You may have heard of mortgage burning parties – but where are they today? The mythical beast of debt-free homeownership may not be so far as you think from today’s homeownership culture.
The meaning of homeownership has changed significantly over the course of the 20th century, mostly due to the evolving nature of the mortgage – a term which literally translates to “dead pledge.” In the early 1900s, for example, homeownership meant more than just signing a purchase agreement for a new home.
Homeowners of the past were able to take out mortgages vastly different from those offered by lenders today. Mortgages predating the Great Depression were for short terms – as little as five to ten years – and were secured by hefty down payments greater even than 20%, which is the custom today. These mortgages culminated in a lump sum payment of outstanding principal on the date they came to term, similar to the modern final/balloon payment. Thus, refinancing was rare.
Homeowners with these historic mortgages with shorter repayment terms prioritized paying off their debt, and many achieved full satisfaction of their mortgage by the end of its term. To celebrate their now-dead pledges, these homeowners threw mortgage burning parties.
A dead man’s party
After paying off a mortgage, homeowners were free to save or spend the money previously allocated to housing costs at their discretion. They didn’t have to fear the risk of lapses in income or conflicting debts. What better way to celebrate than lighting stuff on fire?
Mortgage burning parties were common events during which homeowners burned a copy of their mortgage obligation to celebrate their freedom from home debt. They invited friends and family to share in the revelry and congratulate them on their financial achievement – free of the lender at last. A mortgage burning party was, essentially, a celebration of true ownership of the home and a clearing of title. No bankers attended, naturally.
Homeowners who paid off their mortgages during this time likely never left their homes – the castles they now owned free and clear. They owed nothing to anyone and had the pride of title unencumbered by others with an interest in their property. The idea of taking out another mortgage, and starting on this debt trip all over again, was about as abhorrent as burning their newly debt-free home to the ground – a risk perhaps triggered by their now covetous neighbors.
However, this phase of celebratory fire and debt satisfaction was short-lived. Changes in the nation’s economic conditions were about to rattle the bedrock underneath these successful homeowners and their families.
The Great Depression threw the economy into a disaster state and forced the government to create alternatives for homeowners who weren’t able to refinance their short-term mortgages or find a buyer with all cash. Thus, vast numbers of homeowners were forced to default.
The inception of institutions like the Federal Housing Administration (FHA) and the Home Owner’s Loan Corporation (HOLC) extended the previously-streamlined mortgages by introducing fixed interest rates.
The driving force was the need to provide liquidity for owners so they could sell, not primarily so buyers could buy. This objective remains today with sellers frequently paying all the non-recurring costs a buyer incurs for purchase-assist financing to get the home liquidated.
The HOLC in particular was responsible for significant alterations of mortgages. Fully amortizing fixed rate mortgages (FRMs) with 20-year terms began replacing the 10-year mortgages of the past as the HOLC purchased defaulted mortgages from financial institutions using money generated from government-backed bonds.
Editor’s note — Government funding by the Federal Reserve (the Fed) pumping up the cash supply to save the housing market? That cannot be, right?
The HOLC disbanded in 1936 and was succeeded by the FHA, which further extended mortgage terms to the now standard 30 years in 1948. These changes kick-started the private mortgage insurance (PMI) business. Eventually, the transition to extended mortgage terms and the natural fluctuation of the economy led to today’s qualified mortgage. [See “The American Mortgage in Historical and International Context”]
New terms, new borrowers
Today, homeowners spend roughly half their lives paying off their mortgages. Refinances nearly always reset the clock on the term for mortgage payments. Today’s mortgage payments take up proportionally more of borrowers’ incomes than was the case prior to the 1930s due to mortgage risks generated by lower down payments and covered by mortgage insurance premiums (MIP) – the equivalent of increased interest rates.
New generations of homebuyers have additional obstacles keeping them from satisfying mortgages. For example, Millennials (those born somewhere between 1982 and 2004) struggle with saving enough money for a 20% down payment due to low and stagnant wages following the Great Recession. Further, crippling student debt eats up what little funds Millennials may spare. As a result, most of today’s homebuyers opt for historically low down payments – as little as 3%, often a gift from their better-heeled Baby Boomer parents.
Low down payments help struggling members of each generation transition into homeownership, but there’s a fatal catch: the lower the down payment, the greater principal owed.
The purpose of government guaranteed mortgages is to enable the seller to sell. The lower the down payment, the higher the price the buyer is willing to pay; thus, government guaranteed mortgages provide an additional ancillary benefit to the seller who ultimately gets the money, not the buyer.
Housewarming: the new party, up front and alive
As mortgage payoffs slip from memory into the ever-more-distant past, today’s homeowners have a new definition of ownership. Instead of waiting until they are debt-free, homeowners claim the moment they move into a new home as the one to celebrate with a new kind of party: housewarming.
In contrast with mortgage burning parties, housewarming parties celebrate the prospect of beginning life in a new, fully-indebted home. This is the modern incarnation and polar opposite of the mortgage burning party. Guests bring gifts to help the new homeowners furnish the house. They take tours of all the rooms, usually with wine and cheese in hand. The only fires lit here are in cozy fireplaces or scented candles. The hangover lasts for years – but it is felt only by the homeowner.
Housewarming is a fantastic trend for lenders, builders and real estate agents – it focuses on the beginning of a homeowner’s stay in a house. A homeowner may potentially host infinite housewarming parties, depending on how many times they move in their lifetime. As long as homeownership culture glorifies qualification for extensive debt and government subsidies, lenders, builders and agents remain in business, managing the turnover into homes and mortgages every handful of years.
Despite the overwhelming majority of indebted homeowners, the rare few who manage to pay off their mortgages may ask: Are mortgage burning parties dead for good?
The short answer is no. However, social ideas of etiquette and tact dictate mortgage burning parties today. For instance, many public institutions such as libraries and churches freely advertise mortgage burning parties to their patrons.
Perhaps it is the celebration of a community effort to pay off a mortgage that makes these parties socially acceptable. Mortgage burning parties for individual homeowners, however, invoke quite a different response.
Since the recession, many homeowners have found themselves burdened by some additional form of debt or another. This keeps them from pouring their efforts solely into paying off their mortgages and satisfying that ancestral drive to be clear of lenders. Thus, homeowners who rub their debt-free achievements in the faces of their broke, indebted friends will not likely be well-received.
Will future homeowners bring back the mortgage burning party? Economic conditions as discussed above will likely prohibit such celebrations as long as homeowners need to pay off additional debts. However, many homeowners remain hopeful that someday, they too will satisfy their mortgage debts and be rid of monthly housing payments.
A resurrection of mortgage burning parties might signify another drastic change in the nation’s economic conditions. Similarly, such a resurgence might have the potential to shift the real estate market altogether. With more homeowners able to pay off their mortgages, fewer people stimulate the buying and selling real estate economy, instead remaining in their homes – secure and sedentary in their castles. The wealth of real estate turnover for agents and lenders might dwindle precariously with the diminishing demand for new homes.
For now, however, the real estate market appears to be safe. Housewarming reflects the predominant homeownership sentiment as buyers celebrate their entrance into lifelong mortgage commitments – at least, until their next move.