Mortgages in America: A Short History

The word "mortgage" comes from both the Old French ("mort") and English ("gage") meaning "dead pledge." In the late 12^th century, the first mortgages were recorded in England. One would borrow money to buy property if they could not afford it. If they did not pay up, the creditor would take the real estate and the property ownership would be dead to them. On the flip side, if a debtor paid off the loan, the debt would be extinguished and therefore dead in that respect.

This system was brought to America with the pilgrims and as people bought property they would take out a loan from a local bank. In those days, the banks were smart and the buyer had to put down 50% of the purchase price and pay back the loan over a shorter period of time. Property ownership was nationwide come the early 1900's when the depression hit. The government, the people and the banks all went belly up and it was foreclosure city!

When Roosevelt became president, he created the FHA (Federal Housing Administration) to insure banks in case of mortgage default. This made lenders more apt to lend to people and not worry about foreclosure. However, the lending system was more local and each area had its own economy and based rates and lending on that.

Come on down FannieMae! In 1938 the Government created FNMA to buy the mortgage loans from the lenders. FNMA would buy the loans and sell them as securities on Wall Street. This way, the lenders had a central location to sell their mortgages to with a conforming set of guidelines to meet. After WWII, the vets returned looking for housing and work and so the housing boom started. In 1944, The Veteran's Administration was started to insure loans taken out by Veterans and their families. Not only did the government guarantee (partial) these loans, but they were giving 100% financing. Come, 1970, the Government realized they needed more funding for loans and created Federal Home Loan Mortgage Corporation (FHLMC), known as FreddieMac. Freddie would buy the loans that FNMA would buy and then some. Freddie was known for doing all sorts of weird and commercial loans in addition to the basics. For instance, Freddie would buy multi million dollar loans used to finance coop conversions in Manhattan, big commercial retail projects and health facilities. More of a real estate boom.

So, you can see how housing was able to progress from the caves and huts of simpler times. There will always be housing booms and bubbles that move with the nation's economy. The difference we are seeing now is that there is a global ripple affect from the bulk sale of mortgages. Since FNMA, the mortgage industry became an investment vehicle for Wall Street and now the global financial world. This is good for the lenders in that they have an outlet and conforming guidelines. This is bad, because it can and is literally a house of cards!