ASSIGNMENT, HISTORY OF MORTGAGES
EL-HAM AMADU
A good illustration of long-term funding is a mortgage. Mortgage financing entails, like most
other types of loans, complete return of the money borrowed to buy the property, plus any
applicable interest that is charged in accordance with the terms indicated in the mortgage
agreement.
One of the main supports of the financial systems of many nations is the mortgage industry.
The mortgage market has consequences for welfare since it affects people’s capacity to meet
one of the most fundamental needs of life, shelter, in addition to its role in aiding in the
development of capital markets and offering a powerful credit channel for monetary policy.
When was the mortgage invented?
The concept of a home mortgage was foreign to the majority of Americans before the 1930s.
At the time, a mere 40% of families owned their homes. Those who didn’t have the funds to
buy a house outright were pretty much out of luck.
Mortgages finally entered the U.S. housing market in the early 1930s. Insurance companies,
not financial institutions, implemented the idea as a way to take advantage of borrowers during
the Great Depression. If a borrower failed to keep up with their payments, they would gain
ownership of the property.
Loans that were difficult to obtain
Loans that were available during this time were anything but favourable for borrowers.
According to this resource from HowStuffWorks, loan terms were limited to 50% of the
home’s market value. Borrowers had only three to five years to pay off their loan, while also
accounting for a balloon payment at the end of their term.
Very few Americans could purchase a home due to such unrealistic loan requirements. Families
settled on the notion of renting for the foreseeable future, even if it meant never having a place
of their own. Thankfully, this wouldn’t be the case much longer.
More affordable homeownership
President Franklin D. Roosevelt took charge of the real estate market after the foreclosure of
hundreds of thousands of homes. It all started with the buying of 1 million defaulted mortgages
and changing them to fixed-rate, long-term loans. Borrowers had the option of paying back a
15-year mortgage, or eventually, a 30-year mortgage.
We also saw the advent of mortgage insurance as part of the New Deal. The combination of
this and extended loan terms encouraged more Americans to pursue their homeownership
goals. FDIC-insured deposits made funding these “modern” mortgages easier for banks.
The U.S. homeownership rate skyrocketed from 44% to 62% between 1940 and 1960.
Americans were not only financially capable of buying a home, but the industry had the support
of the newly formed Federal Housing Administration (FHA) and Veterans Administration
(VA). New legislation in the 1960s and 1970s ensured that all borrowers, regardless of race,
could purchase a home in a desirable location.
The housing crisis of 2008
Fast forward to the 2000s when the mortgage lending industry expanded — and not in a good
way. With minimal government regulations in place, borrowers quickly became the victims of
predatory lending practices. Rather than refinancing to access equity, homeowners found
themselves in an uphill battle trying to stay current on an overly complex, risky loan.
The Center mentions that the spread of these subprime loans simply inundated the global
financial system. In a domino effect, the previously thriving economy took a complete
nosedive. Countless borrowers ended up “underwater” or “upside-down” on their
loans because of the 2008 housing crash.
Changes since the real estate crash
The industry has learned a lot since the subprime mortgage crisis. Here are a few key
differences in the lending world, as referenced from The Washington Post.
Safer loan options
Those risky pre-crash mortgages we discussed earlier are gone. Borrowers today are limited to
fixed-rate and adjustable-rate loans. The good thing about ARMs is that you don’t have to
worry about the rate increasing too quickly.
Extensive documentation
Lenders want proof that you can handle a monthly mortgage payment. Borrowers should be
prepared to provide all sorts of documentation, from W-2s to pay stubs. You can potentially
speed up the pre-approval process by gathering this info in advance.
Credit score requirements
Your credit score is another important part of your financial profile. The higher your score, the
greater your chance of obtaining a low mortgage rate. Do yourself a favour and spend some
time improving your credit score before applying for a home loan.
Digital mortgages
It was the norm for borrowers to physically go to their financial institution to get a mortgage.
However, lenders have shifted to digital mortgage platforms in recent years. Borrowers and
lenders alike appreciate the convenience and automation of these tools
In the past, the mortgage industry was dominated by state-sponsored institutions such as FGBS,
Bank for Housing and Construction (BHC) and Home Finance Company (HFC).
In recent years, an increasing number of banks appear to be engaging in mortgage lending. A
review of the annual reports of the twenty-three (23) universal banks reveals that eight (8)
representing about 35% engage in mortgage lending. While the extent of engagement differs
among the various institutions, the trend is unmistakable.
As at the end of 2019, the total mortgage debt outstanding amounted to about GHS 1.72 billion
rising from GHS 854 million in 2015 indicating an annual rise of about 19% over the past five
(5) years. Figure 1 displays the total amount of mortgage debt outstanding over the period 2015
– 2019.
In terms of market share (by value), First National Bank Ghana (Formerly GHL Bank) is the
market leader with about 34% share at the end of 2019 followed by Stanbic Bank (21%),
Republic Bank (17%) and Ecobank Ghana (12%).
Together, the top four institutions controlled about 84% of the market. The remaining four
institutions, Standard Chartered Bank (6%), Absa (6%), Prudential (2%), and CalBank (2%)
accounted for the remaining 16%. It is important to point out the possibility that the various
institutions may not classify loans in the same way, which would make it inappropriate to make
direct comparisons. Also, an alternative measure of market share such as the volume of loans
may reveal different rankings.
It must be encouraging to observe a rise in the amount of mortgage credit and the number of
participating institutions even though the market still faces several challenges including an
unfavourable macroeconomic environment, lack of access to long-term funds, high cost of
funds and weak regulatory regime among others.
Inasmuch as government has a critical role to play in the development of a vibrant mortgage
market, it is important that this is limited to the creation of an enabling environment.
