The deed and the dream: 250 years of the American mortgage

Building and loan associations, member-funded cooperatives that pooled local savings to lend to their own members, filled much of the gap that banks left, but their loans carried the same short, punishing structure. It was a system that worked reasonably well for the modestly prosperous and shut out almost everyone else — as of the early 1930s, only about one in ten American households owned their home, according to Rocket Mortgage’s history of the 30-year fixed-rate loan.

The Depression rebuilds the mortgage from scratch

The system’s fragility became catastrophically clear after 1929. Easy, interest-only lending throughout the 1920s had encouraged buyers to take on more than they could sustain, and when the crash hit, an estimated 40 to 50 percent of all home mortgages were in default by 1933, according to a history of mortgage lending published by The CE Shop. Balloon-payment structures that had been merely uncomfortable in good times became a mass foreclosure machine in bad ones, and neither borrowers nor the banks holding their defaulted paper had any real path out.

Franklin D. Roosevelt’s response effectively invented the mortgage instrument the industry still sells today. The Home Owners’ Loan Corporation, created in 1933, refinanced distressed mortgages directly to keep families in their homes. The National Housing Act of 1934 then created the Federal Housing Administration, which insured lenders against loss on a new kind of loan: fully amortizing, with a term of 20 to 30 years and a down payment as low as 10 percent, according to the Richmond Fed’s history cited above.

That structure — a long, fixed, steadily paid-down loan — was so much more attractive to borrowers than the old short-term balloon note that private lenders adopted it themselves to stay competitive. In 1938, the government layered on a second innovation: the Federal National Mortgage Association, or Fannie Mae, created to buy FHA loans from originating lenders and free up their capital to make new ones, establishing the secondary mortgage market that still funds the bulk of American home lending.

The GI Bill, the suburbs, and a hidden ceiling on the dream

The postwar period turned the FHA-style mortgage into a mass phenomenon, and largely for one policy reason: the Servicemen’s Readjustment Act of 1944, known as the GI Bill, offered veterans low-interest, low-down-payment home loans through the Department of Veterans Affairs. Combined with a booming postwar economy, the effect on the housing market was extraordinary — the national homeownership rate climbed from 44 percent to 62 percent between 1940 and 1960, according to a retrospective on American mortgage history published by Better.