Mortgage Lending: Exploring the Roots

The history of mortgage lending goes back centuries, and it’s still a crucial practice in the real estate industry. By offering collateral, people can borrow money to buy properties that they may not be able to afford upfront.

History of Mortgage Lending

It’s an old practice that dates back to the Tang Dynasty in China. Mortgages during the Tang Dynasty were typically used to secure loans for landowners who needed funds to purchase farming equipment or to invest in their agricultural operations. These mortgages were registered with the government and recorded in the land registry, known as the “Zhongshu Shengzhi Tongjue” or “Official Gazette of the Tang Dynasty.” This document served as a public record of all land transactions, including mortgages, and was used to prevent fraud and ensure property rights were protected.

Mortgages were typically secured by pledging land as collateral. The landowner would transfer ownership of the land to the lender, who would hold onto it until the loan was repaid. If the borrower failed to repay the loan, the lender could sell the land to recover their money.

The Tang Dynasty also saw the development of the “Taixue” or imperial academy, which provided education for scholars and officials. This education system helped to develop a class of educated bureaucrats who were responsible for managing the country’s finances and ensuring the efficient operation of the government. The imperial academy also played a role in developing the legal and financial systems that underpinned the use of mortgages.

The idea of collateral is very old; when you want to borrow money, you have to provide something valuable that the lender can use as security, such as your house or land. This practice is also known as mortgaging. In Latin, the word mort means death, and that’s why the term “mortgage” comes from “mortuus vadium,” meaning “dead pledge.”
A mortgage is a type of loan that is taken out to buy a property, typically a house. The property is used as collateral, meaning that if the borrower can’t repay the loan, the lender has the right to foreclose and take the property.

While property ownership may not always be clear, steps have been taken to make the process more transparent, such as introducing centralized books like “The Grundbuch.”

The Grundbuch

The Grundbuch is a land registry system used in Germany and other parts of Europe to record the ownership of real estate. The system has a long history, dating back to the early 19th century when it was first introduced in Prussia.

The Grundbuch was created to provide a centralized and reliable system for recording land ownership and other property interests. Prior to its introduction, there was no consistent way to document property ownership, which often led to disputes and confusion.

The Grundbuch was designed to address these issues by providing a system for registering and documenting all property transactions in a central registry. It also provided a way to track changes in ownership over time, which was important for determining who had legal rights to a particular piece of property.

Over time, the Grundbuch system has evolved and improved. Today, it is a highly sophisticated system that is used not only to record property ownership, but also to document mortgages, liens, and other property interests.

According to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, as of Q3 2021, there were approximately 49.5 million mortgage accounts in the United States. However, it’s important to note that not all of these accounts necessarily correspond to mortgaged homes, as some may be for investment properties or commercial properties. Additionally, the report notes that the total outstanding mortgage debt in the United States was $11.3 trillion as of Q3 2021.

Modern History of Mortgage Lending

Mortgage lending is vital in the real estate industry, as it allows people to buy properties that they can’t afford upfront. When you get a mortgage on a house, the bank or lender gives you the money to buy the property, but if you fail to pay back the loan, they can reclaim the house and sell it to cover the outstanding balance.

Back in the 18th century, property law wasn’t well developed, and it was often unclear who owned what. The English language only adopted the term “mortgage” in the late 18th century, and personal ads claiming ownership of property were common in newspapers. The process of buying a house involved checking if someone else claimed ownership in the newspaper, and if not, drawing up legal documents with a lawyer.

In the late 19th century, Germany introduced a centralized and authoritative book called “The Grundbuch” to list who owns what. When buying or selling property, papers would be sent to the holders of the Grundbuch, who would then update the ownership. This practice has made property ownership clearer, although it’s still not entirely transparent.

Mortgage lending in the United States

Today, the mortgage lending industry in the United States is highly regulated, with a variety of government agencies and private companies involved in issuing, insuring, and investing in mortgages. However, Mortgage lending in the United States has a long and complex history, stretching back over two centuries. Here is a brief overview of some of the key milestones in this history:

• 1792: The first American mortgage company, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, is established.
• 1862: The federal government establishes the National Bank Act, which creates a standardized system of banking across the country and allows banks to issue mortgages.
• Late 19th century: Home ownership becomes a symbol of the American Dream, and the demand for mortgages increases. Many building and loan associations (now called savings and loan associations) are established to meet this demand.
• 1930s: The Great Depression causes widespread default on mortgages, leading to the creation of the Federal Housing Administration (FHA) in 1934. The FHA insures mortgages issued by banks, making home ownership more accessible for Americans.
• 1938: The Federal National Mortgage Association (Fannie Mae) is established by the federal government to provide liquidity to the mortgage market.
• 1968: Fannie Mae is converted into a publicly traded company, and the Government National Mortgage Association (Ginnie Mae) is created to support government-backed mortgage lending.
• 1980s: The savings and loan crisis leads to the collapse of many savings and loan associations and the creation of the Resolution Trust Corporation to manage the assets of failed institutions.
• 1990s: The use of mortgage-backed securities becomes more widespread, allowing banks to sell their mortgages to investors and free up capital for additional lending.
• 2008: The housing market crash leads to the Great Recession, causing widespread defaults on mortgages and foreclosures. The federal government takes steps to bail out Fannie Mae and other institutions and implement reforms to prevent a similar crisis from happening in the future.

The Importance of Mortgage Lending

Mortgage lending allows lenders to lend money to anyone who has valuable collateral, such as a house or land. They don’t need to assess a borrower’s trustworthiness as much as their ability to repay the loan. If the borrower defaults, the lender can sell the collateral to recover the loan amount. This practice has helped many people become homeowners, and it’s still a crucial aspect of the real estate industry today.

Mortgage lending is a crucial aspect of the United States economy and has a significant impact on individuals, communities, and the overall financial system.

Mortgage lending plays a vital role in the United States economy, supporting homeownership, access to credit, economic growth, and financial stability. Here are some of the key reasons why mortgage lending is important:

1. Homeownership: Mortgages allow individuals and families to purchase homes, which is a key aspect of the American Dream. Homeownership provides stability, security, and the opportunity to build wealth over time.
2. Access to credit: Mortgages are one of the largest types of credit in the United States, and they allow individuals who might not have the cash on hand to purchase a home to still be able to do so. This can be particularly important for those who have limited financial resources or who face discrimination in other types of lending.
3. Economic growth: Mortgage lending supports the construction and sale of new homes, which creates jobs and stimulates economic growth. In addition, the ability to borrow against home equity can provide individuals with capital for investment or other expenses, further supporting economic activity.
4. Financial stability: The mortgage market is a significant part of the overall financial system, and its stability is critical to the health of the economy. The government and private sector work to regulate and monitor the mortgage market to prevent systemic risks and ensure the continued availability of credit.