Mortgage Loan Rates in Detroit and Wayne County, Michigan: 1880 - 1900
David M. Kiriazis, Frostburg State University--USA
(1) Objectives
This paper considers the trend in mortgage loan rates in an urban county during the late nineteenth century, a period in which cities like Detroit were experiencing rapid population growth and industrialization, while the supply of loanable funds outside of the Northeastern US was relatively limited and the financial system less developed. The objectives are: to explain an observed decline in interest rates during the last two decades of the century, and a change in composition of lenders; and to identify factors which determined the rate of interest paid by various borrowers.
(2) Background
The rapid growth of cities which began in the 1880s was accompanied by an increase in the demand for funds to finance investment in residential capital. Non-farm mortgage lending in the late nineteenth century, however, has received relatively little attention from economists and historians. This investigation grew out of my dissertation, in which I examine the Detroit-area mortgage market from the perspective of supply, demand and price. It seeks to shed new light on the development of credit markets in the US.
(3) Data and Methods
The data were obtained from three sources: the terms of more than 1,000 mortgage contracts recorded at the Wayne County Register of Deeds in 1880 and 1900; socioeconomic and demographic characteristics from the manuscript federal census schedules for about 1,500 individuals who appeared as borrowers or lenders; and information about the location and use of the mortgaged properties obtained from property abstracts, real estate atlases, city directories, etc. The paper employs a regression model in which interest rates on mortgages are supposed to be determined by various objective and subjective (borrower-specific) factors more or less related to loan risk.
(4) Results
The paper finds that most mortgage loans recorded in 1880 were made by local property owners or individuals with funds to invest. By 1900, the share of loans made by local financial institutions had increased dramatically, and the individual lenders were much more likely to be non-Michigan residents. These changes coincided with a rapid expansion of state-chartered banks, a sharp fall in local interest rates, and decline in mortgage lending by local investors. The results of the multivariate analysis suggest that the rates of interest on mortgages recorded in 1880 and 1900 were determined primarily by factors objectively related to loan risk.
(5) Discussion
The results are consistent with the market-segmentation hypothesis which explains regional differences in interest rates in terms of barriers to the inter-regional flow of funds. They do suggest, however, that a flow of funds into the county accelerated prior to the turn of the century. The results also confirm the observation that the yield curve during this period, one of deflation, was inverted. The regression results suggest that, with the exception of mortgages taken by sellers, loans made by other lenders--whether institutions or individuals--did not in general differ significantly. Moreover, loan rates appear to have been determined mainly by the conditions of the loans (term to maturity, amount, etc.) and other risk-related factors, such as whether the property was owner-occupied.