The History of Home Financing

Planning on buying a house? There are many financial institutions that are willing to lend you money. Mortgage lenders help you pay for your dream home upfront. Home financing has allowed many Americans to achieve their dreams in no time.

So, how did the banks and other companies end up lending money to homebuyers? What happened to the first-ever mortgage loan? This guide on the history and evolution of home financing will give you the answers. It also touches on the latest developments such as the programs that help in paying for a down payment.

On to more home financing success stories!

Express Takeaways

• Land was pledged as a security for military service during the heyday of the Roman Empire.
• The Romans developed the first laws for mortgage lending.
• The word mortgage is a mix of two French words.
• There was a time when mortgage loans did not have interest and lenders had to own in another way.
• Most Americans before owned farms.
• Changes in the economy and government laws affected the mortgage lending industry.
• The government created programs to help Americans own decent homes.
• Foreign investors contributed to the development of home financing in the U.S.A.
• The technology has allowed for easier mortgage loan application and processing through eMortgage. Even applying for assistance programs is now available online through Homebuyer Wallet.

What was the Beginning of Land Ownership?

As you may know, all real estate activities involve the following:

• Selling, buying, or renting a property (commercial or residential) 
• Managing and operating a building, warehouse, storage units, and others
• Developing fixtures, roads, structures, and utility systems

The above activities need land use, ownership, and regulation. So, they found the need for the development of government and laws. The first was the pledge of land in exchange for military service. It happened when the land was important in an agricultural society.

Where was Land Pledged As a Security?

Babylonians and Egyptians were the first to show proof of making deals with land as a security. They were the same people who developed the following principles of mortgage lending:

• Naming the borrower and the lender
• Describing the property
• Using surveys to describe mortgaged land

Greek temple leaders also loaned money with land as a security. However, it was the Romans that developed more advanced laws for lending. 

How Did Roman Law Develop Mortgage Lending?

The Roman Empire developed the following laws for mortgage lending:

• Fiducia – transfer of possession and title of the land
• Pignus – pawning of land where the lender can get the property back. It was possible even if a borrower stopped paying
• Hypotheca – is when a lender can only take the property back if the borrower has indeed stopped paying

They also developed “gage” where the borrower had the choice to fulfill an obligation. The second option was to lose security to a land.

How was Land Owned in Europe?

A feudal system developed in Europe where the king owned all the land. The monarch had the choice to give parts of it to his subordinates who will provide him with military service. Along with the development of this system is the introduction of the term “mortgage”.

What is the Origin of the Word “Mortgage”?

“Mortgage” came from the following French words:

• Mort – dead
• Gage – pledge

William of Normandy developed this term. He also introduced the Germanic version of “gage” into English law. After his invasion, mortgage lending became useful in financing new mills or livestock. It was possible even with no interest.

How did the Lenders Profit from an Interest-Free Loan?

Back then, the Catholic church considered collecting interest illegal. So, the lenders were only allowed to receive a share of the borrower’s profit in land use. The increasing number of borrowers made the lenders expand to America. They came to the U.S.A. after the Revolutionary War in 1775-1783.

How was the Land Ownership Transferred in America?

The Americans lived on small farms and passed their ownership to families. So, there was no need to apply for a mortgage loan. It was only useful for buying new land or raising capital. Most of the lenders back then were private individuals. Until a thrift association created the first mortgage loan from an organization.

What Happened to the First Mortgage Loan from a Financial Institution?

Unfortunately, the borrower was unable to pay the mortgage. So, a member of the organization took over the loan. Also, families still lived on farms and had enough money for their needs and savings. So, there was little need for a mortgage loan until after the Civil War in 1861-1865.

How Did Mortgage Lending Resume after the Civil War?

After the Civil War, mortgage companies began creating loans for investors. Commercial banks also lent money to fund new farmsteads. In the 1870s to early 1990s, mortgage companies started making loans for single-family houses.  They gave short terms and had low requirements.

What were the Mortgage Loan Requirements in the 20th Century?

A mortgage company had the following terms for a single-family house:

• 50% loan-to-ratio value
• 3-5 years term
• Flexible amortization
• Interest is payable twice a year
• A fee that is 1%-3% of the loan amount and another 1% upon renewal

The mortgage lending industry expanded until the 1920s. Real estate prices appreciated at 25%-50% per year. This rate made lenders believe they can refund unpaid debts. So, they gave loans to almost everyone. But, it did not turn out as they expected as the real estate industry went down in the late 1970s.

What Happened to the Real Estate Industry During the Great Depression Era?

The stock market crash in 1929 caused the following effects on the real estate industry:

• Declined values of real estate prices
• Loss of ability for possible borrowers to qualify for payment needs after losing a job
• Financial institutions had to sell real estate properties at unfavorable terms
• Many homeowners were unable to pay their loans thus leading to a high foreclosure rate
• Lenders lost savings as people started withdrawing money
• Lenders had to pause payment collection for about 2 years

The federal government realized that these contributed to the growing depression. So, it designed programs to help stabilize real estate and the economy.

What Are the Laws Created by the Federal Government?

The federal government created the following legislation to manage residential housing financing:

1932

• Reconstruction Finance Corporation (RFC) – provided cash to commercial banks.
• Federal Home Loan Bank (FHLB) – Created the central credit facility. It included organizations, loan institutions, and savings accounts for home financing.

1933

• Home Owners Loan Act (HOLA) – Placed savings and loan companies under federal regulation.
• Home Owners Loan Corporation (HOLC) – Helped homeowners refinance mortgages.

1934

• National Housing Act – Formed the Federal Housing Administration (FHA). It provided the framework for a true national mortgage market. It instituted the Federal Savings and Loan Insurance Corporation (FSLIC). It also created the Federal Deposit Insurance Corporation (FDIC).  Both of these encouraged people to deposit their money again in financial institutions.

The legislation created methods to help recover the mortgage industry. Some of these are balloon payment loans, mortgage insurance, and long-term self-amortizing loans. However, the construction of single-family housing was minimal. It was an effect of the Great Depression and World War II (1939-1945). It only increased when the government created housing programs.

What Government Programs Helped Build Up the Demand for Housing?

From 1945 to 1955, the demand for housing construction increased. Because the following agencies created their programs: 

• Federal Housing Administration – Insures the mortgage loan. This helped a lender give a better deal to a borrower.

• Veterans Administration – Allows qualified veterans to pay no down payment. The agency also allowed veterans to be free from paying mortgage insurance.

After World War II, financial institutions also had enough income. They had assets and bonds from government securities. It contributed to the rapid expansion of single-family housing construction. The economy grew again after the creation of another legislation.

A Remarkable Legislation in the 20th Century

The Housing Act of 1949 is one of the most critical pieces of legislation passed in the 20th century. Its goal was to give every American a decent home and living environment.  The timeline between the 1950s and 1960s was about optimism and economic growth. It was also a quiet time for mortgage lending on the legislative side. However the creation of the Department of Housing and Urban Development (HUD) changed this in 1965.

How Did HUD Take Over the Mortgage Lending?

HUD became the focal point of the new legislation. It took over the responsibility of managing real estate and mortgage lending. After it became a cabinet-level agency and was able to do the following:

• Elevated the issues in housing and finance
• Created a more formal housing policy
• Allowed the federal government’s housing goals to happen. It included legislative, economic, and social changes

Furthermore, there was a creation of the Housing and Urban Development Act in 1968.  It set regulations that affected mortgage lending.

How Did the HUD Act Affect Mortgage Lending?

The act committed to 26 million new housing. It planned to support interest rates for residential properties and other real estate. It stimulated the highest housing production in 1972 at three million units. 

But, scandals appeared and there were investigations. Findings showed that the programs had high costs. The government then started funding rent instead of supporting homeownership. The Housing and Community Development Act (1974) discusses this change. 

The program allowed low and moderate-income families to choose a rental unit. The people had a choice to live in houses that were 25% excess of their monthly income. As the government supported the amount of fair market rent. The government also created a series of laws and regulations. These affected the mortgage lending industry until today.

When Were Laws Created that Affect Mortgage Lending Today?

From 1913 to 2013, the government created the following acts. Their purpose was to manage the economy and mortgage lending in particular.

• 1913 to 1932 – Different acts to support banks in financing loans for farms, homes, and other real estate.
• 1932 to 1934 – Acts to allow savings and loan associations to operate. In 1938, the Federal National Mortgage Association (FNMA) supported the secondary mortgage market. It helped the Federal Housing Administration (FHA) mortgages.
• 1944 – The Servicemen Readjustment Act established mortgage guarantee programs. These were for qualified veterans within the Veterans Administration.
• 1949 – the Housing Act set the goal of providing a decent home for every American family.
• 1961 – The Consolidated Farmers Home Administration Act. It extended authority for the non-farmers to make mortgage loans in rural areas.
• 1965 – The Housing and Urban Development Act. It consolidated federal housing agencies into one. It formed the new Department of Housing and Urban Development.
• 1966 to 1968 – Acts to set the largest savings rates in commercial banks and thrift institutions. It also covered ban discrimination and full disclosure of mortgage loan information.
• 1968 – The Consumer Credit Protection Act. It formulated the calculation for the Annual Percentage Rate (APR).
• 1968 – The Housing and Urban Development Act. It set the Federal National Mortgage Association (FNMA) as a private entity. It then created a new Government National Mortgage Association (GNMA). It supported FNMA’s special assistance function and guaranteed mortgage-backed securities.
• 1969 to 1974 – Acts to determine the impact of real estate development in an environment. Flood insurance was also required for properties in flood hazard areas.
• 1970 -The Emergency Home Finance Act. It developed the Federal Home Loan Mortgage Corporation (FHLMC). It was another secondary mortgage market participant. It supported conventional mortgages made by thrift institutions.
• 1974 – The Real Estate Settlement Procedures Act (RESPA). It required mortgage lenders to provide borrowers with advance disclosure of the loan. It had to contain all the costs and charges to settle a mortgage loan.
• 1974 to 1975 – An act to ban discrimination. Another is for the lenders to inform an applicant of a rejection and its reason within 30 days. Another act established the lending patterns of lenders in metropolitan statistical areas.
• 1978 – Fair Lending Practices Regulation. It required the underwriting standards and loan registry. The formation of the Community Reinvestment happened in the same year. It is a foundation for institutions, state and local government, and community organizations. Its purpose was to promote equal banking services to all the members of the community.
• 1979 – The Housing and Community Development Amendments. It exempted Federal Housing Administration loans from high interest. These are set by local and state governments. Later on, VA and conventional mortgages were also exempted.
• 1980 to 1987 – Acts to control interest rates and limit tax exemptions. It also allowed loans for consumer, commercial, and agricultural purposes. In 1987, the Housing and Community Development Act required counseling. It was for homebuyers who were overdue on their payments.
• 1994 – the creation of the Homeownership and Protection Act (HOEPA). It was to protect consumers from abusive practices like high-cost home loans.
• 1997 – The Taxpayer Relief Act reduced the tax rate on capital gains.
• 1998 – The Homeowners Protection Act. It allowed homeowners to cancel private mortgage insurance (PMI) in certain circumstances.
• 2008 – The Housing Economic and Recovery Act (HERA). It established house preservation rules and revised housing tax incentives. It also changed the tests and taxation for real estate investment trusts (REIT).
• 2010 – The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). It established the Consumer Financial Protection Bureau (CFPB). It created the rules and applications of regulatory changes in mortgage lending. 
• 2013 – An act redefined the points and fees related to any mortgage transaction. The Servicing Rule established the standard mortgage servicing requirements. It also covers the penalties for large servicers. The CFPB also issued a rule for underwriting requirements in closed-end mortgage loans. The rule set the four types of qualified mortgage categories. It also provided extra protection to lenders. The TILA-RESPA Integrated Disclosure Rule (TRID) changed the legal responsibilities of lenders. It also affected the processes for mortgage loan applications.

In the same years, the mortgage lending industry experienced lows and highs. Until foreign investors started to put capital into financing mortgages in the country.

How Did the Foreign Investors Impact Home Financing?

In 1990, the mortgage industry in the country started to develop. Lenders and government entities from around the world started to invest. Below are some of its positive outcomes:

• Creation of more financial products like credits, insurance, and financial investments.
• Improvement of the design, processing, and selling of loans.
• More investment banks and private entities joined the secondary mortgage market.
• The demand for mortgage brokers increased. They were cheaper and quicker for big companies rather than hiring staff.

At the start of the 2000s, interest rates were so low that people started to refinance.

Why Did the Americans Refinance their Mortgage Loans?

Below are the reasons why many homeowners decided to refinance. It is a method to pay a current mortgage with money from a new one.

• To apply for a new mortgage with lower rates
• To take cash from the home’s equity

It was a time for a change on the side of mortgage lenders and loan products. But, these changes did not stop the growth of the economy in the country. Starting in 2003, the demand for housing became stronger. So, the government and lenders developed subprime programs.

What are Subprime Programs?

Subprime programs allowed the following applicants to qualify for homeownership:

• First-time homebuyers
• People who have low credit scores
• Borrowers who will have a high loan-to-value ratio
• Those who have minimal or no financial documents to support their application.

Secondary mortgage channels converted these higher-risk loans into private securities. Funds came from investment banks, national lenders, and foreign investors. Subprime lending increased but became unsustainable contributing to the Great Recession in 2008.

How Was Mortgage Lending Affected By the 2008 Great Recession?

Over 380 mortgage companies that depended on subprime lending closed. Many homeowners lost income and were not able to pay for their loans. To help resolve these, the government created the following programs in 2009-2010. These helped Americans refinance their mortgages:

• Making Home Affordable Program by The Federal Housing Finance Agency. It helped overdue homeowners with their payments. It also helped people who had houses decrease in value.
• Home Affordable Modification Program (HAMP). It helped homeowners who were overdue with their payments after losing their income.
• Hardest Hit Fund (HHF) by the U.S. Treasury. It provided funds to the states hit by the decline in subprime lending.

The Federal Reserve Bank also decreased its discount rates in December 2008. It helped lower interest.  

Post-Great Recession, the government continued to create rules in mortgage lending. It reached the involvement of technology.

How has Mortgage Lending Evolved into eMortgage?

The Consumer Financial Protection Bureau created a rule for eMortgage. It affected mortgage lending by:

• Requiring mortgage lenders to keep an electronic copy of all their documents.
• Creating Fannie Mae and Freddie Mac’s eClosing and eMortgage. Both of these helped lenders adapt to digital solutions.

Aside from shifting to technology, mortgage lenders also offered extra mortgage products. Veterans were one of the first to enjoy these new offerings.

What Were the New Mortgage Products for the Veterans?

There were new mortgage lenders that focused on providing loans to Veterans. They offered the following extra products:

• Detached house
• Condominium
• Manufactured or recently constructed home
• Duplex, triples, or four-unit properties
• Loan for home improvements and repairs

The lenders also offered these products through cash-out refinance. It is a new mortgage loan to replace the current one. But, the federal government is still involved in all segments of mortgage lending. It is one of the many factors that affect the industry today.

What Is the Current Situation of Home Financing and How Will it Be in the Future?

The following factors affect home financing today and may continue to do so in the future.

• The federal government is the dominant mortgage lender in the country through:

1. Fannie Mae
2. Freddie Mac
3. Federal Housing Administration
4. Rural Housing Service
5. Veterans Administration. 

However industry experts believe that this must change in the future.

• A review of the rules that affected mortgage lending is being done. The results may or may not change the current processes of home financing.
• Ongoing discussions about Fannie Mae and Freddie Mac going private again. The decision may affect the secondary mortgage market.
• Emerging financial technology industries. Their products may help the processes of mortgage lending easier and faster.

One of the latest developments in the industry is online mortgage processing. A database for all down payment assistance (DPA) programs is another one. This is ideal for anyone who needs extra funds to come up with the money to buy a house. If you would like to find which DPA program to apply for, visit Homebuyer Wallet.

The history of home financing has affected the processing of mortgage loans today. It changed the rates, loan products, requirements, and homeownership in general. Many government agencies created strategies to help every American have a decent home. Down payment assistance (DPA) programs are also available to those who need financial aid. If you are unsure about which program to apply for, let Homebuyer Wallet help you. Apply for financing now and be the next homeowner!

Article Sources

Homebuyer Wallet requires its writers to get information from original and reliable resources. Please see our editorial policy to learn more about our standards for producing factual information and content.

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