When was the first instance of use of Amortization in a residential
home loan? Please provide 3 scholarly citation that do not reference
each other.
I am looking for when the practice came into general use. A decade
would be nice and a region.
I know that in 1934 the US Government was backing mortgage securities
that were amortized. I do believe the practice extends back to the
turn of the 20th Century if not before (and it may extend far back
beyond that but the scope of my question is more in terms of American
home financing).
Further, I suspect amortization of home mortgages in pre-calculator
America was mearly a sales device to:
1. Increase overall rate of debt payments from borrowers,
2. Make it nearly impossible for the average borrower to be able to
calculate their principal payments, thereby mystifying the process,
3. All the while maximizing the transfer of the time value of said
money to the lender.
If this is correct and then the practice caught on ... it should have
occured in a reasonably well defined period.
So, as stated above, I guess I do not need a specific bank.
Hi samlee2010,
Thanks for the clarification... Amortized loans were first introduced
by the Federal Government during the depression because people were
losing their homes due to their inability to pay the balloon payment
that was common then. Although we would like to think they created
amortized loans to get more of our money, in all actuality, they were
trying to help us keep our homes at a time when only the wealthy OWNED
homes (about 60% of the population rented housing), and even the
wealthy were unable to pay. I know you were expecting a different,
earlier answer, so I found two government sources that explain it in
some detail, as a reference for you:
Reference:
HUD Historical Background - The 1930s
http://www.hud.gov/offices/adm/about/admguide/history.cfm
..."In the midst of widespread unemployment and financial collapse,
Congress passed the Emergency Relief and Construction Act of 1932,
creating the Reconstruction Finance Corporation (RFC). This was the
government?s first major involvement in the housing field. The RFC was
authorized to make loans to private corporations providing housing for
low-income families. Also in 1932, the Federal Home Loan Bank Board
was established to make advances on the security of home mortgages and
establish a Home Loan Bank System.
However, these efforts did little to assist individual homebuyers. The
average home loan at that time required very short-term credit, with
terms generally ranging from three to five years. Large down payments,
second mortgages, and high interest rates were commonplace. As the
depression ended, and the prospect of improved financial status for
individual families increased, the National Housing Act of 1934 was
passed to relieve unemployment and stimulate the release of private
credit in the hands of banks and lending institutions for home repairs
and construction. To accomplish this, the Act of 1934 created the
Federal Housing Administration (FHA). The FHA continues to this day,
under the Assistant Secretary for Housing-Federal Housing
Commissioner, as the main federal agency handling mortgage insurance.
Title II of the Act of 1934 established two basic mortgage insurance
programs: Section 203 mortgage insurance for one to four family homes;
and Section 207 multifamily project mortgages. The FHA?s assumption of
risk, through its insurance programs, made possible the amortization
of mortgage loans with regular monthly payments to reduce the size of
loan.
The Act of 1934 also authorized the FHA to create a national mortgage
association to provide a secondary market where home mortgages could
be sold. The allowed more money to be available for home loans. In
1937, the Federal National Mortgage Association, or Fannie Mae, was
chartered by the FHA as a subsidiary of the RFC.
While these early measures were a major government effort to
stimulate housing construction, they did not help those lower income
families most in need of housing. Because of the needs of this group,
the United States Housing Act of 1937 established the public housing
program. The Act, administered by the United States Public Housing
Authority, authorized loans to local public housing agencies for
lower-rent public housing construction expenses...."
What is an FHA loan and is it for me?
http://www.fhatoday.com/fha.htm
..."The Federal Housing Administration (FHA), a wholly owned
government corporation, was established under the National Housing Act
of 1934 to improve housing standards and conditions. It's goal was to
provide an adequate home financing system through insurance of
mortgages, and to stabilize the mortgage market.
Thanks to the insurance products FHA helped to pioneer, such as the
long term amortizing loan, the nation's home ownership rate has soared
to an all time high of 66 percent as of the third quarter of 1997;
well on the way towards the goal of 67.5% by the year 2000.he Federal
Housing Administration (FHA), a wholly owned government corporation,
was established under the National Housing Act of 1934 to improve
housing standards and conditions. It's goal was to provide an adequate
home financing system through insurance of mortgages, and to stabilize
the mortgage market.
Thanks to the insurance products FHA helped to pioneer, such as the
long term amortizing loan, the nation's home ownership rate has soared
to an all time high of 66 percent as of the third quarter of 1997;
well on the way towards the goal of 67.5% by the year 2000..."
Another (non government) take on it, same story different words:
History of Mortgages
http://money.howstuffworks.com/mortgage24.htm
..."It wasn't until 1934 that mortgages, as they work now, came into
being. The Federal Housing Administration (FHA) played a critical
role. In order to help pull the country out of its economic
depression, the FHA initiated a new type of mortgage aimed at the
folks who couldn't get mortgages under the existing programs. At that
time, only four in 10 households owned homes. Mortgage loan terms were
limited to 50 percent of the property's market value, and the
repayment schedule was spread over three to five years and ended with
a balloon payment. An 80 percent loan at that time meant your down
payment was 80 percent -- not the amount you financed! With loan terms
like that, it's no wonder that most Americans were renters.
FHA started a program that lowered the down payment requirements. They
set up programs that offered 80 percent loan-to-value (LTV), 90
percent LTV, and higher. This forced commercial banks and lenders to
do the same, creating many more opportunities for average Americans to
own homes.
The FHA also started the trend of qualifying people for a loan based
on their actual ability to pay back the loan, rather than the
traditional way of simply "knowing someone."
The FHA lengthened the loan terms. Rather than the traditional five-
to seven-year loans, the FHA offered 15-year loans and eventually
stretched that out to the 30-year loans we have today.
Another area that the FHA got involved in was the quality of home
construction. Rather than simply financing any home, the FHA set
quality standards that homes had to meet in order to qualify for the
loan. That was a smart move; they wouldn't want the loan outlasting
the building! This started another trend that commercial lenders
eventually followed.
Before FHA, traditional mortgages were interest-only payments that
ended with a balloon payment that amounted to the entire principal of
the loan. That was one reason why foreclosures were so common. FHA
established the amortization of loans, which meant that people got to
pay an incremental amount of the loan's principal amount with each
interest payment, reducing the loan gradually over the loan term until
it was completely paid off..."
The FHA also created the ?amortization? of mortgages. As mentioned
earlier, people were losing their homes because they couldn?t come up
with the balloon payment at the end of the loan term. With
amortization, homeowners could now pay a little bit of the principal
every month, instead of just making interest payments. At the end of
the loan term, no balloon payment was necessary..."
If I can be of further assistance in regards to the history of
amortized loand in the US, please don't hesitate to ask via the
"request for clarification" feature.
~~Cynthia
Search terms used at Google:
"history of mortgages" amortization
"Housing Act" 1934 FHA
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First usage of Amortization in U.S. home loans