Many people mistakenly believe a mortgage is the same as a real estate loan. A mortgage is actually a lien, securing a piece of property (which may or may not be real estate) as security against the repayment of a loan. The term, "mortgage" is derived from the French words "mort", (meaning dead) and "gage" (claim or pledge). So, if a borrower paid his debt, then the lenders' claim on the property was dead. Conversely, if the debt was not repaid then the borrowers claim on the property was dead.
Mortgages in America came into use in the late 19th century. Most people who needed a loan to purchase real estate could rarely get money from banks. Unlike the lending environment today, there were no devices of credit, securitization or creative financing that allowed a bank to ensure a loan other than cash assets. So, to get a loan for $10,000, a banker would often require a borrower to prove he had 80 percent of the loan in available cash. This led to the popular conception that the only way to get a loan was to prove that you didn't need one.
As with most industries in the United States, once a need is realized, businesses will form to address it. So, mortgage brokerages, such as Sonnenblick-Goldman of New York began arranging debt financing for real estate projects that had difficulties getting financed through banks. Around the same time real estate investors saw opportunities in real estate development out West. Individuals leaving the cities for the suburbs would need financing and the banks were still not willing to shoulder any risk. This environment gave birth to the mortgage broker who would arrange financing individually in the same way Sonnenblick-Goldman did for larger projects back East.
The New Deal
The effects of the Great Depression forever changed the landscape of real estate finance. After tens of thousands of people lost their homes to foreclosure, the New Deal legislation of the 1930s produced the Federal Home Loan Banking System, the Federal Housing Administration and the Public Housing Act of 1937. All were involved with helping the average American secure affordable housing.
Between 1930 and 1980 the mortgage industry grew, matured and stabilized. In the 1980s many politicians felt the deregulation of this industry would spur greater economic growth and prosperity. Unfortunately, it also generated fraud and abuse. Mortgage brokers, bankers, savings and loan associations all wanted to capitalize on the growth of the mortgage industry. Banks and mortgage brokers began the practice of selling their originated loans and keeping the servicing rights.That was the beginning of the secondary market.
With the skyrocketing inflation of the decade and the prime interest rate at 21 percent, fixed rate mortgages were quickly being dumped on the secondary market. Variable rate mortgages came into being.
20th Century Mortgages
The turmoil and change of the 80s gave way to the modern mortgage industry. By the turn of the century, new mortgage instruments were being developed by companies in an effort to gain market share. Low interest rates and easy financing terms brought a rush of new mortgage consumers to the market. This created a housing boom that would eventually lead to a market bust in 2007 and an effort to reregulate the mortgage industry by the end of the decade.
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