I am drunk. Free up cash for your creditors.
Fannie Mae’s role would change over time, but in the short term, its creation also meant the introduction of fixed-rate lending conditions.
1940 – 1960: The End Of World War II
With the end of World War II, a new generation was ready to settle down and buy homes. Some received additional help from recently introduced low-interest VA loans. Veterans Bill – This led to a significant increase in home ownership nationwide by 8% between 1940 and 1960.
1968: Truth in Lending Act (TILA) and Fair Housing Act
Up until this point in our history, mortgage lending was neither fair nor equitable, and discrimination and segregation against black borrowers was rampant. President Lyndon Johnson began promoting fair housing legislation in the late 1960s. After the assassination of Dr. Martin Luther King Jr. in 1968, Congress passed the Fair Housing Act, which stated that people who want to rent or own a home cannot legally be discriminated against based on race or national origin.
During this time, Congress passed the Truth in Lending Act (TILA), designed to protect borrowers from incorrect and inaccurate credit reporting. With TILA, lenders were now required to provide borrowers with standardized information about loan terms and costs. This bill brought greater clarity and transparency to the mortgage process.
1970: The Founding Of Freddie Mac
As the 1960s gave way to the 1970s, the housing market faced unpredictable mortgage rates, creating additional hurdles that potential homebuyers had to overcome in order to obtain financing. In response, Congress created Freddie Mac with the goal of stabilizing the mortgage market by creating more affordable options for home ownership.
Like Fannie Mae, Freddie Mac bought mortgages from lenders and then sold them to real estate investors. This practice, which continues today, frees up cash for lenders while promoting the secondary mortgage market.
However, despite the efforts of Congress, rising inflation continued to drive mortgage rates up throughout the 1970s, rising from an average of 7% in 1971 to 11.20% in 1979, and home ownership remained difficult for many Americans. A problem remained.
1975: Home Mortgage Disclosure Act Is Passed
The Home Mortgage Disclosure Act was passed in 1975 to increase transparency in the lending process. The law requires mortgage lenders to keep basic information about their lending practices and submit that information to regulators.
Credit data collected as a result of the Home Mortgage Disclosure Act helps protect borrowers and identify predatory or discriminatory practices by tracking trends and geographically targeting lending and borrowing.
1980: Introduction of variable rate mortgages
Adjustable rate mortgages (ARMs) were first introduced in the 1980s. As the name suggests, ARMs allow borrowers to take advantage of interest rate fluctuations by adjusting the interest rate on the loan over the life of the loan.
For example, suppose a borrower signed a mortgage in 1981 with an interest rate of 16.63% APR. For a fixed rate mortgage, this borrower would pay an interest rate of 16.63% over the life of the loan. .Pay. However, with adjustable rate mortgages, the borrower’s interest rate changes to the average annual rate, so he had to pay less interest in 1989 when the interest rate dropped to 10%.
Of course, the same principle applies in other directions. If a borrower signs an ARM when interest rates are low and interest rates rise, he or she is now responsible for paying more interest than originally agreed upon.
1990 – Early 2000s: An Effort To Increase Homeownership Rates
In 1992, the Federal Home Equity Financial Security and Soundness Act (FHEFSSA) was enacted to increase government oversight of the mortgage market. But even as interest rates began to fall in the early 2010s, home ownership rates remained low because of all the hassles associated with buying a home.
The US government has been trying to raise the national home ownership rate to 70%, which would ultimately encourage very low lending and allow borrowers with less-than-ideal credit to get mortgages.
Around this time, lenders began offering other attractive mortgage products, such as 80/20 loans. This product allowed borrowers to avoid mortgage insurance premiums by specifically accepting two mortgages: an 80% first mortgage and a 20% second mortgage. %.
These lower credit requirements have played a key role in stabilizing the mortgage market, increasing homeownership and enabling millions of Americans to buy their first home. But this stability was short-lived, with many unqualified buyers biting off more than they could chew, leading to a housing crisis.
2008: The Housing Crisis
The US housing bubble peaked in 2006 as mortgages became available to unqualified borrowers. However, starting in 2007, housing prices began to fall, which, combined with the lack of regulation of subprime mortgage lenders, led to a bubble. This has caused many borrowers to default on their mortgage payments.
The housing crisis is officially considered a major cause of the Great Recession, which began in December 2007. In September 2008, Fannie Mae and Freddie Mac assumed responsibility for paying the government all outstanding mortgages they purchased or they forcibly executed them. . The agency guarantees it. The cost is $6 trillion. The negative consequences of the housing crisis were felt by everyone.
2020 – Present: The Effect Of COVID-19 On Mortgages
The COVID-19 pandemic has had a lasting impact on both the US housing market and the mortgage industry. The economy stagnated in 2020 as Americans were forced to stay home for safety, prompting the Federal Reserve to cut mortgage rates to stimulate spending.
This led to a sharp increase in home loan applications and refinancing, bringing more buyers into the market and causing a sharp drop in the stock of available homes. The growing demand and shortage of housing has led to significant increases in home values and increased competition in the seller’s market, making it difficult for potential buyers to find and purchase homes that fit their needs.
