Mortgage History 411: FHA
Like many government agencies related to the housing market, the Federal Housing Administration (FHA) was established to help lessen the impact of a crisis, if not stave one off altogether. The FHA was one of the cornerstones of the National Housing Act of 1934, one of several New Deal legislative actions undertaken during the start of the Roosevelt administration to help bring the country back from the Great Depression. The primary purpose of the FHA at its inception was to help the struggling housing market back on its feet—foreclosures were rampant due to joblessness and mortgage default, and homeless families had no avenues to try and obtain new housing. By providing federal mortgage insurance, the FHA was able to help lenders regain confidence that they would not suffer heavy losses by taking risks on new homeowners. The FHA also offers housing loans directly to prospective buyers, provided they meet certain criteria.
Loans insured by the FHA are advantageous to home buyers because they allow the lender to accept a lower cash investment up front in order to finance the mortgage, and the ratios of household income and payment can be less prohibitive. The trade-off for the insurance is a higher monthly payment, although this additional insurance premium will drop off after five years or when the remaining balance of the loan is 78 percent of the property value. This arrangement can be especially beneficial for prospective home buyers who have undergone financial difficulty and who may have a poorer credit rating as a result. Although the conditions of paying back the loan may be more strict on such home buyers, they are more likely to obtain such a loan through these means than they might through a private lending company that forgoes FHA insurance.
The FHA has undergone a number of changes and experienced several periods of particularly specialized activity since it first began operating. After the Depression subsided and the United States became involved in World War II, the FHA helped provide housing for military personnel and veterans. The 1950s saw the FHA working to help provide private housing for elderly and disabled Americans, and helped keep these properties solvent when the energy crisis of the 1970s and the early 1980s recession threatened to eliminate that housing. The FHA has also been party to a number of less ethical practices, however, such as adopting standards for “redlining” minority communities, or steering lenders away from housing in those communities (the practice was made illegal by the Fair Housing Act of 1968). Today, the FHA operates as part of the Department of Housing and Urban Development (HUD), and insures over 34 million mortgages and nearly 50,000 multifamily projects.
The FHA is unique among government agencies in that it is fully self-funded, receiving no taxpayer money. All proceeds generated from mortgage insurance premiums are placed in a single operating account, and the agency runs entirely off the money from this account. The agency maintains a capital reserve fund that is mandated by Congress to maintain a level at 2 percent of total assets. Until the recent economic collapse, FHA-backed loans had slowly been decreasing, a byproduct of a healthier private market, and by 2006 was only responsible for 3 percent of all housing loans in the United States. The decline had led to questions about dismantling the FHA entirely. However, the recent housing crisis and collapse of the subprime market has forced the FHA back into heavy activity—today, nearly 40% of loans are backed by the FHA. As such, the agency now finds itself a less secure position; the agency’s reserve fund has dwindled below its mandated 2 percent, despite having been at 6 percent a few years ago, and substantial losses are expected to occur before the markets stabilize and strengthen. Recent analysis predicts that FHA losses could be as high as $100 billion.
Although it faces an uncertain presence and future, the FHA has been a significant force for financial security in the housing market for several decades. As bad as the housing crisis has been, it is arguable that it could have been much, much worse without the systems and practices of the agency in place to handle it.
PERL Mortgage is an Illinois residential mortgage licensee (MB0004358) and equal housing lender