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Industrial Revolution and Housing Finance

Simultaneously, with the origins of real estate development in the late eighteenth century came the rise of building societies accompanying the metalworking industry around Birmingham, England. In the coffee shops and taverns where ideas were freely exchanged, specialized savings organizations were founded to promote homebuilding.13 While most early building societies were initially self-terminating, with the final house built by a remaining member, permanent building societies emerged to become more sustainable financial institutions.

The founding of today’s U.S. savings and loans in the early 1830s began with the legacy of early British settlers. They used their familiarity with British building societies to establish similar lending operations in the United States. The development of savings institutions grew through these building and loan societies and later through mutual savings banks in 1816 with the founding of the Provident Institution Savings of Boston, as is more fully discussed in Chapter 2, “Building Blocks of Modern Housing Finance.”

Mutual savings banks were owned by their depositors rather than by stockholders. Therefore, any profits belonged to the depositors. In their early years, most of the funds deposited in mutual savings banks had to be invested in municipal bonds that financed the growth of cities—hence, the link between infrastructure and residential expansion was ensured. At the end of the Civil War, about one million people had deposited approximately $250 million in 317 U.S. savings banks. By 1900, more than six million depositors had deposited nearly $2.5 billion in 1,000 banks.14

The building and loan associations, in contrast, were created to promote homeownership. The number of associations and assets grew dramatically through the end of the 1800s. Eventually, the building societies took on some aspects of savings banks. They extended loans to building association members who did not have significant funds on deposit to borrow for a home.

Although mutual savings banks and building and loan societies retained individual characteristics, they were often lumped together. When Congress passed the Wilson Tariff Act in 1894 to tax the net income of corporations, building and loan associations and other businesses that made loans only to their shareholders were excluded from taxation. That began a series of provisions granting special legal consideration to savings and loans and the provision of financing for homeownership.

Not surprisingly, other financial innovations arose with the massive shift in structural demand for capital in housing, driven by rapid industrialization and urbanization that accompanied the economic changes of the late eighteenth century. In 1769, Frederick the Great of Prussia structured the first covered bonds in the aftermath of the Seven Years War to ease the credit shortage in agriculture, but he later extended the concept to residential and commercial real estate. Issued by banks and secured by a pool of mortgages, covered bonds resemble mortgage-backed securities, with the exception that bondholders have recourse to the underlying collateral of those bonds because the mortgages stay on the issuing bank’s balance sheet.15

Table 1.2 shows the spread of the use of covered bonds to finance homeownership in different countries over time. The practice has been largely restricted to European countries; the spread to Canada and United States is a recent development. These bonds are the primary source of mortgage funding for European banks, but compared to the securitization used by banks in the U.S., covered bonds have a cost disadvantage due to greater capital requirements.16

Table 1.2 Mortgage Covered Bond Use in Countries Over Time



Start of the mortgage covered bond (pfandbriefe) market

First Danish mortgage covered bond





First Swiss mortgage covered bond

First Asian mortgage covered bond




Czech Republic

First Czech mortgage covered bond

First Hungarian mortgage covered bond



First Baltic mortgage covered bond





First French mortgage covered bond(obligations foncieàres)

First Spanish mortgage covered bond (Cèdulas Hipotecarias)



First Slovak mortgage covered bond



First Polish mortgage covered bond

First Bulgarian mortgage covered bond




United Kingdom

First UK mortgage covered bond

First Irish mortgage covered bond





First Finnish mortgage covered bond


First Lithuanian mortgage covered bond



First Dutch mortgage covered bond

First Portuguese mortgage covered bond (Obrigações Hipotecárias)





First Luxembourgian mortgagebacked securitization (Lettres de Gage hypotheécaires)

First U.S. mortgage covered bond

United States


First Swedish mortgage covered bond

First Norwegian mortgage covered bond





First Canadian mortgage covered bond


First Russian mortgage covered bond

First Italian mortgage covered bond





First Greek mortgage covered bond



First Korean mortgage covered bond

First New Zealand mortgage covered bond

New Zealand


Source: Milken Institute, Capital Access Index, 2005. Information for Denmark is from the European Covered Bond Council, European Covered Bond Fact Book, 2010

Figure 1.2 (a-c) shows the extent to which the mortgage-backed covered bonds played a role in financing homeownership in 2009. Denmark is noteworthy, with covered bonds accounting for 100% of residential loans outstanding and representing more than 140% of the country’s GDP. In the United States, covered bonds are a new development and, thus, still relatively unimportant in financing homeownership.

Figure 1.2

Figure 1.2 The role of covered bonds in selected countries, 2009.

(a) Mortgage Covered Bonds Outstanding

Source: Hypostat, 2009.

Even as urbanization and residential development grew in the eighteenth and nineteenth centuries throughout Europe and the United States, agriculture drove economic growth. Homeownership accompanied reform and expansion of landownership for farming. By 1890 in the United States, two-thirds of all farm housing was owner-occupied; this figure increased throughout the twentieth century. At the same time, homeownership was less prevalent in urban areas. As it became more prevalent, the overall homeownership rate increased from 45% at the beginning of the twentieth century to a range of 60% to 70% by 1960 and has remained at that level ever since (see Figure 1.3).17 Costs associated with homeownership represent a large and growing portion of consumer spending, especially since the turn of the twentieth century, as the homeownership rate increased, the size of homes expanded, and home prices trended upward. Possession of land and property, especially homes, reinforced some main drivers of nation building: thrift, industriousness, geographical and occupational mobility, citizenship, and economic security.

Figure 1.3

Figure 1.3 U.S. homeownership rate, 1900 to Q1 2011.

Note: Data from 1910–1960 is for decades, with annual data thereafter.

Source: U.S. Census Bureau.

From Thomas Jefferson, to Andrew Jackson, to Abraham Lincoln, the democratic assumption was that if most citizens had the opportunity to become farmers or independent artisans and proprietors, they would acquire the values, habits, and discipline required to create a viable democracy. Politicians and economists in this tradition believed that the best way to combine a democratic government with a market society was to make sure that productive assets were distributed widely. This goal became increasingly difficult to achieve after the Civil War.

Let’s next consider the American economy during the late colonial and early national periods. By the end of the eighteenth century, soil exhaustion caused by tobacco planting and European demands for grains created an extraordinary opportunity for ordinary men to produce for trade. The expansion of international commerce created the material base for a social vision of a democratic nation that had little to do with elitist notions of antiquity, the Renaissance, or the mercantilism of Europe.

The surge in demand brought about by trade increased commercial activities in cities and fueled population growth and westward expansion for 30 years after the American Revolution. Jefferson’s vision was democratic, capitalistic, and commercial, linking his interpretation of economic development and how it related to his political goals.18 Access to farmland was not to shelter a traditional way of life but to apply scientific advances in cultivation, processing, marketing, and finance to enhance agricultural profitability.

Appleby explains it this way:

  • It was exactly the promise of progressive agricultural development that fueled his hopes that ordinary men might escape the tyranny of their social superiors both as employers and magistrates. More than most democratic reformers, he recognized that hierarchy rested on economic relations and deference to the past as well as formal privilege and social custom.19

Access to capital in the form of land for the individual owners, opening markets globally for their product, committing funds to internal improvements, and opposing fiscal measures that hurt taxpayers were all part of Jefferson’s policies. Limiting formal authority, deferring to individual freedom, and making a commitment to growth through access to economic opportunity were the keys to economic and political democracy. These notions were the very definition of Americanism, a term that Jefferson coined and counterposed to aristocracy. He argued consistently against the dominance of a new elite of wealth and privilege and gave high priority to laws that would prevent the concentration of landed wealth. In this context, land reform and home finance merged in public and financial policies and programs.

One concern was that the Jeffersonian and Jacksonian ideals of independent economic citizens could not be realized, given the requirements of industrial production. Most Americans rejected industrial wage labor as a permanent status. As Christopher Lasch recounts in his history of political thought during nineteenth-century America:

  • Even when Americans finally came to accept the wage systems as an indispensable feature of capitalism, they continued to comfort themselves with the thought that no one had to occupy the condition of a wage earner indefinitely—that each successive wave of immigrants, starting at the bottom, would eventually climb the ladder of success into the proprietary class...permanent status as wage workers...simply could not be reconciled with the American Dream as it was conventionally understood.20

Focusing on land and homeownership, the Homestead Movement was consistent with the Jeffersonian response to this situation. It was geared to opening opportunities for would-be farmers in an age when this occupation was still considered the norm. Ever since the passage of the Land Ordinance of 1785 and the Land Act of 1796, the government provided assistance to settlers in the form of low-priced land. Other acts followed with regularity, such as the Preemption Act of 1841, which permitted would-be settlers to stake claims on most surveyed lands and to buy up to 160 acres for a minimum price of $1.25 per acre.

In 1862, Lincoln signed into law the Homestead Act. Under its terms, any citizen or person intending to become a citizen who headed a family and was over the age of 21 could receive 160 acres of land, with clear title to be conveyed after five years and payment of a registration fee.21 As an alternative, after six months, the land could be bought for $1.60 an acre. Housing and landownership became common American goals.22

On January 1, 1863, Daniel Freeman and 417 others filed homestead claims, and more pioneers followed. By 1934, more than 1.6 million homestead applications had been filed, and more than 270 million acres (representing 10% of the U.S. land mass) passed to individuals in the largest capital distribution measure in public policy.23 The ethos and purpose of this infused housing policy for years to come.

Considerable restrictions limited the ability of agricultural and industrial workers to access capital and asset markets throughout the nineteenth century. Aside from saving accounts and insurance policies, real estate in the form of houses and lots was a new investment objective of savers.

Without large-scale pension plans, homes were a major repository of wealth, and owner-occupied homes could also become a source of income through rentals and boarding. The choice of home tenure—between renting and owning—emerged in this social, political, and economic context as property markets grew in the nineteenth century with industrialization. Wealth accumulation became concentrated in real property as society became more urban and less rural, and with the associated increasing homeownership rate. These developments set the stage for the genesis of modern housing finance.

In the coming chapters, we outline the market structure, regulatory environment, and banking and financial challenges that formed the environment for the building blocks of housing finance. We examine what went wrong in the recent housing crisis and the variation between countries in developed and emerging markets. Finally, we examine future innovations to bridge market gaps in financing that led to the global housing crisis and the lessons learned for more robust, stable, and sustainable housing markets.

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