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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 United States, mortgages became widely used
starting in 1934. In that year, the Federal
Housing Administration (FHA) 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 U.S. 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.) |
