The term “mortgage” is a funny one. Just the word itself is odd. It does have a meaning however with Latin roots. “Mort” means death or an end and “gage” is a pledge or a promise. In practice, when the loan is paid off and the pledge kept, the loan ends or dies. For instance, if you get a 15 year mortgage, the borrowers promise to repay the lender based upon the terms of the note and when the loan is paid in full, the loan goes away and the promise is kept.

Here in the United States, prior to the 1930s, individual banks made their own lending decisions and lending guidelines varied greatly. This period was way before the Fair Credit Reporting Act and discrimination was common and rarely even thought about. For instance, a bank could deny a loan application to a couple if the woman was pregnant. The bank thought that when the baby was born the woman would have to quit her job to take care of the child. This would be unheard of today.

Down payments were much higher, too. As much as 50 percent down or even more might be required and the loan term lasted but a few years when the borrowers would have to refinance into another new loan. However, in 1934, the FHA loan appeared. The Federal Housing Administration prepared a list of guidelines that if the lender followed them, should the loan ever go into default, the lender would be compensated for the loss. With the FHA program, universal guidelines began to become the norm.

When banks made mortgage loans, they generally had to use money that was deposited by their customers. This means they could run out of money to lend and have to wait until a mortgage was paid off before they could make another. In 1968, the Federal National Mortgage Association, or Fannie Mae, was created for the sole purpose of providing liquidity in the mortgage market. When a lender approved a loan using these guidelines, the loan could be sold to Fannie Mae and replenish the lender’s funds to make yet another mortgage. Freddie Mac was created in 1970 for the very same purpose and still today both make for the vast majority of all home loans issued today.

What can we expect in the future? The mortgage industry has always had a tendency to gradually expand lending guidelines in order to make more mortgage loans. Yet the industry went too far in the last decade creating the financial crisis. We’ve recovered and lending has again stabilized but don’t expect the return of subprime mortgages and loans without documentation. Instead, we can expect small tweaks in the process but not really straying too far from existing requirements.

For more information or questions about mortgage loans,
Please visit Majestic Home Loan

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