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Mortgage History: Loans And Foreclosures

By Elizabeth R. Elstien

What does the insurance industry have to do with mortgages? Well, it was insurance companies that dared to initiate the mortgage system that today helps many Americans buy their own home.

In the 1930s insurance companies devised a plan to acquire more properties. That plan was called a mortgage. Where today banks and other institutions lend money for mortgages to make money on fees and interest charges, these 1930s insurance companies figured that they could gain ownership of properties if the owner failed to make the mortgage payments.

Early loans were difficult to afford leaving many dreaming of homeownership while renting instead. These loans typically were only made on fifty percent of the market value with the repayment schedule spread out over three to five years, leaving one large payment at the end. Foreclosures were common. Loans were given simply by knowing someone. In those days, an eighty percent loan didn't mean that you were borrowing eighty percent of the purchase price, but that you had paid eighty percent as a down payment. Who could afford that?

In 1934 the Federal Housing Administration (FHA) tried to pull the United States out of its economic depression by beginning a mortgage geared to those sixty percent of households who couldn't get mortgages under the existing program. FHA lowered the down payment requirements and set up programs offering the eighty or ninety percent loan-to-value mortgages that we are more accustomed to today. The FHA also began the practice of qualifying those applying based on their actual ability to repay the loan rather than the "who-you-know" method of lending. Lenders (banks) were now forced to keep up with the FHA and do the same, which enabled more Americans to become homeowners.

The FHA also lengthened the loan term from the then standard five- to seven-year loans to the 15- and now 30-year loans so commonly used today. They further set quality standards for all homes to meet in order for a borrower to obtain a loan. This was done so they could guarantee that the home was safe and would last for at least the duration of the loan. Smart thinking.

Prior to 1934, interest-only mortgages were the norm with one large last payment equaling the loan principal amount. The FHA established amortized loans, which meant that borrowers could pay a portion of the loan's principal amount with each interest payment, reducing the loan gradually over its term until it was completely paid off.

The popularization of interest-only loans in the twenty-first century took off with lenders easily awarding them to the masses, many who barely qualified. However, there was a good reason the FHA brought in amortized loans in the 1930s: to make it easier for a homeowner to pay off their mortgage and not lose the home. History often repeats itself, as it has been in recent years with those same masses of borrowers with interest-only loans losing homes in foreclosure. These days instead of insurance companies taking over the homes, it's mostly big banks Now the FHA and other government regulators are once again reforming the lending industry.

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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