A brief history of the mortgage, from its roots in ancient Rome to the English “mortgage” and its revival in America
The average interest rate for a new US The 30-year fixed-rate mortgage exceeded 7% at the end of October 2022 for the first time in over two decades. This is a sharp increase from the previous year, when lenders were charging homebuyers just 3.09% for the same type of loan.
Several factors, including inflation rates and the general economic outlook, affect mortgage rates. One of the main drivers of the ongoing upward spiral is the Series of Federal Reserve interest rate hikes intended to control inflation. Its decision to increase the reference rate by 0.75 percentage points on November 2, 2022up to 4% will push the cost of mortgages even higher.
Even if you’ve had mortgage debt for years, you may not know the history of those loans – a topic I cover in my mortgage finance course for undergraduate business students at Mississippi State University.
The term dates back to medieval england. But the roots of these legal contracts, in which land is pledged for a debt and will become the property of the lender if the loan is not repaid, go back thousands of years.
Historians trace origins of mortgage contracts to the reign of King Artaxerxes of Persia, who ruled modern Iran in the 5th century BC. The Roman Empire formalized and documented the legal process of pledging a loan.
Often using the forum and temples as base of operations, mensariiwhich is derived from the word mensa or “bank” in Latin, would arrange loans and charge interests of borrowers. These government-appointed public bankers required the borrower to provide collateral, whether real estate or personal property, and their agreement to the use of collateral would be handled in three ways.
First the Trust, Latin for “trust” or “confidence”, required the transfer of ownership and possession to the lenders until the debt was paid in full. Ironically, this arrangement did not imply any trust.
Finally, the MortgageLatin for “pledge”, allows borrowers to retain both property and possession while paying off their debts.
The commitment of the living against the dead
Emperor Claudius introduced Roman law and customs to Britain in AD 43. four centuries of Roman domination and the the next 600 years known as the Dark Agesthe British adopted another Latin term for a pledge of security or guarantee for loans: Vadium.
If pledged as security for a loan, real estate could be offered as “Vivum vadium.” The literal translation of this term is “living commitment”. The land would be temporarily pledged to the lender who used it to generate income to repay the debt. Once the lender collected enough revenue to cover the debt and some interest, the land reverted to the borrower.
With the alternative, the “Mortuum Vadiumor “mortgage”, the land was pledged to the lender until the borrower could repay the debt in full. It was essentially an interest-only loan with full principal payment by the borrower required at a later date. When the lender demanded repayment, the borrower had to repay the loan or lose the land.
Lenders would keep the proceeds of the land, whether it was income from farming, selling timber, or renting the property for housing. Indeed, the earth was death to the debtor during the life of the loan because it brought no benefit to the borrower.
Establishment of borrower rights
Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans of the 11th-16th centuries were unpredictable. Lenders could demand repayment at any time. If the borrowers could not comply, the lenders could seek a court order and the land would be forfeited by the borrower to the lender.
This new right allowed borrowers to repay their debts, even after default.
The official end of the period to redeem the property has been called foreclosurewhich is derived from an Old French word meaning “exclude.” Today, foreclosure is a legal process in which lenders take possession of property used as collateral for a loan.
Early history of housing in the United States
But eventually, American financial institutions offered mortgages.
Before 1930 they were small – generally amounting to a maximum of half the market value of a dwelling.
These loans were generally short-term, maturing in less than 10 years, with repayments due only twice a year. Borrowers either paid nothing of the principal or made a few such payments before the due date.
Borrowers would have to refinance loans if they couldn’t repay them.
Save the housing market
The federal government responded by establishing new agencies to stabilize the housing market.
Another new agency, the home owner loan companyestablished in 1933, purchased short-term, semi-annual, interest-only mortgages and turned them into new long-term loans with 15-year terms.
Payments were monthly and self-amortized – covering both principal and interest. They were also fixed rate, remaining stable for the duration of the mortgage. Initially they were more interest oriented and later they disbursed more principal. The company made new loans for three years, handling them until it closed in 1951. He pioneered long-term mortgages in the United States
In 1938, Congress established the Federal National Mortgage Association, better known as the Fannie Mae. This government-sponsored company made long-term fixed rate mortgages viable through a process called securitization – sell debt to investors and use the proceeds to purchase these long-term mortgages from banks. This process reduced risk for banks and encouraged long-term mortgage lending.
Fixed-rate or adjustable-rate mortgages
After World War II, Congress authorized the Federal Housing Administration to insure 30-year loans on new construction and, a few years later, purchases of existing homes. But then the 1966 credit crisis and the years of high inflation that followed made adjustable rate mortgages more popular.
Known as ARMs, these mortgages have stable rates for only a few years. Typically, the initial rate is significantly lower than it would be for 15 or 30 year fixed rate mortgages. Once this initial period is over, ARM interest rates be adjusted up or down each year – as well as monthly payments to lenders.
Unlike the rest of the world, where MRAs predominate, Americans still prefer the 30-year fixed rate mortgage.
But as interest rates rise, demand for ARM grows Again. If the Federal Reserve fails to curb inflation and interest rates continue to climb, unfortunately for some ARM borrowers, the term “death pledge” may live up to its name.