We tend to think of mortgages as being something that originated in the last few centuries. Actually, the first mortgages began in Persia in the fifth century BC. The original purpose of a mortgage was quite different from today. The original mortgages were used as collateral to borrow money. A borrower would provide the lender rights to land the borrower held for a loan. In some cases, the borrower would have to transfer the ownership of the land until the debt was repaid.
When the Roman Empire extended into England, a borrower would pledge the land to the lender who could then use it to generate income (e.g., crops, timber, rent). In essence, the land was dead to the borrower. The term mortgage is essentially a combination of French terms meaning dead pledge.
In the Middle Ages, English loans were not made for a fixed amount of time as are today’s mortgages (15-30 years). The lender could demand payment at any time. If the borrower could not repay the loan, the land would be given to the lender.
When the American colonies took hold, the concept of mortgages was not immediately transferred from England. As the U.S. government came into existence, so to did mortgage practices. Up until the Depression years, mortgages were often at less than half the property’s value. Loans were for less than 10 years and loan payments were often just for interest. At the end of the loan, the full amount borrowed was due.
With the Great Depression, the federal government had to help. Agencies came into being to help homeowners secure mortgages that they had a reasonable chance of affording.
Mortgage practices are commonplace today with nearly two-thirds of American homeowners having mortgages. With such a huge amount of money involved, the opportunities for improper loan practices are very tempting. The Great Recession was largely due to these improper practices.
Homeownership is an essential part of the good life. Societies are stable when citizens can afford housing. Thus, mortgages provide an essential service for societal preservation.
* * *
“The paid-off home mortgage has taken the place of the BMW as the status symbol of choice.” – Dave Ramsey