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The First Housing Finance Innovations

The credit mechanisms that have amplified the growth and economic effects of the housing sector have a long and, at times, unpleasant history.

The first evidence of mortgages was horoi, or “mortgage stones,” in ancient Athens (see Figure 1.1). These were markers used to indicate that a property was mortgaged and to identify the creditors.11 By the late twelfth century, mortgages had reappeared in England in the form of common-law instruments to enable the purchase and sale of property. In a property sale, lenders could recover real estate debts that were not paid.

Figure 1.1

Figure 1.1 Mortgage boundary stone, Athens agora market, 215 B.C.

Source: Center for Epigraphical and Paleographical Studies, Ohio State University.

Initially, ownership rights of property were extended from the earth’s center to the sky. Later, however, they were constrained to surface rights, as “air rights” for further vertical development and their transfer increased in value through increasingly dense urban settlement.

Reverse mortgages, which provided benefits for elderly owners by allowing them to extract equity, did not appear until the 1930s. The ability to borrow against the equity in homes came later. Table 1.1 provides selected developments in the housing and mortgage markets in various countries over the past millennia.

Table 1.1 Historical Developments in Housing and Mortgage Markets




2650-2575 B.C.


Property mortgage used in the Old Kingdom.

1000 B.C.


Pawnshop mortgages used.

400 B.C.


Mortgages and personal loans secured by real estate.



Emergence of mortgage loan industry during Qing Dynasty.



First mortgage institution funded as an association.



Start of the mortgage covered bond (Pfandbriefe) market.


United Kingdom

First known building society for housing finance formed.



First Danish mortgage bank.


United States

Oxford Provident Building Association established by immigrants. It was modeled on the British building societies and was the first savings association.



First Swedish mortgage institution, Landshypotek, established.


United Kingdom

Building Societies Act becomes first comprehensive mortgage banking regulation in Europe.



First Mortgage Credit Act passed.



France established first mortgage bank, Credit Foncier de France.



First building societies established.


South Africa

First building societies established.



Building Societies Act passed.



First Mortgage Law (Ley Hipotecaria) passed.



First private mortgage bank, Frankfurter Hypothekenbank.



Loan Corporations Act passed.



State housing bank of Indonesia founded.



Mortgage Bank Act (HBG) entered into force.


South Africa

First building societies legislation created.


United States

First credit union established.



First Land Mortgage Bank started at Jhang in Punjab.


United States

Federal Home Loan Bank Act passed.



Development bank Banco de Obras Publicas created to finance low-income housing.



First significant legislation on housing finance, the Dominion Housing Act, passed.


United States

Federal National Mortgage Association (Fannie Mae) chartered.



Japan Housing Loan Corporation established.


South Korea

First mortgage issued by Korea Industrial Bank.



Private-sector began to provide housing loans.



Housing Finance System was introduced.


United States

Federal Home Loan Mortgage Corporation (Freddie Mac) chartered.



Formal housing finance system in India first came with the setting up of HUDCO.



First home mortgage loan issued by China Construction Bank.



First home mortgage loan administrative approach issued by People's Bank of China.



Mortgage loans became available in Russia.

Sources: Mistress of the House, Mistress of Heaven: Women in Ancient Egypt, Anne K. Capel, Glenn Markoe, Cincinnati Art Museum, Brooklyn Museum, 1996. http://om-paramapoonya.hubpages.com/hub/Pawnshop-Loans. A History of Interest Rates, 4th ed., Sidney Homer and Richard Sylla, 2005. Securitization of the Financial Instrument of the Future, Vinod Kothari, 2006. Improving Unification of Euro Debt Markets: A Concrete Case Study of Covered Bonds, AMTE Final Report. 2005. Housing Finance Policy in Emerging Markets, Loiiüc Chiquier, Michael J. Lea, 2009. Mortgage Finance in Denmark, Torben Gjede, 1997. National Housing Finance Systems: A Comparative Study, Mark Boléat, 1985. Scandi Covered Bond Handbook 2010, Christian Riemann-Andersen and Kristian Myrup Pedersen, 2010. The History of Building Societies in the UK, The Building Societies Association, 2001. European Covered Bond Fact Book, 2006. Credit Union and Building Society Group, www.comesbacktoyou.com.au/what-are-credit-unions-building-societies-/history-of-credit-unions-building-societies. Real Property Law—Spain Report, Pedro Garrido, 2009. The German Pfandbrief: A benchmark for Europe, Verband Deutscher Hypothekenbanken and Association of German Mortgage Banks, 1998. Handbook on the History of European Banks, Manfred Pohl, Sabine Freitag, and European Association for Banking History, 1994. http://blog.sina.com.cn/s/blog_4865b35c0100gy57.html. Housing Finance and Mortgage-Backed Securities in Mexico, L. Zanforlin and Marco Espinosa-Vega, 2008. Housing Finance in Japan, Miki Seko, 1994. Wu Xiaoling: Strengthening China’s Financial Industry in the Process of Opening up 2006, China Housing Finance Report, People’s Bank of China, 2004 (www.pbc.gov.cn/history_file/files/att_15025_1.pdf).

Innovations in housing and expansion of ownership track closely with land reform. In the eighteenth century, when this process began to emerge, most land was “entailed.” This meant that the landed gentry and noblemen owned all real estate in perpetuity.

Early land developers crafted financial contracts that were rolling options—the real estate investor bought not an entire large tract, but a segment for development and resale accompanied by a purchased option for the adjacent segment. The pioneer in this effort was John Wood and his son, whose projects in Bath, England, used this method to integrate individual housing units and related commercial space to develop the city. Wood went beyond the city limits of Bath to an area unencumbered by regulations and leased land for 99 years, with each lease based on the performance of the development of the previous one. By utilizing options, he was able to circumvent land laws, raise debt and equity financing, and lease and manage related properties in Bath developments. This was the beginning of urban real estate development and residential housing finance as we know it today12

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