The history of the home mortgage goes back to as early 1190 AD. English common law included a law that protected a creditor by giving him an interest in his debtor’s property. With this law, the creditor held the title to the property, but the debtor could sell the property to recover money in the event the debt was not paid.
When the pilgrims moved to America from England, they brought the system with them. Mortgages became widespread throughout America. Not everyone could afford a mortgage, though. A mortgage usually required a fifty percent down payment for a five-year mortgage. The terms were much less favorable to buyers than they are today and home ownership was limited to roughly forty percent of the population. At the time of the Great Depression, home buyers were typically asked to make a down payment of one-third of the sales price and loans were only extended for periods of five to ten years with interest rate reaching eight percent. The restrictive lending system ran into trouble during the depression and the whole system collapsed, with the number of property loans dropped from 5,778 in 1928 to just 864 in 1933. There were thousands of foreclosures and mortgages became unavailable.
In an effort to prevent foreclosures, President Franklin D. Roosevelt pushed for the passage of the Home Owners’ Loan Act in 1933. This Bill established the creation of the Home Owners’ Loan Corporation, which made loans to those in danger of losing their homes. The lending terms were much more generous, as loan amounts of up to eighty percent of a home’s value were made and the interest rate was five percent. Also, borrowers could borrow money for up to twenty-five years.
The Home Owners’ Loan Corporation became very popular, with nearly forty percent of all buyers applying for the new loans. Because all of the applicants could not be selected, President Roosevelt established the Federal Housing Administration in 1934. The newly established FHA loans were guaranteed by the government. The FHA extended mortgages to thirty years to make purchasing a home more affordable. The FHA loans prompted the creation of the Federal National Mortgage Association, also known as Fannie Mae, in 1938 to make even more money available for home buyers. Fannie Mae bought FHA-insured loans and sold them as securities on the financial markets. Fannie Maw also created laws and regulations that lenders had to follow.
World War II shifted the mortgage environment once again. The Servicemen’s Readjustment Act, more commonly called the GI Bill of Rights, was passed by Congress in 1944. Harry W. Colmery, a World War I Veteran, wrote the first draft of the G.I. Bill. The G.I. Bill provided college or vocational education for returning World War II veterans, one-year compensation for out of work veterans and also provided different loan types to Veterans to buy homes or start a business. The G.I. bill provided low interest, zero down payment home loans for servicemen. The GI bill allowed millions of families to purchase their first homes and moved many families out of urban apartments and into suburban homes. It increased demand for mortgages.
In 1970, U.S. Congress chartered the Federal Home Loan Mortgage Corporation, better 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 more Americans.
The mortgage industry continues to change and adjust with time. It will be interesting to see what changes will happen in the future of home mortgages.