The Federal Housing Administration (FHA), also known as the Office of Housing within the Department of Housing and Urban Development (HUD), is a United States government agency founded by President Franklin Delano Roosevelt, created in part by the National Housing Act of 1934. The FHA insures mortgages made by private lenders for single-family properties, multifamily rental properties, hospitals, and residential care facilities. FHA mortgage insurance protects lenders against losses. If a property owner defaults on their mortgage, FHA pays a claim to the lender for the unpaid principal balance. Because lenders take on less risk, they are able to offer more mortgages. The goal of the organization is to facilitate access to affordable mortgage credit for low- and moderate-income and first-time homebuyers, for the construction of affordable and market rate rental properties, and for hospitals and residential care facilities in communities across the United States and its territories.
It is different from the Federal Housing Finance Agency (FHFA), which supervises government-sponsored enterprises.
The FHA is currently led by Assistant Secretary for Housing and Federal Housing Commissioner Frank Cassidy.
History New Deal origins During the Great Depression many banks failed, causing a drastic decrease in home loans and ownership. At that time, most home mortgages were short-term (three to five years), with no amortization, and balloon instruments at loan-to-value (LTV) ratios below sixty percent.Monroe 2001, p. 5 This prevented many working and middle-class families from being able to afford home ownership. The banking crisis of the 1930s forced all lenders to retrieve due mortgages; refinancing was not available, and many borrowers, now unemployed, were unable to make mortgage payments. Consequently, many homes were foreclosed, causing the housing market to plummet. Banks collected the loan collateral (foreclosed homes) but the low property values resulted in a relative lack of assets. In 1934 the federal banking system was restructured. The National Housing Act of 1934 created the Federal Housing Administration. with the intention to regulate the rate of interest and the terms of insured mortgages. Before the FHA was established, many mortgages were balloon mortgages that required large payments at the end of the mortgage period, The mortgage period was typically 5 to 10 years. To secure a mortgage, people needed a large down payment of 30 to 50%. With the new FHA-secured loans, people now only needed a down payment as low as 10% and mortgage payment period went from 5–10 years to 20–30 years. In 1934 the newly formed FHA hired Homer Hoyt as Chief Land Economist to write the first FHA underwriting criteria resulting in the Redlining policy.
Appraisal criteria and race discrimination
The new practices were restricted only to white Americans. These new lending practices increased the number of white Americans who could afford a down payment on a house and monthly debt service payments on a mortgage, thereby also increasing the size of the market for single-family homes. The FHA calculated appraisal value based on eight criteria and directed its agents (called "appraisers") to lend more for higher appraised projects, up to a maximum cap. The two most important were "Relative Economic Stability", which constituted 40% of appraisal value, and "protection from adverse influences", which made up another 20%. In 1935, the FHA provided its appraisers with an Underwriting Manual, which gave the following instruction: "If a neighborhood is to retain stability it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally leads to instability and a reduction of values." Appraisers were then told to give higher property and zoning ratings where "protection against some adverse influences is obtained", and defined adverse influences as "infiltration by inharmonious racial or nationality groups". Because the FHA's appraisal standards included a whites-only requirement, racial segregation became an official requirement of the federal mortgage insurance program, as the FHA frequently judged any properties in racially mixed neighborhoods or in close proximity to black neighborhoods as being high-risk.
Fannie Mae and G.I. Bill In 1938 Congress created the Federal National Mortgage Association (Fannie Mae) which helped establish a secondary mortgage market in which banks and investors could buy and sell current home loans. After the adoption of the Serviceman's Readjustment Act (known as the GI Bill) in 1944, the FHA brought together a system of long-term mortgages for the construction and sale of private homes. The Veteran's Administration's home-loan guarantee program through the GI Bill allowed veterans to put down a payment of only one dollar. These changes helped fuel a surge in American home ownership, with families living in owner-occupied homes increasing 44 percent to 63 percent from 1934 and 1972.
Major housing projects
In 1935, Colonial Village in Arlington County, Virginia, was the first large-scale, rental housing project erected in the United States that was Federal Housing Administration-insured. During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York. During the Great Depression, Ohio Cities used federal government funds for building housing projects and first two of those projects completed in the United States were in Cincinnati and Cleveland.
The FHA was led by the Federal Housing Commissioner Raymond M. Foley (1945–47) and Franklin D. Richards (1947–52). In 1954, Norman P. Mason was appointed as the Federal Housing Commissioner.
Establishment of HUD In 1965, the Federal Housing Administration became part of the Department of Housing and Urban Development with the Passage of the Department of Housing and Urban Development Act of 1965. When the FHA became part of HUD, the FHA became a separate entity within HUD. A Federal Housing Commissioner who would also be an Assistant Secretary would head the FHA. The FHA and HUD have their similarities and differences. The Commissioner designated would administer all other departmental programs that relate to the private mortgage market in addition to duties as Assistant Secretary and FHA head. The FHA and HUD both help borrowers with bad credit and insufficient down payment to be able to buy or repair a house.
Subprime mortgage crisis
In the late 1990s, subprime mortgage products emerged and competed with the standard mortgages financed by the FHA. These products were typically poorly underwritten (if it all) and had higher profits for lenders. As a result lenders were motivated to turn borrowers toward subprime products even when qualified for FHA loans, which were safer. As the subprime mortgage market boomed, the FHA's market share of mortgages fell; in 2001 the FHA insured 14% of home-purchase loans, but by 2005 that number fell to less than 3%. The influx of these unregulated subprime loans helped fuel the United States housing bubble, which led to the subprime mortgage crisis and the near-collapse of the housing market. Following the subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became a large source of mortgage financing in the United States. The share of home purchases financed with FHA mortgages went from 2 percent to over one-third of mortgages in the United States, as conventional mortgage lending dried up in the credit crunch. By 2011 the FHA backed about 40% of all home purchase loans in America. Since 2008 the FHA has backed more than 4 million loans and helped 2.6 million families lower monthly payments through refinancing. With the private subprime market, many of the riskiest buyers borrowed from the FHA instead, exposing the FHA to substantial potential losses. At the time, these possible losses were estimate as up to $100 billion.Joshua Zumbru, Maurna Desmond. "Lending Over Backward", Forbes, August 25, 2008."The Next Hit: Quick Defaults", Washington Post, March 7, 2009. The troubled loans weighed heavily on the FHA's capital reserve fund, which by early 2012 had fallen below its congressionally mandated minimum of 2%, in contrast to more than 6% two years earlier. By November 2012, the FHA was essentially bankrupt.
Mortgage insurance
Since 1934, the FHA and HUD have insured almost 50 million home mortgages. Currently, the FHA has approximately 8.5 million insured single family mortgage, more than 11,000 insured multifamily mortgages, and over 3,900 mortgages for hospitals and residential care facilities in its portfolio.
FHA down payment A borrower's down payment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving an eligible gift from a family member or other eligible source.
FHA mortgage insurance