A history of mortgages in the United States.

1781 – The first legitimate commercial bank is founded in America, introducing a new system of banknotes for exchange, government involvement, and decreased liability for bankers, spurning the modern mortgage.

Early 1800’s - Commercial, mutual savings, and property banks expand their role.  Each bank specialize in the needs of regions they serve, for instance, rural banks issue mortgages to farmers.

1820-1860 – The number of banks increases dramatically, as mortgage loans rise from 55 million to 700 million dollars in that period. 

1864 - The National Bank Act helps develop a national currency to assist in financing the Civil War.  This currency replaces bank and state bonds, though investment in mortgages is prohibited.

Late 1880’s. The United States mortgage market faces disruption, falling into a disorganized network of uneven allocated mortgage loans. Regional favoritism by banks sees favoritism in the Northeast and higher rates in the West.   

1905 - Only 4 in 10 Americans own homes.  In urban areas, up to 75% of people are renters.

1929 - The Great Depression sees a collapse of the US financial system, including banking collapses in which they called mortgage notes due in a cash crisis.  1 in 10 US mortgages end up foreclosed.  Property values drop and consumer confidence and bank lending are almost nil.

1934 – the modern mortgage is born as government intervention stabilizes the banking industry and injects confidence and safeguards into mortgages and lending.  This government intervention in mortgages sets it apart from rest of world.

As part of the New Deal, the Federal Housing Authority was established and enacted changes in mortgages like lower down payments, 30-year amortization, 80 and 90% loan-to-values or higher, and universal standards for qualifying as well as construction standards.

But mortgages were first introduced not as a brainchild of banks but insurance companies, as a way to make money by seizing homes if people didn’t pay.

Initially, mortgages were interest-only with a big balloon payment after 5-7 years and homeowners had to put at least 50% down. 

1938 - Fannie Mae was founded by the government.

Post World War II – As troops returned home, the G.I. bill for veterans, was enacted, along with the VA mortgage insurance program.

1949 – 1960’s – The measures to stabilize and ensure banking confidence work, with mortgage debt to income ratio rising from 20 to 73 percent during this time, and mortgage debt to household assets ratio rising from 15 to 41 percent

1968: The Housing and Urban Development Act of 1968 looks to promote lending and home ownership to people all over the country.

1970 - The Federal Home Loan Mortgage Corporation was established to help promote home ownership.

1970- Freddie Mac is chartered by Congress.

1974 – the Equal Credit Opportunity Act seeks to prohibit financial institutions from discriminating based on race, color, religion, national origin, sex, age or marital status. 

1977 – the Community Reinvestment Act is enacted to promote lending by banks and savings and loan associations and home ownership among minority and low income groups, ostensibly eliminating the practice of “redlining.” 

1980’s - Adjustable rate mortgages returned to the market under the guidance of the Federal Reserve bank.

1986 – the Tax Reform Act of 1986 eliminated tax deductions for interest paid on credit cards, encouraging the practice of using home equity lines of credit and second mortgages. 

1991- A US recession looms and new construction prices fall.

1991–1997 – housing prices are flat until we go into the tech bubble.

1997 – Important tax legislation is enacted, with the Taxpayer Relief Act, including certain exclusions on capital gains, encouraging people to buy bigger, more expensive homes, vacation homes, and rental properties. 

2000-2003 – Early 2000’s recession.  Government mortgage institutions accounted for nearly 43 percent of the total mortgage market

2001 – The US Federal Reserve lowers the Federal funds rate an unprecedented eleven straight times, from 6.5% to 1.75%.

2003 - Fannie Mae and Freddie Mac buy $81 billion in subprime securities.

2004 – US home ownership increases to 69.2%, the highest of all time.

2004–2005 - Arizona, California, Florida, Hawaii, and Nevada record price appreciation in excess of 25% per year

1997–2005 – Mortgage fraud increases by 1,411%!  

2007 The Subprime Meltdown - New century, American Home Mortgage, and other huge subprime lenders file bankruptcy.  Countrywide, the nation’s biggest lender, narrowly avoids BK, while Ameriquest goes out of business.

2008 – according to the National Association of Realtors, 2007 had the largest decrease in existing home prices in 25 years

2009 - A total of 3,957,643 foreclosures were filed on 2,824,674 properties during the year, up 21 percent from 2008.

2010-2012 – the real estate market finds its “bottom,” as record foreclosures, defaults, modifications, and short sales sweep the nation.  New regulations are enacted.  Housing tightens and lending standards become more conservative.  Institutional investors snatch up REOs and distressed sales.

2013 - A total of only 801,359 properties receive foreclosure notices during the first half of the year, a 19 percent decrease over the previous six months, and 23 percent down from the same period in 2012. 

5 Ways the Federal Housing Administration changed mortgages forever.

In the dark days of the United States Great Depression, banks had failed, the monetary system all but collapsed, and the real estate marketing was in shambles.  Home ownership was a rarity in those days to being with – by some estimates up to 70% of people rented.  But as people lost their jobs, their incomes, and their trust in the banking system, foreclosures and defaults on mortgages reached epidemic proportions.  So many people walked away from their homes that the banks were forced to “call due” existing notes in an attempt to gobble up whatever cash and assets they could.  But this just quickened the cycle of values plummeting and more people losing their homes.  No banks wanted to lend because of the risk and certainly few people wanted to buy a home under those conditions.  

Something had to be done, so the Federal Government, under President Franklin Delano Roosevelt, initiated the Housing Act of 1934, with the aim to insure loans made by private banks and commercial lending institutions to trigger home buying and home building again.  They knew no amount of monetary policy would be effective if they didn’t build in insurances for banks and consumers – creating confidence in the system, once again.  Part of this Act was the creation of the Federal Housing Administration, the FHA, who’s sole purpose was (and is) to stabilize the mortgage market, regulate rates of interest, and promote home buying.

Here are 5 ways the Federal Housing Administration changed mortgages forever: 

1. Lower down payments.

Prior to the FHA’s new mortgage plan, home buyers traditionally put up to 50% of the home’s value down as a deposit. That means you had to come up with half the value of the property in cash!  But the FHA changed that by lowering down payment requirements, offering mortgages with only 20%, 10%, or even lower deposits.  Thus, 80% and 90% Loan To Value mortgages were born, allowing access for a huge new group of home buyers. 

2. A qualification process.

In the old days, small town banks did business based on a borrower’s reputation in the community.  Basically, they knew the person and the kind of business they did, so they’d vouch for them and approve the loan based on anecdotal information.  The FHA did away with that, instead setting up a structured qualification process based on their ability to repay.  That’s where income qualification ratios and employment verifications factors came in, and later, credit score.

3. Lengthened loan terms.

Up to the time of the Great Depression, mortgage loans were only for 3-5 years, or up to 5-7 for a longer-term loan.  The FHA lengthened the term of the loans to 15 years, and later to 30 years.  Like many of these changes, once the FHA offered these new, improved mortgage provisions, traditional lenders and banks all followed step, to stay competitive.

4. Standards of quality.

In order to bolster confidence and assure the value of a property, the FHA put in play standards of construction.  They mandated a qualified inspection before they allowed a mortgage loan on a home. FHA appraisals factor in 8 criteria, with “Relative Economic Stability," constituting 40% of the appraisal value, and "protection from adverse influences,” another 20%.

5. Amortization.

Traditionally, mortgages only had Interest Only payments, and after the 3-5 year term was up, a big balloon payment for the rest of the balance.  Of course we can see how this led to mass defaults, so the FHA instituted the novel concept of amortization, meaning a set schedule of interest and principal payments every month.  The mortgage started out with heavy interest payments, but as they stayed in the loan and time went down, started paying off their principal more and more.

These measures were wildly successful in turning around the momentum of home ownership in the United States.  In 1935, Colonial Village in Arlington, Virginia was the first large-scale rental housing project built and funded with the Federal Housing Administration’s backing and insurance. From there the economy rebounded and home ownership rates rose to all-time highs a decade later as soldiers came back from World War II and settled back in to their American Dream, with the help of FHA-backed mortgages.  

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