History of the development of mortgage lending

Recommendation points

• Mortgage in the Middle Ages
• Recent history – the golden age of mortgages
• American experience
• The modern mortgage market

Mortgage … A word that has become so tightly embedded in our everyday life that it is perceived as something very familiar, familiar, of course, causing ambiguous opinions and criticism, but at the same time it has become an integral part of the life of many Russians, even more Europeans and the vast majority Americans.

Solon also proposed using the citizen’s valuable movable and immovable property as such a pledge. And in order to certify the transaction on the land plot of the borrower, a special post was installed on which the names of the lender and the borrower were indicated, the amount of the debt and the condition – it is prohibited to take out and sell property from this site until the debt is repaid. That is, in principle, the main points of a modern loan agreement appeared already then.

Such a “speaking” pillar was called “mortgage” – “hypotheka”, which in Russian means “support, support”.

Of course, in the future, the use of pillars was abandoned, instead of them special books appeared, called “mortgage”, but the very principle of lending secured by real estate (and not only) property took root and received a new development already during the Roman Empire.

By the way, in the republics of Ancient Greece, the mortgage lending system was quite open, and each lender could at any time familiarize himself with the condition of the land plot or building that was offered to him as collateral. The borrower, on the other hand, could be sure that the terms of the loan were final and in the event of harassment and new demands from the lender, he would be able to file a complaint with the authorities. However, the very terms of mortgages in Ancient Greece were quite strict – the lender had every right to sell the property received as collateral if he was offered a higher price, so in many ways such a system was based on personal relationships and trust between the parties. Such credit transactions were called “fiduciations”.

In the Roman Empire, already in the 1st century AD, the first mortgage institutions were opened, and during the reign of Emperor Anthony Pius, in the 2nd century AD, a system of legislative acts was developed that regulated the activities of such credit institutions.

It is interesting that the first state programs, according to which loans to especially needy segments of the population – orphans and widows, were issued at preferential rates, appeared in ancient Rome, under the Emperor Trajan. At that time, the preferential rate was 5% per annum.

Eugene Ferdinand Victor Delacroix. La justice de Trajan. 1840

At the same time, a loan transaction with a pledge in the form of real estate underwent changes – the lender now had the right to sell the pledged property only if the borrower did not fulfill his obligations to timely pay the collateral. This deal was called “pygnus” – an informal pledge.

Simultaneously with the development of mortgages, the first scammers appeared – some real estate owners mortgaged their property several times and thus received an amount much higher than the actual value of a house or land.

After the fall of the Roman Empire, mortgages awaited a period of some oblivion, until the emergence of sufficiently developed states of Medieval Europe. However, transactions in which the loan was secured by the borrower’s real estate and especially valuable property have been carried out in all centuries, without any intervention of state authorities..

Mortgage in the Middle Ages

A new round of development of mortgage began in the Middle Ages, when the slave system began to give up its positions, and the provision of land for rent became more widespread. Initially, the most common subject of pledge was labor tools, and then real estate.

It is interesting that, for example, in Germany, mortgages as such appeared in the 14th century, but the first state institutions officially providing loans secured by real estate opened only in the 18th century. That is, initially, ordinary citizens entered into lending deals on security without any coordination with government agencies. Later, the role of the authorities in regulating the credit system increased significantly, mortgages appeared, limited in time, the corresponding conditions began to be entered into mortgage books, as well as loans, divided by degree of importance, due to the requirements of the legislation.

In France, mortgage loans became widespread a little later – only in the 16th century, and then it was still not public, was not regulated by the state and was mostly based on trusting relationships between the parties.

In Russia, the first mention of the provision of a loan on security dates back to the 13th century, the state at that time also did not regulate the terms of transactions.

It is because of the lack of interference in the credit relations of the authorities and the lack of relevant laws, already in the 16th century, the first mentions of fraud appeared – as in ancient times, some landowners mortgaged plots several times.

Ilya Repin. Barge Haulers on the Volga. 1870-1873

In the announcements and documents of that time, you can find references to the transfer of the pledged property to “other hands”, on the pledging of the site “already pledged earlier”, which speaks of the widespread distribution of mortgage lending and the emergence of various options for transactions.

Recent history – the golden age of mortgages

The rise in popularity of mortgage lending and the development of the state regulation system began in the second half of the 18th century. The first state bank, which issued loans to landowners on the security of land plots, opened in 1770 in Silesia, after three years of operation, when the system proved its effectiveness and profitability, similar institutions were opened in Prussia.

In Austria, the first bank that specialized in granting loans secured by real estate was opened in 1811, in France – in 1852. By the way, the first French mortgage bank – “Credit foncier de France” is successfully operating to this day.

In Russia, the first noble banks that provided loans on the security of estates and mansions were opened during the reign of Elizabeth Petrovna, in 1754. They credited only the upper strata of society – exclusively the aristocracy. A few years later, the first mortgage banks for the merchant class were opened at the Commerce Collegium and in the St. Petersburg port, and in 1786 the Empress, by her decree, united all these institutions into a single State Loan Bank.

Alexander Grigorievich Varnik. Count Mikhail Mikhailovich Speransky. 1824

Already at the beginning of the 19th century, Mikhail Speransky, a famous statesman of the era of Alexander the First, developed a detailed pledge law, the main provisions of which were included in the Code of Civil Law.

By 1870, 11 banks were already operating in the Russian Empire, with branches opening throughout the country. It was the state mortgage banks that provided loans to peasants to buy land from landlords after the abolition of serfdom, so the role of such institutions in the history of our country cannot be underestimated..

Before the revolution, mortgage in Russia developed no less, and often at a faster pace than in Europe. But after 1917, a loan secured in our country was consigned not only to oblivion – it was officially banned. So in the 90s Russia had to rebuild its mortgage lending system..

American experience

Interest in the mortgage system of the United States of America increased sharply after the financial crisis of 2008, because, as you know, the economic recession that swept almost the entire world began precisely with the mortgage crisis in the United States..

Meanwhile, such a large-scale and influential system began to form not so long ago, before the Great Depression, the United States government was not very interested in the credit collateral system, and mortgages in America were issued mainly by small private banks, and the system itself was not very effective and often went through periods of crisis.

In 1934, the government of Theodore Roosevelt finally came to understand how effectively mortgage lending can be used to revive the country’s economy. The Federal Housing Administration was created, which standardized the conditions for granting loans, under its influence, a secondary lending market began to form. The mortgage loans themselves were categorized as low-risk investments, which contributed to an increase in their popularity among different segments of the population..

John Singer Sargent. Theodore Roosevelt. 1903

In 1938, the Federal Mortgage Lending Association or “Fannie Mae” appeared, with its participation it was possible to establish a lending system in which risks are transferred from a lender to an investor who buys shares and securities on collateral.

In 1970, the Federal Mortgage Lending Commission, better known as “Freddie Mac”, was founded. Both of these organizations are private institutions; government agencies such as the Department of Urban and Housing Development are also involved in the field of mortgage lending..

The massive spread of mortgage loans in the United States was caused by their availability, but in the end, when the Federal Reserve was forced to raise rates and mortgages began to rise in price, many Americans were unable to pay loan payments on time, which ultimately led to the financial crisis.

The modern mortgage market

Today Russia belongs to the countries with a rather weak mortgage system. For comparison: only 10% of Russians applied to banking institutions to get a loan secured by real estate, in European countries this figure reaches 40-50%, and in the USA over 90% of citizens have experience in obtaining a mortgage loan.

As for the average mortgage rates, in Japan you can buy an apartment or house at only 2% per annum, in Germany and France the interest on loans secured by real estate is 4-5%, in the homeland of the mortgage, in Greece the average interest rate settled at 6% per annum, and in the United States – 3.2-3.5%.

As for the initial payment, the US generally accepted practice before the crisis was the provision of a mortgage without an initial payment at all, in Japan and the EU countries most often the borrower has to pay 10% of the value of the real estate in the first payment, Russian banks most often provide mortgage loans subject to an initial payment in the amount of 30% of the value of the loan object.

As you can see, Russian mortgage rates are still several times higher than interest on loans in other developed countries, and the initial payment is quite large, this is the situation that determines the popularity of mortgage loans among the population of our country..