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Chapter 1
History of Mortgage Lending
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, students should be able to:
Distinguish between title theory and lien theory.
Describe the mortgage lending activities of the early thrifts,
mortgage companies and commercial banks.
Cite the effects of the Depression on financial institutions
and their mortgage lending practices.
List and describe the function of the major federal
legislation enacted to stabilize real estate values in the
1930s.
Identify the reasons for the rapid growth in single-family
mortgage lending after World War II.
Identify the major consumer protection acts.
Cite the impact of deregulation, inflation, and high interest
rates and other recent events on the ability of the average
American family to afford housing.
Understand the magnitude of the refinancing wave of 2001-
03 and how the average age life of loan for a 30-year
mortgage was only about three years during this period.
Understand the dynamics of the rapid expansion and
collapse of the mortgage lending industry and real estate
markets since 2000
Be more aware of important regulatory activity in the near
future
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I. Ancient concepts of Mortgage Lending
A. Romans developed Fiducia (transfer)
B. Hypotheca (pledge) similar to modern lien
theory
II. Roman Law
A. Lenders took title and possession in lieu of
Interest
B. Courts of equity established favoring
mortgagors
C. A balance reached – forerunner of modern
title theory
III. American Developments
A. Thrift Institutions
B. Mortgage Companies
C. Commercial Banks
D. Turn of the Century
E. Great Depression Era
IV. Government Intervention
A. Landmark Federal Legislation
B. The Growth Era
C. Housing Act of 1949
D. Department of Housing and Urban
Development
E. Consumer Protection
F. Role of Government
Teaching Tips
Discuss the history of real estate in America and how the
mortgage industry developed.
Review how the government and industry took steps to
repair itself and the economy after the Depression
An interesting discussion would be to parallel what
happened in the thirties and forties with what we are going
through now.
See if history did indeed repeat itself.
The Federal legislation that was developed in the 1930’s
was supposed to ward off any wave of foreclosures from
happening again. What errors do you think the government
made as a result of the legislation?
What could have been with subsequent legislation and
regulations that might have helped?
Discuss the FHA and what role, if any, that agency had on
the development and failure of the mortgage industry.
Discuss how other economic factors might have also
affected the real estate industry.
The rise and fall of the secondary mortgage market will
forever change the real estate industry. Discuss the current
state of affairs and ask for input about concerns for the
future and what the class would do suggest to avoid further
issues.
V. Recent Residential Mortgage Lending
VI. The 1980s: The Decade of Change
A. Federal Reserve and the Money Supply
B. Prime Rate at 21½ Percent
C. Financial Institutions Reform, Recovery,
and Enforcement Act (FIRREA)
VII. The 1990s: A Shift in Policy, Boom Years, and
a Fundamental Change
A. Deficit Reduction and Homeownership as a
Political Goal
VIII. 2000-2010: The Rise and Fall of the Secondary
Mortgage Market
A. Need for Additional Funds for Housing
B. The Role of Subprime Lending
C. Evolving Mortgage Lending Issues in the
New Century
The subprime market and serving industries
collapse
D. Foreclosures increase to higher than post-
Depression levels
E. The mortgage industry enjoys another
makeover
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SUGGESTED TRUE/FALSE QUIZ
1. Prior to the development of English common
law, mortgage lending generally favored the
mortgagor.
2. Under title theory, the title remains with the
mortgagor, and the mortgagee has only a lien
against the property.
4. The first thrift institutions were created as temporary
organizations, intended to exist only until each member
purchased a home.
5. Early mortgage companies primarily financed farms, and
sold the loans to wealthy East coast investors.
6. Commercial banks were originally organized to provide
financing for farmland and homes.
7. Amortization of mortgages was nonexistent before the
1930s.
8. Following the stock market crash in 1929, lenders were able
to sell foreclosed properties at inflated prices and earn
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record profits.
9. Many states passed laws in the Depression years suspending
foreclosures.
10. The Federal Housing Administration (FHA) was created in
the 1930s to purchase or refinance defaulted mortgages.
11. Financial institutions suffered liquidity problems following
World War II, due to the tremendous demand for housing by
returning veterans
12. Fannie Mae and Freddie Mac project that 13 to 15 million new
households will be formed in the first decade of the new century.
13. Home values increased which gave consumers the ability to pull
equity out of their homes and increase spending.
14. After the steady rise in defaults of subprime loans, investors halted
lending which led to the collapse of this market segment
15. In order to thwart off more foreclosures, the mortgage industry put a
self proclaimed moratorium on mortgage lending from 2009-2010
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16. The future of Fannie Mae and Freddie Mac is unknown and these
organizations will surely be revamped in the coming years.
MULTIPLE CHOICE QUESTIONS. More than one answer may be correct
– select all correct answers. (Correct answers are italicized.)
1. Under the feudal system in England the King was considered the
owner of all land and allowed certain lords to use the land in return
for:
a. money
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2. The first financial institution formed for the purpose of financing
the purchase of a house was:
a. Mortgage companies
3. The typical mortgage loan at the turn of the century (1900)
contained the following characteristics:
a. maximum loan of 75 percent loan to value
4. The Federal Government took a leading role in mortgage lending
during the Great Depression by enacting the following legislation:
a. Servicemen’s Readjustment Act
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5. Ancillary results of the subprime mortgage industry were:
a. More Americans were able to purchase homes
SUGGESTED SHORT ESSAY QUESTIONS
1. Describe the underwriting standards and mortgage loan terms that
prevailed in the 1920s. How did they contribute to the high
foreclosure rates in the 1930s? What are the similarities to recent
events starting after 2000?
ANSWER: As real estate values appreciated sharply, lenders became
careless about underwriting standards and made many imprudent loans.
Workers lost their jobs, were unable to make the quarterly or semiannual
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2. How were the same financial institutions, which suffered a
liquidity crisis and huge losses in the 1930s able to accommodate
the demand for housing at the end of World War II?
ANSWER: During World War II financial institutions invested
huge amounts of assets in no-risk, low yielding war bonds. At the
3. Describe the conditions that were conducive to $2 and $3 trillion
being originated in the early part of the 21st century.
ANSWER: After the cyclical high interest rates of the early
1980s, interest rates began a long slide allowing long-term interest
rates to hit a 40-year low in 2003. Rates for a 30-year mortgage
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ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers/points to emphasize for the
questions are found below.
1. Examine how the concept of private ownership of land has evolved
since the days of the Egyptians.
ANSWER: Ownership of land has always been an important part
of law and commerce even as early as the days of the early
Egyptians and Babylonians. Hand in hand with ownership of land
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2. How has the involvement of the federal government in real estate
and mortgage lending allowed for growth in homeownership?
ANSWER: Although the Federal Government was reluctant to
get involved in real estate for many decades, the Great Depression
changed that position. Since that period the Federal Government
3. The Great Depression was the beginning of modern residential
mortgage lending. Examine the changes that occurred during this
period and their importance to modern mortgage lending
ANSWER: The Great Depression was so severe that the Federal
Government understood it must get involved or the entire economy
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term, self-amortizing mortgage loan.
4. The 1960-1970 period witnessed the enactment of many major
consumer protection laws/regulations. How have these federal
enactments changed the way residential mortgage lending is
conducted?
ANSWER: The primary focus of Federal involvement was in
stimulating the economy and in protecting the rights of groups of
5. What is the difference between the Title Theory and Lien Theory of
mortgage lending? Which exists in your state?
ANSWER: Title theory was developed by English courts of
equity in the l600s in an effort to balance the rights of mortgagors
and mortgagees. Under title theory, the mortgagor retains
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6. What were two reasons for the stock market crash of 1987 and
what was the impact on mortgage lending?
ANSWER: Among the many factors that fueled the crash, the two
most important were the already overvaluation of stock prices and
7. What role did subprime lending play in the mortgage industry
events during 2000-2010?
ANSWER: The government encouraged investment in the housing
market and encouraged lenders to increase the national
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