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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

Year

Country

Comment

2650-2575 B.C.

Egypt

Property mortgage used in the Old Kingdom.

1000 B.C.

China

Pawnshop mortgages used.

400 B.C.

Greece

Mortgages and personal loans secured by real estate.

1644

China

Emergence of mortgage loan industry during Qing Dynasty.

1700

Denmark

First mortgage institution funded as an association.

1769

Prussia

Start of the mortgage covered bond (Pfandbriefe) market.

1775

United Kingdom

First known building society for housing finance formed.

1797

Denmark

First Danish mortgage bank.

1831

United States

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

1836

Sweden

First Swedish mortgage institution, Landshypotek, established.

1836

United Kingdom

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

1850

Denmark

First Mortgage Credit Act passed.

1852

France

France established first mortgage bank, Credit Foncier de France.

1850s

Australia

First building societies established.

1855

South Africa

First building societies established.

1859

Canada

Building Societies Act passed.

1861

Spain

First Mortgage Law (Ley Hipotecaria) passed.

1862

Germany

First private mortgage bank, Frankfurter Hypothekenbank.

1897

Canada

Loan Corporations Act passed.

1897

Indonesia

State housing bank of Indonesia founded.

1900

Germany

Mortgage Bank Act (HBG) entered into force.

1909

South Africa

First building societies legislation created.

1909

United States

First credit union established.

1920

India

First Land Mortgage Bank started at Jhang in Punjab.

1932

United States

Federal Home Loan Bank Act passed.

1933

Mexico

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

1935

Canada

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

1938

United States

Federal National Mortgage Association (Fannie Mae) chartered.

1950

Japan

Japan Housing Loan Corporation established.

1957

South Korea

First mortgage issued by Korea Industrial Bank.

1961

Japan

Private-sector began to provide housing loans.

1964

Brazil

Housing Finance System was introduced.

1970

United States

Federal Home Loan Mortgage Corporation (Freddie Mac) chartered.

1971

India

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

1985

China

First home mortgage loan issued by China Construction Bank.

1995

China

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

Mid-1990s

Russia

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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