In today’s society, people are dealing with an economy that is trying to keep its’ head above water. Unemployment is a huge concern as many home owners are fighting to keep their home while others are forced to live on the streets. Despite this, the market is showing signs of improvement for first-time homeowners through a program that has not only existed for roughly eighty years but was created during a time that the economy was far worse than it is today. The Federal Housing Administration was created by the Federal government to help stabilize the mortgage market, provide a means that loans could be accessible as well as paying it back with an affordable schedule. In order to believe this is possible, it is important to look at what is the FHA and how the loans are able to make owning a home a reality.
What is the FHA?
For those of us who were not around during the 1930’s, the economy in the United States was in dire straits which would eventually be known as the “Great Depression.” This was an accurate label as the system banks were using had failed miserably which led to a dramatic reduction involving ownership and home loans. Unlike today, a large majority of mortgages for homes were usually three to five years as well as setting up a reasonable timetable to pay off the loans. The crisis forced lenders to claim the full amount of mortgages due from home owners. Without any refinancing options available as well as a large amount of borrowers being unemployed, many defaulted on their mortgage payments and the banks were forced to foreclose on these homes. This became loan collateral banks were hoping would have some value but ultimately proved useless as low property values made these assets not valuable.
Realizing the federal banking system needed to be changed; therefore, the National Housing Act of 1934 brought into existence the FHA. Their purpose was to create lending policies that would make it easier for people to make a down payment for a home as well as being able to make an affordable monthly payment toward a mortgage. Doing this would also bring about an increase in the market for individuals wanting to buy a single-family home. Wanting not to make the same mistakes that brought on the banking crisis, the FHA will give insurance on mortgage loans provided by FHA-approved lenders in the United States as well as their territories. Mortgages are not just limited to single family homes but also cover multifamily, hospitals and manufactured homes. It insures over 34 million properties and is the biggest insurer of mortgages worldwide since its birth eight decades ago.
How this Government Agency Generate Loans
Though it is important to know the history of this government agency, future homeowners need to understand how the FHA can help in generating loans so owning a home can be a reality. In order to learn from past mistakes as well as not repeating them, they needed to come up with a system that would make lenders willing to approve loans without worrying too much if a homeowner defaulted on a mortgage. Therefore, the Federal Housing Administration made sure that their approved lenders would be covered if a default would occur. That way, lenders would be willing to offer loans rather than mostly focusing on the consequences. When the new policies came into effect, a lender now bears a lower risk since a claim can be filed and paid by the FHA. Keep in mind that lenders must meet certain requirements if they wish to qualify for insurance.
While this would inspire future homeowners to reach out to lenders, others might wonder how they are able to provide insurance to these lenders. Unlike other government agencies or programs that would cost taxpayers, the FHA operates solely off of its self-generated income. Obviously, taxpayers would show their support for this government agency since they do not have to pay for it to exist. The administration establishes an account where those funds are solely used to operate the program. The self-generated income mentioned earlier is actually the proceeds from the mortgage insurance which is paid from the homeowners. While some people may think this program is focused only on those wanting to own a home, they would not only be incorrect but missing out on the big picture. In fact, this government agency has the potential to become a great economic stimulation to the country. This can be achieved through both home and community development while also branching out to local communities in the form of schools, jobs, tax bases, building suppliers as well as other forms of resources.
Whenever new government programs and agencies are born, their usefulness can only be judged over time and longevity. Society can then make a decision on whether or not this government agency was successful. The Federal Housing Administration was born in 1934 to revive a banking system that failed. This new agency also made lenders feel easier of approving loans and mortgages because if a homeowner would default on their mortgage, the lender could file a claim rather than be forced to foreclose on a property that would end up being worthless. Roughly eighty years later, many things have changed but an argument can be made that Americans are now the best housed people in the world and the FHA has greatly helped with that success.