The History of Mortgage Lending

Young couple discussing loan application with lender

Americans rely on mortgages every day to achieve their homeownership goals. Whether you’re looking to buy a home or refinance your current one, you’ll be working with a dedicated mortgage lender. It’s this person’s job to find the right mortgage program for your needs, and at the lowest rate.

What most borrowers today don’t realize, though, is that mortgage lending has evolved considerably over the years. We’ve seen the industry shift from offering primarily cookie-cutter products to more specialized loans that are tailored to a borrower. This is a major reason why so many borrowers are able to buy a home sooner in their lifetime.

In this article, we thought it would be beneficial to explain the progression of the mortgage industry, specifically as it relates to lending. 

When was the mortgage invented?

The concept of a home mortgage was foreign to the majority of Americans before the 1930s. At the time, a mere 40% of families owned their homes. Those who didn’t have the funds to buy a house outright were pretty much out of luck.

Mortgages finally entered the U.S. housing market in the early 1930s. Insurance companies, not financial institutions, implemented the idea as a way to take advantage of borrowers during the Great Depression. If a borrower failed to keep up with their payments, they would gain ownership of the property. 

Loans that were difficult to obtain

Loans that were available during this time were anything but favorable for borrowers. According to this resource from HowStuffWorks, loan terms were limited to 50% of the home’s market value. Borrowers had only three to five years to pay off their loan, while also accounting for a balloon payment at the end of their term. 

Very few Americans could purchase a home due to such unrealistic loan requirements. Families settled on the notion of renting for the foreseeable future, even if it meant never having a place of their own. Thankfully, this wouldn’t be the case much longer.

More affordable homeownership

President Franklin D. Roosevelt took charge of the real estate market after the foreclosure of hundreds of thousands of homes. It all started with the buying of 1 million defaulted mortgages and changing them to fixed-rate, long-term loans. Borrowers had the option of paying back a 15-year mortgage, or eventually, a 30-year mortgage.

We also saw the advent of mortgage insurance as part of the New Deal. The combination of this and extended loan terms encouraged more Americans to pursue their homeownership goals. FDIC-insured deposits made funding these “modern” mortgages easier for banks. 

The U.S. homeownership rate skyrocketed from 44% to 62% between 1940 and 1960. Americans were not only financially capable of buying a home, but the industry had the support of the newly formed Federal Housing Administration (FHA) and Veterans Administration (VA). New legislation in the 1960s and 1970s ensured that all borrowers, regardless of race, could purchase a home in a desirable location.

Housing crisis of 2008

Fast forward to the 2000s when the mortgage lending industry expanded — and not in a good way. With minimal government regulations in place, borrowers quickly became the victims of predatory lending practices. Rather than refinancing to access equity, homeowners found themselves in an uphill battle trying to stay current on an overly complex, risky loan.

The Center for American Progress mentions that the spread of these subprime loans simply inundated the global financial system. In a domino effect, the previously thriving economy took a complete nosedive. Countless borrowers ended up “underwater” or “upside-down” on their loans because of the 2008 housing crash.  

Changes since the real estate crash

The industry has learned a lot since the subprime mortgage crisis. Here are a few key differences in the lending world, as referenced from The Washington Post.

Safer loan options

Those risky pre-crash mortgages we discussed earlier are gone. Borrowers today are limited to fixed-rate and adjustable-rate loans. The good thing about ARMs is that you don’t have to worry about the rate increasing too quickly.

Extensive documentation

Lenders want proof that you can handle a monthly mortgage payment. Borrowers should be prepared to provide all sorts of documentation, from W-2s to pay stubs. You can potentially speed up the pre-approval process by gathering this info in advance.

Credit score requirements

Your credit score is another important part of your financial profile. The higher your score, the greater your chance of obtaining a low mortgage rate. Do yourself a favor and spend some time improving your credit score before applying for a home loan.

Digital mortgages

It was the norm for borrowers to physically go to their financial institution to get a mortgage. However, lenders have shifted to digital mortgage platforms in recent years. Borrowers and lenders alike appreciate the convenience and automation of these tools.

Stricter lending requirements due to COVID-19

The COVID-19 pandemic forced mortgage lenders across the country to tighten their lending standards even more. There are now higher credit score requirements, fewer loan programs available, and a reluctance to move forward with high LTV loans.

Choose the right lender for you

Now that you have a better understanding of mortgage lending and its history, you might be thinking about getting a home loan yourself. Just be sure to do your research and ask plenty of questions. 

Choosing a mortgage lender is more than locking in a low rate — it’s also about getting a custom loan that aligns with your goals.

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