Mortgage History

In simple terms, a mortgage is a loan in which your house functions as the collateral. The mortgage lender loans you a huge sum of money (usually 80 percent of the value of the house) which you must pay back with interest over a set period of time. If you fail to pay back the loan, the lender can take your home through a legal process known as 'foreclosure".

You might be thinking that mortgages have probably been around for hundreds of years. Wrong, it was just in the 1930s however that mortgages actually got their start. Although banks are the traditional mortgage lenders, it would surprise you to learn that they weren't the ones that came up with the idea. Yea that's right insurance companies did. These daring insurance companies came up with this idea not with the aim of making money no, but with the hopes of gaining ownership of properties if the borrowers fail to keep up with the payments. That was somewhat a smart but greedy idea don't you think?

It was actually in 1934 that modern mortgages came into existence. The Federal Housing Administration (FHA) initiated a new kind of mortgage aimed at people who could not get under the existing mortgage programs. Mortgage loan terms were limited to 50 percent of the property's market value, and the repayment schedule was spread over three to five years and ended with a balloon payment. An 80 percent loan at that time meant your down payment was 80 percent (not the amount you financed). With loan terms like this it's no wonder most Americans were renters. FHA started a program that lowered down payment requirements. They set up programs that offered 80 percent Loan To Value (LTV), 90 percent LTV and higher. This for sure forced commercial banks and other mortgage lenders to do the same, thereby creating much more opportunities for average Americans to own houses. The FHA then went further to begin a trend of qualifying people for loans based on their actual ability to pay back the loan, rather than the traditional way of simply knowing someone. The FHA also lengthened the loan terms, instead of the traditional length of five-to-seven-years loans, the FHA offered 15 year loans which eventually stretched 30 year loans.

The FHA then pulled of a smart move, they set standards for the quality of the construction of houses rather than just financing any house, the FHA set quality standards that the houses had to meet in order to qualify for the loan; of course they wouldn't want the loan outlasting the building, this started another trend that commercial lenders eventually followed. Before FHA, traditional mortgages were interest only payments that ended with a balloon payment which amounted to the principal of the loan. This was the main reason why foreclosures were so common. The FHA then came into action again, this time they started the amortization of loans, which meant that people got to pay an incremental amount of the loan's principal amount with each interest payment, reducing the loan gradually over the loan term until it was totally paid off.