The Federal Housing Administration is the most enduring legacy of the New Deal and second only to the Sherman Anti-Trust Act in its positive impact on the lives of the average American and consumer; both have remained intact for multiple generations and have become established in our cultural expectations about the economy and our society. The FHA was one of the earliest parts of the New Deal passed by Congress and signed into law by President Franklin D. Roosevelt in the first hundred days of his administration. The purpose of the FHA was to stabilize the US Housing market after the devastating effects of the bank failures and illiquidity of the first years of the Great Depression. Prior to the creation of the FHA most home mortgages were either demand notes, mortgages that could be called at any time by the lender/bank, or were single year balloon notes that were due with interest at the expiration of one year with the traditional expectation that the loan would be re-negotiated with the bank at the end of the year at whatever the then current market rate for interest rates on mortgages so that banks and thrifts making loans on homes would not be stuck with mortgages at below market interest rates.
From 1933 to the mid 1980’s the FHA functioned more or less unchanged. FHA mortgages could be made on any single family home or multi-family home up to four units with a government guarantee that the FHA would make any approved lender whole in the event of a default. Much like today’s real estate market, real estate prices went into free fall in the early years of the depression due to the inability of home owner’s to cover the demand calls by banks and thrifts that called the mortgages resulting in previously unheard of numbers of Foreclosures which only resulted in further depressed prices which only resulted in further drops in prices – the proverbial downward spiral. The FHA stemmed the tide of these foreclosures by allowing home owners to refinance with long term thirty year loans, (yes this is the basis of the modern thirty year mortgage), and allowed FHA mortgages to be assumed by anyone if the existing owner no longer could afford or wanted the house. In the mid-1980’s the FHA changed it’s rules and no longer allowed carte blanche assumptions of home mortgages as a way of moving the government “out of the housing market”. This move however has not served the public well as the easy assumability of FHA mortgages stemmed the tide of foreclosures in many earlier recessions and prevented wholesale implosions of housing as we have had in the last few years.
The following is an excerpt from my New Hampshire 40 Hour pre-licensing class.
Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development’s (HUD) Office of Housing in 1965.
When the FHA was created, the housing industry was flat on its back:
- Two million construction workers had lost their jobs.
- Terms were difficult to meet for homebuyers seeking mortgages.
- Mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment.
- Americawas primarily a nation of renters. Only four in 10 households owned homes.
During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.
In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat.
The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s.
By 2001, the nation’s homeownership rate had soared to an all time high of 68.1 percent as of the third
quarter that year.
The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in it
In the more than 60 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world. HUD has helped greatly with that success.
What is the FHA and What do they do?
How is FHA funded?
FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.
What is the Federal Housing Administration?
The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.
What is FHA Mortgage Insurance?
FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.
Why does FHA Mortgage Insurance exist?
Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -whichever is longer.
By Dick Thackston CRB, ABR, ABRM, Broker NH, MA & VT
Photo Credit: http://en.wikipedia.org/wiki/File:US-FederalHousingAdmin-Logo.svg