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Real Estate Mortgage & Historical Financing Perspective
The1930s initiated much change favorable to the borrower.
Prior to this time, the borrower would generally receive a
loan for only around 5 years, interest payments were made
periodically and the total principal amount was due in
entirity, at the end of this 5 year period. This system
made it difficult for the borrower and further conditions
brought the economic cisis of 1929, resulting in mass
foreclosures, homelessness and lenders being stuck
with properties of little value.
The Federal Government initiated programs to remedy this
crisis. The Federal Housing Administration (FHA) organization
was formed where fixed rate loans were created for longer
periods of up to forty years and a combined principal and
interest payment was paid monthly.
An unprecedented withdrawal of funds, at the beginning
of the Depression, brought a need for stability for financial
institutions so the Federal Savings and Loan Insurance
Corporation (FSLIC) and the Federal Deposit Insurance
Corporation (FDIC) was formed, to insure the funds of
individual depositors. These organizations restored
confidence in the depositors, housing construction
increased and economy expanded especially after
World War II. The market recovered, even in worrisome
times and the need for "new starts" in housing
construction continued to grow.
During the 1970's there was a severe credit crunch
because depositors were withdrawing their funds from
a low interest regular savings account to reinvest into
more high-yield investments. This practice, known as
disintermediation, forced institutions to increase their
interest rates on savings accounts to compete. Many
institutions went out of business by losing money because
borrowers were still paying the same low fixed rate that was
assured to them years before
The financial environment has evolved into different types
of loan packages being developed to accommodate changes
in the market and still remain profitable.
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