An Historical Look at Mortgages

A common economic goal shared by any and all elected officials is to spark home ownership. It makes sense: More homeowners mean more markets for home-related products and services. With such a profound macro-impact, it's no surprise that home mortgages became widespread as a result of initiatives by the Federal Housing Administration (FHA) in the mid 1930s.

FHA and home mortgages

Initially, banks were not synonymous with mortgages companies. Insurance companies were the first businesses to give customers mortgage loans. If an insured failed to pay his premiums, the company would seize the property. This was their main goal, not earning interest and fees.

When customers fell prey to the harsh loan terms of the insurance companies, the FHA entered the picture. To both stem the unfair lending practices and help pull the economy out of the Depression, the FHA launched several milestone initiatives. These contributed to a revitalized economy, and many remain in effect today:

Qualifying guidelines. The FHA required banks to lend money for home loans based on the qualifications of a borrower. Banks couldn't make loans simply because they knew the borrower. This led to greater fairness in lending practices.

Longer, amortized loan terms. Loan terms were stretched out to present day 15 to 30 year terms, making the size of monthly payments more realistic for borrowers.

Higher Loan-to-Value ratios. Instead of having to present a down payment of 50 percent or more-as required by those original insurance companies-borrowers only needed to put 10 to 20 percent down.

Building standards. Even builders had to clean up their acts and adhere to new building standards, a wise move that ensured the loan didn't outlast the life of a building.

These breakthrough new standards revolutionized the home buying industry, and formed the foundation for today's market. The longevity of these principles is a testament to the FHA, which spurred a market in which home loans became available from sea to shining sea.