At common law, a mortgage was a conveyance of land that on its
face was absolute and conveyed a fee simple estate, but which was in
fact conditional, and would be of no effect if certain conditions were
not met --- usually, but not necessarily, the repayment of a debt to the
original landowner. Hence the word "mortgage," Law French for "dead
pledge;" that is, it was absolute in form, and unlike a "live gage", was
not conditionally dependent on its repayment solely from raising and
selling crops or livestock, or of simply giving the fruits of crops and
livestock coming from the land that was mortgaged. The mortgage debt
remained in effect whether or not the land could successfully produce
enough income to repay the debt. In theory, a mortgage required no
further steps to be taken by the creditor, such as acceptance of crops
and livestock, for repayment.
The difficulty with this arrangement was that the lender was absolute
owner of the property and could sell it, or refuse to reconvey it to the
borrower, who was in a weak position. Increasingly the courts of equity
began to protect the borrower's interests, so that a borrower came to
have an absolute right to insist on reconveyance on redemption. This
right of the borrower is known as the "equity of redemption".
This arrangement, whereby the mortgagee (the lender) was on theory the
absolute owner, but in practice had few of the practical rights of
ownership, was seen in many jurisdictions as being awkwardly artificial.
By statute the common law position was altered so that the mortgagor
would retain ownership, but the mortgagee's rights, such as foreclosure,
the power of sale and the right to take possession would be protected.
In the United States, those states that have reformed the nature of
mortgages in this way are known as lien states. A similar effect was
achieved in England and Wales by the Law of Property Act 1925, which
abolished mortgages by the conveyance of a fee simple. In the U.S.
mortgages got really started in 1934. In that year the Federal Housing
Administration lowered the down payment requirements by offering 80
loan-to-value loans. Next, banks, insurance companies, and other lenders
followed the example. The FHA also lengthened loan terms by first
introducing 15-year loans to supplant 3, 5, and 7-years loans which
ended with a balloon payment.
Until the 1930s only 40% of households owned homes, the rate today is
nearly 70%.
In 2003, total U.S. residential mortgage production reached a record
level of $3.8 trillion through record low interest rates (though these
continue to vary according to credit rating).
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