Mortgage loans have long been a major form of credit for households and business firms, and they provide major assets for banks and other financial firms.
From colonial times, the pursuit of income and profit led many people to borrow extensively to buy and develop land. Several colonial governments created land banks, lending on mortgage security by issuing paper currency.
During the nineteenth century, the majority of Americans lived on farms. Farmers relied on mortgages to finance the acquisition and improvement of land, construction of buildings (including the family home), and other expenses. Mortgage credit was also important for business firms. As railroad building expanded after the 1830’s, many of the railroad bond issues involved mortgage claims on the land involved in the right-of-way.
In 1900, total mortgage debt was around $6.7 billion, of which one-fourth was farm debt. Despite urbanization, farm mortgages increased to $11 billion in 1922, 40 percent of the total mortgage debt, reflecting boom times for farmers. The
Urbanization brought rapid growth in nonfarm residential mortgages. By 1900, these totaled about $2.9 billion, of which half was held by financial institutions. Mutual savings banks were the largest lenders ($632 million), followed by savings and loan associations (which had developed primarily to provide home-mortgage loans–$371 million).
The proportion of nonfarm residents who were homeowners rose steadily in the prosperous early twentieth century, from one-third around 1900 to nearly half by 1930. By then nonfarm residential mortgages exceeded $30 billion, two-thirds held by financial institutions. Savings and loan associations were the largest lenders, accounting for over $6 billion.
Plummeting incomes and prices following 1929 increased the burden of debts of all kinds. During the
An 1888 advertisement for the Equitable Mortgage Company.
The federal government created a multitude of new agencies and programs designed to ease debt burdens and promote new home building. The
Under President Franklin D. Roosevelt, mortgage programs multiplied. The Federal Farm Mortgage Corporation (created in 1933) issued bonds and made loans to the federal land banks. The
A relatively new institutional player was
Rising interest rates following 1965 brought on deregulation of deposit institutions and the savings and loan crisis. Longstanding institutional differentiation of mortgage lenders largely disappeared.
As mortgage default rates began to rise in 2007, financial firms with substantial mortgage operations rapidly showed signs of trouble. They were holding long-term assets (mortgages or CDOs) financed by short-term loans whose lenders were reluctant to renew. Fannie Mae, Freddie Mac, and other mortgage operators had very small capital accounts; thus, the value of their assets barely exceeded their liabilities. When mortgage defaults began to reduce asset values, these operators soon showed indications of insolvency. This was accentuated by marking-to-market accounting rules requiring that reported assets be reported at their (supposed) current market value.
Mortgage involvements brought about bank failures involving IndyMac, Washington Mutual, and Wachovia. Lehman Brothers, a large issuer of CDOs, went bankrupt. Its closing precipitated its creditors falling into financial distress. Fannie Mae and Freddie Mac were taken over by the government. Under the supervision of the Federal Housing Finance Agency, they became the chief source of continued credit to the home-mortgage sector.
The mortgage crisis was especially acute in California. Although U.S. home prices declined about 10 percent over the year ending October, 2008, prices in California fell by one-third. About one-third of all the mortgages in an average mortgage-backed security were written on California properties. California mortgages were a major reason for the failures of Countrywide, IndyMac, and Washington Mutual. Housing and housing finance were in a severe slump by late 2008. In the second quarter of 2008, more than 9 percent of home mortgages were in default, compared with 6.5 percent a year previous. Sales of foreclosed properties made up 45 percent of existing-home sales in October.
Bogue, Allan G. Money at Interest: The Farm Mortgage on the Middle Border. Ithaca, N.Y.: Cornell University Press, 1955. Case studies humanize the interactions among lending institutions, agents, and farm borrowers in the nineteenth century. Chandler, Lester V. America’s Greatest Depression, 1929-1941. New York: Harper & Row, 1970. Devotes much attention to the debt crisis and the extensive federal programs that attempted to deal with it. “Credit and Housing Markets.” Economic Report of the President, 2008. Washington, D.C.: Government Printing Office, 2008. Simple but comprehensive review of the subprime mortgage mess and its macroeconomic effects. Markham, Jerry W. A Financial History of the United States. Vol. 3. Armonk, N.Y.: M. E. Sharpe, 2002. Chapter 2 reviews the savings and loan crisis; Chapter 5 gives an excellent overview of the complexities arising for mortgage markets from the 1970’s on. Quigley, John M. “Federal Credit and Insurance Programs: Housing.” Review, July/August, 2006, pp. 281-321. Recommends limiting the activity of the FHA and government-sponsored enterprises to first-time home buyers.
Deregulation of financial institutions
Farm Credit Administration
U.S. Department of Housing and Urban Development
Commercial real estate industry
Residential real estate industry
Savings and loan associations