Transcript Chapter 6 The Early History of Residential Finance

Chapter 6
The Early History of Residential Finance
and Creation of the Fixed-Rate Mortgage
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Learning Objectives
• Describe how residential lending developed
from its earliest instances through WW II
• List causes of the high number of mortgage
defaults during the 1930s Depression
• Describe how federal programs supported
the mortgage and household market during
the 1930s Depression
• Describe the important characteristics of
mortgages in the latter half of the 19th
century
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Historical Foundations of
Residential Finance
• Roman Empire
– Fiducia- Transferred legal title and possession
to lender
– Pigus- Borrower retained title and possession,
“suspicion of the probability of default”
– Hypotheca- Title and possession transferred
under actual default
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German Influence
• Gage
- Deposit made to insure fulfillment of an
agreement
- Live gage- physically portable property
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English Developments
• French word for dead is mort
• Dead gage- Loan involving real property
thus the term mortgage
• Equitable Right of Redemption
• Statutory Right of Redemption
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American Residential Finance
• Building Societies
• Post Civil War Expansion
• Until 1913 federally chartered banks were
prohibited from making real estate loans
• Federal Reserve System in 1913 authorized
banks to originate five-year loans with a
maximum 50% loan-to-value-ratio
• Massive default on these loans in late 1920s
and early 1930s
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Residential Finance Con’t.
• Building and loan associations grew rapidly in the
1920s
• In early 1930s, the money supply plummeted,
property prices declined, and defaults skyrocketed
• High default risk on short-term non-amortining
loans
• Federal Savings and Loan Insurance
Corporation(FSLIC) created in 1934
• Federal Housing Administration(FHA) created in
1934
• Federal National Mortgage Association(Fannie
Mae) created in 1938