In the National Housing Act of 1934, the government set apart an agency to insure loans for home building and purchasing. Current housing conditions needed vast improvement, the mortgage market had to be stabilized and mortgage financing requirements needed a serious makeover. The Federal Housing Administration was created to fulfill these needs. But what is FHA in our country’s history and has it lived up to its purpose?
The Beginning of Government Loans for Housing
In the historical event we know as The Great Depression, the banking system met with complete failure, bringing home loans and ownership to an all-time low. At this time, options in the mortgage world were almost non-existent. Loans terms were typically three to five years, offered no amortization, and ended in a balloon payment at loan to value ratios below 60%.
When the banking crisis hit, all lenders were forced to retrieve due mortgages. Refinancing was not available, and since many borrowers were now jobless, they could not afford payments on their home. They were foreclosed upon and put out on the streets. The domino effect brought the housing market to its knees. Because the overall market value was so low and no one was able to purchase anyway, foreclosures brought no money and very little asset.
The government’s solution was to restructure everything. The FHA was set apart to regulate the interest rates and terms of the mortgages it insured. Down payments and monthly charges dropped significantly, allowing families to afford a home again. The criteria for appraising home value changed completely, with the two most important factors being “Relative Economic Stability,” accounting for 40%, and “Protection from Adverse Influences,” making up another 20%.
In 1935, the first housing project insured by government loans was constructed. Colonial Village in Arlington, Virginia was a large-scale rental community. During World War II, they provided financial backing for many workers’ housing projects, including Kensington Garden’s Apartment Complex in Buffalo, New York. What is FHA? A solution to economic downturn.
What Is FHA Today?
In 1965, the Federal Housing Administration was joined with the Department of Housing and Urban Development (HUD). Together they have insured over 34 million home mortgages and 47,205 multi-family projects since 1934. 4.8 million single-family and 13,000 multifamily loans are currently active. The FHA is the only government program designed to be completely self-funded. However, there is a requirement that taxpayer’s dollars must be used to bail them out in times of financial strain.
In the wake of the subprime mortgage crisis, federal mortgages skyrocketed from 2% to nearly half of all the home loans in the United States. Conventional lending was dying out as credit scores fell. Without the subprime market, the administration ended up taking on a large quantity of extremely risky loans, greatly increasing the chance of financial loss. This was not without consequence.
All those unstable loans are now weighing on an already-depleted Capitol Reserve Fund. In November of 2012, the agency was determined to be, for all intents and purposes, bankrupt. What is FHA today? Another service provided by American taxpayers.
Overall Effects on Housing
This agency undoubtedly succeeded in increasing the market. By convincing banks to lend again and making requirements easier to meet, they brought the rate of homeownership from 40% in the 30s to nearly 70% in 2001. By 1938, down payments had decreased to ten percent of the home’s purchase price. The rest was financed by a 25-year, self-amortizing, government-insured loan.
After World War II, the agency created programs to help returning veterans and the widowed families of soldiers. In the 50’s, 60’s and 70’s, they inspired and enabled the development of millions of apartment complexes to house the elderly, handicapped and low-income citizens of America. When inflation and sky-high energy costs threatened to sink these housing properties, emergency federal financing kept them above water. In the 1980’s, when the economy proved to be insufficient for the increase in homeownership, the administration worked to stabilize falling prices and keep the market open to potential buyers.
If you could ask the minority populations and low-income families, “What is FHA?” the answer would be, “Our only opportunity to own a home.” Their footprint is greatest within central cities, to borrowers of African or Hispanic origin as well as young couples struggling to establish credit.
As capital markets matured, the necessity of the administration temporarily decreased. In 2006 Congress began questioning whether the government had any business in the operation of mortgage insurance. Many were even calling for the end of the program. As credit markets began to deteriorate shortly thereafter, criticism was silenced. Today this department holds 40% of all new mortgages.
The agency has had many ups and downs throughout its history, just as the housing market and financial state of the country has experienced increase and decrease. Regardless, this program has always adjusted to meet current needs and honor its purpose. What is FHA? A safety net put in place to make homeownership possible for all American citizens no matter what the economy does.