How Have Mortgages Evolved Over the Decades?
The mortgage industry is hotter than ever as interest rates have hit record lows for the last two years. Although home prices are high, low interest rates allow homebuyers to scoop up mortgages and buy property in an otherwise pricey market.
While it’s crucial for mortgage professionals to be aware of the current market, learning how the modern mortgage market came to be will build your knowledge of the industry overall (and is fun to share at parties).
The first mention of mortgage law, possibly as early as the fifth century AD, comes from ancient India in the form of the Code of Manu. This Hindu script shunned fraudulent mortgage practices, bringing to light those usurers who were taking advantage of the lending process and charging exorbitant interest rates. The next mention of mortgage we see is from English common law documents dating back to 1190. These mortgages described how creditors were to be protected in property purchase agreements. The mortgages of old denoted a conditional sale in which the creditor held the title to the property, meaning the debtor was able to sell the property to recoup the money paid as needed. This system worked out largely as expected for centuries.
After the first legitimate commercial bank was established in 1781, the American mortgage industry started taking shape. Banks began to follow government policies, and the bankers’ liability lessened as they were able to issue home loans, collect fees for doing so, and subsequently sell the home loan to other financial institutions. Commercial, mutual savings, and property banks started to boom. At this time, banks lent specifically to those in their region. For example, banks in rural areas would issue mortgages to farmers. Between 1820 and 1860, the American banking system expanded heavily, issuing between $55 and $700 million in mortgage loans — and the industry didn’t stop there.
In the early 1900s, mortgages often required a 50% down payment and offered a five-year amortization period. To illustrate this concept, let’s say a client wants to buy a $200,000 house. In the early 1900s, they would have to provide a $100,000 down payment, and they’d have five years to pay the remaining $100,000.
Much of the modern mortgage industry resulted from the impact of the Great Depression, which began in 1929. Many Americans were unable to pay their mortgages, resulting in 40-50% of all home mortgages going into default by 1933. Droves of homeowners were forced to foreclose on their homes.
This system began to change that year with the creation of the Home Owners’ Loan Corporation (HOLC), which was a government-sponsored corporation created with the intention of expanding homebuying opportunities and refinancing default mortgages to prevent foreclosure. At this time, only one in every 10 American households owned a home. Clearly lending practices were not yet in their prime, as unstable market conditions and questions about how lending and the mortgage industry should continue lingered.
In 1934, President Roosevelt signed the New Deal, which put the National Housing Act of 1934 into action. This act created the Federal Housing Administration (FHA), built to protect lenders and reduce the risk associated with lending. The New Deal was the start of regulating and standardizing the practice of issuing home loans, and mortgages grew to be more secure as a result.
The Mae and Mac Family
Created as an addition to the New Deal, the Federal National Mortgage Association (widely known as Fannie Mae) hit the mortgage scene in 1938. The purpose of Fannie Mae was and remains to expand the secondary mortgage market by making mortgage loans more secure with mortgage-backed securities, a process in which mortgages can be packaged together and sold as a bundle to investors. This methodology allows lenders to reinvest their assets into more lending, increasing the number of lenders in the mortgage market.
In 1968, the Government National Mortgage Association (Ginnie Mae) was founded as a part of the U.S. Department of Housing and Urban Development (HUD). Its purpose was to promote affordable homeownership by guaranteeing mortgages for single or multi-family homes. These home loans are backed by the government, allowing homeowners to secure lower interest rates.
To round out this family tree, Fannie Mae’s brother organization, the Federal Home Loan Mortgage Corporation (aka Freddie Mac), was created in 1970. Its purpose is the same as that of Fannie Mae: to expand the secondary mortgage market by buying mortgages, pooling them together, and selling them as bundles to investors.
The Birth of the Modern Mortgage
After government intervention via the creation of the FHA and HOLC, mortgages close to defaulting were refinanced, long-term and low-interest mortgages were established, and uniform national appraisal methods were put in place. From 1933 to the end of the ‘80s, the government worked within the mortgage industry to create a sustainable, secure way for Americans to obtain mortgages:
- 1938: Fannie Mae was created.
- The secondary mortgage market started to expand as a result, and mortgage-backed securities came into play.
- 1945: WWII led to the creation of VA loans.
- As part of the GI Bill, VA loans feature low interest rates and were originally part of a compensation package for service members returning to the U.S.
- 1968: The Government National Mortgage Association (Ginnie Mae) was formed.
- Ginnie Mae worked to guarantee affordable home loans to underserved consumers in the mortgage market.
- 1970: Freddie Mac was created.
- Similar to Fannie Mae, Freddie Mac helped to expand the secondary mortgage market and provide mortgage-backed securities to lenders.
- 1980: Adjustable Rate Mortgages (ARMs) were created.
- Adjustable Rate Mortgages were created on 3/4/1980, introducing interest rates that could be periodically adjusted based on the lender’s rate.
The 1990s brought sky-high interest rates as high as 11%, which was unattainable for most Americans. The U.S. government wanted to raise the percent of American homeownership to 70%; to this end, mortgage requirements were loosened and subprime lending was encouraged. Subprime mortgages are typically issued to borrowers with low credit, which was thrilling for those who struggled to qualify for traditional mortgages. With this lack of regulation, lenders were able to issue mortgages to anyone who wanted one, regardless of their qualifications.
The annual average mortgage rate decreased from 10.13% in 1990 to 6.03% in 2008. By 2008, the demand for housing had dipped dramatically, which was reflected in dropping housing prices. Americans had been buying homes for more than their worth for decades, and mass mortgage defaults led to a record number of foreclosures.
The housing crisis of the 2000s inspired the creation of the SAFE Act of 2008, part of the Housing and Economic Recovery Act of 2008, which was designed to protect consumers and reduce fraud by standardizing and regulating the education and qualifications of mortgage professionals. This legislation slowly stabilized both the mortgage and real estate industries during the 2010s.
The Mortgage Industry Today
Much was learned in the aftermath of the subprime mortgage crisis. More rigid regulations were put into place to offer consumers safer loan options based on credit score qualifications and stricter lending requirements. As a result of the COVID-19 pandemic, mortgage rates have dropped to historic lows within the past two years. While the average mortgage rate in 2019 was 3.94%, 2020 saw an average rate of 3.11%. Although we’re seeing high home prices and low-interest rates, there is no anticipation of a housing bubble or subprime mortgage crisis occurring again.
The history of the mortgage industry shows how the concept of lending has changed over time. No matter how mortgages continue to evolve, The CE Shop will be here to keep you informed on the latest industry trends and tips.
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