A Brief History of the Mortgage, From Its Roots in Ancient Rome to the English ‘Dead Pledge’ and its Rebirth in America

Yves here. Michael Hudson fans might enjoy this deep dive into the backstory of the development of a key type of lending, the collateralized loan known as a mortgage. Notice even in their early form, they often used chattel as opposed to real estate, and one type sounds a lot like our modern pawn shop. This illustrates that ancient finance techniques were often very sophisticated. Derivatives date to at least 1788 BC.

Even though the modern part of this account may seem oversimplified, hopefully some of you will enjoy learning about the origins of the mortgage.

By Michael J. Highfield, Professor of Finance and Warren Chair of Real Estate Finance, Mississippi State University. Originally published at The Conversation

The average interest rate for a new U.S. 30-year fixed-rate mortgage topped 7% in late October 2022 for the first time in more than two decades. It’s a sharp increase from one year earlier, when lenders were charging homebuyers only 3.09% for the same kind of loan.

Several factors, including inflation rates and the general economic outlook, influence mortgage rates. A primary driver of the ongoing upward spiral is the Federal Reserve’s series of interest rate hikes intended to tame inflation. Its decision to increase the benchmark rate by 0.75 percentage points on Nov. 2, 2022, to as much as 4% will propel the cost of mortgage borrowing even higher.

Even if you have had mortgage debt for years, you might be unfamiliar with the history of these loans – a subject I cover in my mortgage financing course for undergraduate business students at Mississippi State University.

The term dates back to medieval England. But the roots of these legal contracts, in which land is pledged for a debt and will become the property of the lender if the loan is not repaid, go back thousands of years.

Ancient Roots

Historians trace the origins of mortgage contracts to the reign of King Artaxerxes of Persia, who ruled modern-day Iran in the fifth century B.C. The Roman Empire formalized and documented the legal process of pledging collateral for a loan.

Often using the forum and temples as their base of operations, mensarii, which is derived from the word mensa or “bank” in Latin, would set up loans and charge borrowers interest. These government-appointed public bankers required the borrower to put up collateral, whether real estate or personal property, and their agreement regarding the use of the collateral would be handled in one of three ways.

First, the Fiducia, Latin for “trust” or “confidence,” required the transfer of both ownership and possession to lenders until the debt was repaid in full. Ironically, this arrangement involved no trust at all.

Second, the Pignus, Latin for “pawn,” allowed borrowers to retain ownership while sacrificing possession and use until they repaid their debts.

Finally, the Hypotheca, Latin for “pledge,” let borrowers retain both ownership and possession while repaying debts.

The Living-Versus-Dead Pledge

Emperor Claudius brought Roman law and customs to Britain in A.D. 43. Over the next four centuries of Roman rule and the subsequent 600 years known as the Dark Ages, the British adopted another Latin term for a pledge of security or collateral for loans: Vadium.

If given as collateral for a loan, real estate could be offered as “Vivum Vadium.” The literal translation of this term is “living pledge.” Land would be temporarily pledged to the lender who used it to generate income to pay off the debt. Once the lender had collected enough income to cover the debt and some interest, the land would revert back to the borrower.

With the alternative, the “Mortuum Vadium” or “dead pledge,” land was pledged to the lender until the borrower could fully repay the debt. It was, essentially, an interest-only loan with full principal payment from the borrower required at a future date. When the lender demanded repayment, the borrower had to pay off the loan or lose the land.

Lenders would keep proceeds from the land, be it income from farming, selling timber or renting the property for housing. In effect, the land was dead to the debtor during the term of the loan because it provided no benefit to the borrower.

Following William the Conqueror’s victory at the Battle of Hastings in 1066, the English language was heavily influenced by Norman French – William’s language.

That is how the Latin term “Mortuum Vadium” morphed into “Mort Gage,” Norman French for “dead” and “pledge.” “Mortgage,” a mashup of the two words, then entered the English vocabulary.

Establishing Rights of Borrowers

Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans in the 11th-16th centuries were unpredictable. Lenders could demand repayment at any time. If borrowers couldn’t comply, lenders could seek a court order, and the land would be forfeited by the borrower to the lender.

Unhappy borrowers could petition the king regarding their predicament. He could refer the case to the lord chancellor, who could rule as he saw fit.

Sir Francis Bacon, England’s lord chancellor from 1618 to 1621, established the Equitable Right of Redemption.

This new right allowed borrowers to pay off debts, even after default.

The official end of the period to redeem the property was called foreclosure, which is derived from an Old French word that means “to shut out.” Today, foreclosure is a legal process in which lenders to take possession of property used as collateral for a loan.

Early US Housing History

The English colonization of what’s now the United States didn’t immediately transplant mortgages across the pond.

But eventually, U.S. financial institutions were offering mortgages.

Before 1930, they were small – generally amounting to at most half of a home’s market value.

These loans were generally short-term, maturing in under 10 years, with payments due only twice a year. Borrowers either paid nothing toward the principal at all or made a few such payments before maturity.

Borrowers would have to refinance loans if they couldn’t pay them off.

Rescuing the Housing Market

Once America fell into the Great Depression, the banking system collapsed.

With most homeowners unable to pay off or refinance their mortgages, the housing market crumbled. The number of foreclosures grew to over 1,000 per day by 1933, and housing prices fell precipitously.

The federal government responded by establishing new agencies to stabilize the housing market.

They included the Federal Housing Administration. It provides mortgage insurance – borrowers pay a small fee to protect lenders in the case of default.

Another new agency, the Home Owners’ Loan Corp., established in 1933, bought defaulted short-term, semiannual, interest-only mortgages and transformed them into new long-term loans lasting 15 years.

Payments were monthly and self-amortizing – covering both principal and interest. They were also fixed-rate, remaining steady for the life of the mortgage. Initially they skewed more heavily toward interest and later defrayed more principal. The corporation made new loans for three years, tending to them until it closed in 1951. It pioneered long-term mortgages in the U.S.

In 1938 Congress established the Federal National Mortgage Association, better known as Fannie Mae. This government-sponsored enterprise made fixed-rate long-term mortgage loans viable through a process called securitization – selling debt to investors and using the proceeds to purchase these long-term mortgage loans from banks. This process reduced risks for banks and encouraged long-term mortgage lending.

Fixed- Versus Adjustable-Rate Mortgages

After World War II, Congress authorized the Federal Housing Administration to insure 30-year loans on new construction and, a few years later, purchases of existing homes. But then, the credit crunch of 1966 and the years of high inflation that followed made adjustable-rate mortgages more popular.

Known as ARMs, these mortgages have stable rates for only a few years. Typically, the initial rate is significantly lower than it would be for 15- or 30-year fixed-rate mortgages. Once that initial period ends, interest rates on ARMs get adjusted up or down annually – along with monthly payments to lenders.

Unlike the rest of the world, where ARMs prevail, Americans still prefer the 30-year fixed-rate mortgage.

About 61% of American homeowners have mortgages today – with fixed rates the dominant type.

But as interest rates rise, demand for ARMs is growing again. If the Federal Reserve fails to slow inflation and interest rates continue to climb, unfortunately for some ARM borrowers, the term “dead pledge” may live up to its name.

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  1. Alex Morfesis

    But do we really have mortgages today as they exist in statutes or are homeowners simply contributing capital to loan pools ?? And half the country does not get offered mortgages…trust deed loans are not mortgages in any real sense…they operate no different than car loans with quickee conversion of ownership and occupancy rights without any judicial oversight nor remedy. Americans overpay for interest rates compared to other oecd economies. The excess/surplus is then repurposed and a guarantee is acquired after the homeowner gets funding by some form of reinsurance or other derivative instruments. To collect on a claim judicially or otherwise requires a pecuniary loss but no parties owning the instrument have a loss. The issue is the guarantees are withheld from the courts when they bring suit against a homeowner thus depriving the court of it’s capacity to use its discretion and deliver an equitable ruling. To further complicate the matter, the nonsense with MERS to avoid paying required fees to government county and local property records custodians due to the trading/churning that goes on with the financial instruments behind the home finance system creates a broken instrument. MERS can not be a nominee as it is not a fiduciary in any which way shape nor form…it’s ip is listed with the federal government as simply a computer program company since there are many other companies that use MERS for their ip…moi had imagined there would have been an omnibus understanding with MERS eliminated and a large amount of reformation and new documents being signed but too much greed on wall street (perhaps tied to all the isda on hold “mediations” to avoid calling “an event”) and too much free house nonsense on the left just led to punting on the issue. On paper folks might be signing documents proclaiming a note and mortgage but me wearing a shirt that say Kareem Abdul Jabbar doesn’t make me 7 ft tall….

    1. jefemt

      Remember Linda Green!

      I would LOVE to see how many of the Mortgage Servicers would be able to produce an original ink-signed promissory note…

      Secondary market lending generally does not provide for the use of a note, mortgage, judicial foreclosure, and a year’s right of redemption.

      Caveat Emptor.

  2. michael hudson

    re: Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans in the 11th-16th centuries were unpredictable. Lenders could demand repayment at any time. If borrowers couldn’t comply, lenders could seek a court order, and the land would be forfeited by the borrower to the lender.

    Me: When Henry III imposed a tallage on Jews (often while imposing a tallage on Englishmen as well), and the Jews insisted on payment but the landholder couldn’t pay, this claim passed to the king, because England’s Jews were obliged to live in designated cities and could not own land. The result was that imposing a heavy tax on the Jews (as King John did in 1207) transferred land to the king.
    Good luck on trying to get the king to avoid this increase in his landholdings.

  3. rOn cOn cOMa

    On account of Michael Hudson’s reputation, I’m surprised that the government of Mississippi would let anyone named Michael near their state!

    1. Earthling

      The professor at MSU is Michael Highfield, who technically is a part of the government of Mississippi. I’ve known some very good scientists and analysts in Mississippi, public and private alike, and it’s a shame the prejudice they are up against, as a result of their address.

  4. Anthony G Stegman

    30 year mortgages are albatrosses around the necks of many mortgagees. Home ownership may be great, but 30 year debt burdens are not. Just as motor vehicle prices are driven onward and upwards by extending loan periods, housing prices are driven upwards by 30 year mortgages. I’ve always viewed a house as shelter, not an investment. It ought not be considered an asset as it generates no income for the majority of home owners. The way homes are financed contributes significantly to economic destabilization.

    1. Yves Smith Post author

      Did you miss that banks offer 15 year mortgages, and most consumers reject them? And that most homes are owned for <30 years so the principal balance is repaid out of the sale proceeds?

      1. JohnnySacks

        Or just take the 30, pay it as if it was a 15, and not worry so much about ups and downs of jobs if handcuffed to a 15. But I’d take that 18% on a 100k house in 1981 in a heartbeat over the 9% on a $200k house in 1991.
        It’s the principal, and the industry never misses the opportunity to pile more onto the principal and restart the payment clock at zero – if the payments are lower the customers fall over themselves to sign. Something’s badly missing in our education system.

  5. Soredemos

    This seems like a good place to post an update, in case anyone was wondering: I bit the bullet and simply wired Wells Fargo a rather eye-watering amount of money to pay off the mortgage my mother left behind outright.

    A staggeringly inept, or just evil, bank; they went several months before bothering to inform me that the mortgage hadn’t been frozen like all her other debt obligations, and had kept accruing interest and overdue fees. So in the end I had to pay 2k extra on top of what I would have paid if I had just paid it right away after her death. Never do business with any big bank, but if you have to, make sure it isn’t Wells Fargo.

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