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History of Mortgage Rates

Mortgage rates have played a critical part in American history ever since home ownership was tied to the “American Dream”. Purchasing and owning a home is one of the critical parts of the classic American Dream.

However, few people in the middle class can own a home without taking out a mortgage. Thus, mortgage rates have always been important in modern America.

Mortgage rates actually have their roots in ancient civilization. Today, we’re going to explain the history of mortgage rates and explain where mortgage rates could be going in the future – and how you may be able to benefit.

Mortgages in Ancient Civilization

Scholars believe that certain ancient civilizations – like ancient India – had a basic form of the mortgage. In these societies, one party, “the mortgagor”, would make an agreement with another party, the “mortgagee” to exchange property for repayment over time.

If the borrowing party could not meet the terms of the agreement at any point during the life of the agreement, then the pledge was “dead”.

One of the earliest mortgages in recorded history comes from ancient India’s Code of Manu. That ancient Hindu script specifically speaks out against deceptive and fraudulent mortgage practices.

The Code of Manu wasn’t the only ancient script that referenced mortgages. Other ancient scripts included:

  • Dante’s Inferno, which mentioned that “usurers” had a special place in the seventh circle of hell
  • In Jewish law, God condemns money lending, and the sacred Talmudic scriptures reportedly reference early mortgage history
  • The ancient Greeks and Romans borrowed certain concepts from Judaic sources, like the concept of debt security by assigning the possession of property to the creditor while the debtor remains in control of it until the debt is repaired

Mortgage Markets in America

America’s mortgage market started to grow significantly in the Post-World War II era. Between 1949 and the year 2000, mortgages rose from a smaller financial product to the largest source of debt in the nation.

Some of the interesting stats from this period include the fact that mortgage debt to income ratios rose from 20% in 1949 to 73% in 2000.

At the same time, mortgage debt to household assets ratios rose from 15% to 41%.

Many attribute this growth to the American federal government’s intervention in mortgage-based lending, setting it apart from the rest of the world and intrinsically tying US debt to mortgages.

The first mortgage in American history, however, can be traced way back to 1781, when America’s first legitimate commercial bank was established. This led to a new system of banknotes exchanges, governmental intervention, and banking liability. Namely, the reduced liability of bankers created the foundations for growth in the mortgage market.

1800s and the Rise of American Banking

The American banking system grew by leaps and bounds throughout the 19th century. Banks emerged all across America. Each bank catered to the unique regional requirements of its area. Banks in rural areas west of the Mississippi, for example, would sell mortgages to farmers.

Between 1820 and 1860, the number of banks in America increased enormously, leading to a huge increase in the number of mortgages. During this period, money-lending institutions also issued between 55 and 700 million dollars in mortgage loans.

Banking activity was further encouraged by the National Bank Act of 1864, which established national bank charters and gave the federal treasury greater security. This also led to the formation of a nationalized currency, the creation of which was spurred by the Civil War. Instead of relying on gold, silver, and copper reserves for capital requirements, the United States began printing paper notes. This helped to finance the high costs of the Civil War and would change America’s financial history forever.

This nationalized currency would replace state and bank bonds. New charters allowed for the banking system to expand. Nevertheless, national banks were heavily restricted from investing in mortgages and the long-term investment markets.

Early, Trust-based Mortgages Start to Appear in Small State Banks in 1893

The restrictions on bank mortgages led to a unique type of mortgage we don’t see today: these early mortgages started to appear in small banks in 1893. Banks would issue bonds as acknowledgements of debts based on the trust of the debtor alone.

Although the United States government favored these types of mortgages, they were vastly different from modern mortgages.

One of the key differences was the term: these mortgages only lasted for about six years.

Another difference was the property value: instead of covering 80% or more of the property’s value, mortgages typically covered less than half of the property’s value. This is understandable because it limited the bank’s exposure to risk. In a trust-based mortgage system, unwise banks could easily lose money to unscrupulous property buyers.

Western Versus Eastern Mortgages

If you’ve read anything about American history, then you know that the American government made a big push to encourage citizens to settle the vast western frontiers of its territory.

That’s why it’s so puzzling to hear about mortgage rate history during this time. Towards the end of the 19th century, America’s banking system was a disorganized system of uneven mortgage loans with no cohesion or standardization.

One thing that was common across lenders, however, was that mortgages were cheaper and easier to get in the heavily populated areas of the northeast.

Meanwhile, settlers in the west faced enormously higher rates.

It’s thought that lending institutions saw huge potential in the urban areas of the Northeast. Thus, they encouraged the injection of investment funds into city projects and urban expansions.

Despite the difference in mortgage rates between the east and west, the population of western cities doubled during this time period. Nevertheless, many historians believe that the population growth would have been even more significant if western mortgage rates had been closer in value to eastern mortgage rates during this time period.

Mortgages and the Great Depression

Before the Great Depression, homeowners would renegotiate their mortgages every year. After the Great Depression, the US government decided to intervene, leading to the formation of several major regulatory bodies that would pave the way for modern American mortgages. Those regulatory bodies included:

  • Federal Housing Administration
  • Federal National Mortgage Association
  • Home Owner’s Loan Corporation

During the Great Depression, property values across America plummeted. This, in turn, sent the mortgage market into a nosedive. When homeowners went to renegotiate their mortgages annually – like they always did – they found that banks refused to refinance. Thus, many homeowners defaulted on their loans.

Approximately 10% of homes across America faced foreclosure. Banks were under enormous pressure to resell repossessed property.

In an effort to spur investment, banks provided government-sponsored bonds to reinstate mortgages in default. This led to the extension of terms and fixed rates to create self-amortizing loans.

Together, these efforts gradually increased investment confidence and boosted the hopes of homeowners and prospective homeowners. And then World War II happened.

America’s Mortgage History After World War II

World War II’s biggest impact on America’s mortgage history came in the form of the G.I. Bill for veterans. Veterans coming back from overseas battlefields were given benefits as stated in the GI Bill.

The most important among these benefits (at least for this discussion) was the formation of the VA mortgage insurance program, often known simply as a VA loan. This program gave veterans attractive rates on mortgages, enabling many returning veterans to purchase homes at competitive prices.

The millions of returning veterans applying for mortgages on homes led to a huge stimulation in the housing market.

Other changes during this period included:

  • The loan to value ratio of mortgages increased 95%
  • The maximum mortgage term was extended to 30 years

Meanwhile, other regulatory agencies were introduced to control the housing and mortgage markets.

In 1968, for example, the Government National Mortgage Association was created with the goal of bringing uniformity to the American mortgage market. To do that, the GNMA introduced financial instruments.

Then, in 1970, the Federal Home Loan Mortgage Corporation sought to promote ownership even further. One final important change occurred in the 1980s when, under the discretion of the Federal Reserve, adjustable rate mortgages were re-introduced to the marketplace.

As these governmental organizations grew and grew, the government became more and more involved in America’s mortgage industry. By 2003, government mortgage institutions accounted for 43% of the total mortgage market.

The American Government Gets Involved in Mortgages

Up until the 1980s, private institutions and banks were the biggest mortgage lenders in America. However, as these institutions faced problems, the American government decided to intervene.

This paved the way for Fannie Mae and Freddie Mac. These institutions weren’t classified as fully governmental organizations, nor were they totally private. Instead, they were government-sponsored enterprises, or GSEs.

Fannie Mae and Freddie Mac were created by Congress with the goal of providing liquidity, stability, and affordability to America’s mortgage market. Fannie Mae was originally created in 1938, while Freddie Mac was created in 1970 as a private company.

In order to do that, Fannie Mae and Freddie Mac provided liquidity to thousands of banks. These banks, in turn, used that liquidity to provide affordably-priced mortgages to prospective homeowners. Fannie Mae and Freddie Mac provided this liquidity to banks in the form of ready-to-access funds on reasonable terms.

The Creation of Mortgage-backed Securities

This is where things get a little complicated. Fannie Mae and Freddie Mac continued to intervene in America’s mortgage industry.

In addition to providing liquidity to banks, these two organizations would buy mortgages from lenders and keep these mortgages in their investment portfolios. Many of these loans would be packaged and bundled into the infamous mortgage-backed securities (MBS), which were then sold.

Lenders would use the proceeds of these sales to engage in further lending and investment activity.

The Federal Housing Finance Agency paints Fannie Mae and Freddie Mac in a positive light. Here’s what that site has to say about it:

“By packaging mortgages into MBS and guaranteeing the timely payment of principal and interest on the underlying mortgages, Fannie Mae and Freddie Mac attract to the secondary mortgage market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing. That makes the secondary mortgage market more liquid and helps lower the interest rates paid by homeowners and other mortgage borrowers.”

The site also explains that the two organizations can help stabilize mortgage markets during times of turmoil.

Mortgage Rate History in the United States

We know all about the history of mortgages in America thus far. But what about the actual mortgage rates? How much did mortgages cost throughout American history? Are we paying more or less for mortgages today than we did in the past?

One of the best sources for this information is Freddie Mac, which publishes the average rates for 30 year fixed rate mortgages online. That data only goes back to 1971, but it represents the average monthly rates across all mortgages in America.

Freddie Mac is famous for its market surveys. Every week, Freddie Mac surveys lenders across America. Then, it collects all the data about rates, fees, and points and averages it across the country. This is called the Primary Mortgage Market Survey, or PMMS, and it plays a critical role in economic decisions made across the country.

Thanks to Freddie Mac, for example, we know the following average rates for mortgages in the United States as of October 2015:

  • 30 Year Fixed Rate Mortgage (FRM): 3.79%
  • 15 Year FRM: 2.98%
  • 5-1 Adjustable Rate Mortgage (ARM): 2.89%
  • 1 Year ARM: 2.62%

Jumping every 5 years, here’ what the annual average mortgage rate data tells us about the average rates of 30 year fixed rate mortgages over the years across America.

  • 1972: 7.38%
  • 1977: 8.85%
  • 1982: 16.04%
  • 1987: 10.21%
  • 1992: 8.39%
  • 1997: 7.6%
  • 2002: 6.54%
  • 2007: 6.34%
  • 2012: 3.66%

In September, 2015, the average rate for a 30 year mortgage across America was 3.89%. Mortgage rates have been consistently low since 2008. The lowest average rate for mortgages occurred in 2012, when the average 30 year mortgage was priced at a rate of 3.66%. That year, mortgage rates fell to a historic low of 3.35% in November and December.

Here’s what Freddie Mac’s data looks like in graph form:

Freddie Mac only started tracking its average annual mortgage rates in 1971, which is why this data only goes back to this period.

Where Will Mortgage Rates Go in the Future?

The Federal Reserve has deliberately kept interest rates low since the end of 2008 in an effort to stimulate the economy.

However, with the United States economy growing stronger and stronger, it’s likely that we’ll see interest rates continue to go up. Between 2015 and 2016, American mortgage rates could increase to around 5%, according to some industry experts.

If you want to be extra cautious, then some homeowners are paying extra for rate locks, which locks in your rate at a certain low interest rate. Lenders charge a premium for rate locks, but when used right, they can save huge amounts of money. If you think that mortgage rates are about to increase substantially in the near future, then a rate lock might be a good idea.

To best decide on your mortgage, it’s important to realize what kinds of historical events trigger major rate changes.

Why Do Mortgage Rates Change?

Mortgage rates have changed throughout history for a variety of reasons. Here are some of the reasons mortgage rates have changed in the past – and may change in the future:

The 1980s Inflation Crisis Leads to 18.45% Interest Rates

In 1981, American mortgage rates hit their all-time high of 18.45%. Today, it seems unthinkable to pay 18.45% mortgage rates on a 30 year mortgage. In 1981, however, homeowners had no other choice.

This spike occurred because the Federal Reserve was waging a war against inflation. Facing double-digit inflation figures, America’s central bank drove interest rates higher.

Understandably, high interest rates had a negative effect on the housing market. Houses had never been more expensive. Many Americans were priced out of the market, leading to slumping retail sales.

The 2008 Housing Crash Leads to Cheap Interest Rates

The opposite occurred during the market crash of 2007 and 2008. Facing an economy in recession, the Federal Reserve needed to do something to spur the economy. As is the norm during these situations, the central bank lowered interest rates to encourage spending. This made homes more affordable than ever before – leading to some of the all-time mortgage rate lows that we mentioned above.

Some of the other reasons why mortgage rates fluctuate include:

  • Changes in the economy (higher economic growth typically leads to higher interest rates, which in turn raises mortgage rates)
  • Changes in economic forecasts (regardless of actual economic performance, the change in economic forecasts can give insight into how mortgage rates are expected to behave)
  • Changes in money supply (government policy can control interest rates and rein in inflation by adjusting money supply)
  • Certain economic indicators (Consumer Price Index, Producer Price Index, etc.)
  • Mortgage market conditions (if sales of new homes are steadily increasing, then lenders may push mortgage rates upward because they expect demand to increase)

By carefully weighing all of these economic indicators, you can make an intelligent and informed decision about upcoming mortgage rates.

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