Mortgages are loans to purchase a property. The word derives from the French “mort” and meant death pledge with the obligation ending when the loan was paid off or the property repossessed.
The Dutch have the earliest mortgages. Originally in the Netherlands, people saved money and purchased their house for cash. However, starting in the 1800s, people would borrow money from one another. These peer-to-peer lending schemes functioned well and increased homeownership.
Eventually, the Netherlands came to view homeownership as good public policy and established specialized mortgage banks. In the 1850s, Dutch mortgage banks financed the purchase of homes by selling bonds. They’d then lend the funds at .75% above the bond face value as a “servicing fee” for collecting payments remitted to investors. This model eventually evolved into securitization.
The Netherlands continued to expand its mortgage banks. Other countries adopted various lending schemes. In Prussia, credit co-ops called Landschaften arranged for loans though typically to royals. Landschaften were interesting because they were non-profit.
In the US and UK land ownership was for the wealthy who rented on oftentimes terrible terms. The infamous English “Star Chamber” – known for its brutality hearing heresy cases – was primarily a landlord/tenant court. Russian Vladimir Lenin worked as a legal assistant and, some historians believe, focused on landlord-tenant issues. These cases radicalized him, transforming him into the Founding Father of Soviet communism.
Towards Home Ownership
Towards the later 1800s and into the early 1900s mortgage lending in the US and UK became more common. However, in the US most loans were five-year interest-only payment schemes with the full balance due at the end of the loan. Usually, people would refinance to another five-year loan, sometimes paying down more principal if they managed to save. While this system was an improvement over terrible landlords, it was far from optimal.
American mortgages became a serious problem during the Great Depression when home values plummeted. Borrowers were unable to refinance their loans and foreclosures (repossessions) became rampant. As additional repossessed homes were auctioned, and the economy worsened, the price of houses further decreased creating further foreclosures. American house prices entered a death spiral plunging countless people into homelessness.
In 1934, the US government created the Federal Housing Administration to rescue the housing market. The agency guaranteed mortgages under certain terms, encouraging banks to start lending again. One of the terms is that mortgages last the life of the loan. That is, mandatory refinancing was prohibited.
Over time, these long-term mortgages because of the standard in the western world. Asian countries also evolved from cash-only to partial mortgages to western-style mortgage loans. Today, in many Asian countries, long-term mortgages are no longer unusual.