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, established in part by the National Housing Act of 1934. Its primary function is to provide insurance for mortgages originated by private lenders for various types of properties, including single-family homes, multifamily rental properties, hospitals, and residential care facilities. FHA mortgage insurance serves to safeguard these private lenders from financial losses. In the event that a property owner defaults on their mortgage, FHA steps in to compensate the lender for the outstanding principal balance.
Under this insurance arrangement, lenders assume a diminished level of risk, thereby allowing them to offer a larger number of mortgages. The primary mission of the Federal Housing Administration (FHA) is to facilitate access to reasonably priced mortgage financing, with a particular focus on individuals with low to moderate incomes and those embarking on their first home purchase. Furthermore, the FHA lends its support to the construction of both affordable and market-rate rental properties, along with the establishment of hospitals and residential care facilities, not only in communities throughout the United States but also in its territories.
It's important to distinguish the FHA from the Federal Housing Finance Agency (FHFA), which oversees government-sponsored enterprises. Presently, the FHA is under the leadership of Assistant Secretary for Housing and Federal Housing Commissioner Julia Gordon.[1]
History
The Federal Housing Administration (FHA) was under the leadership of the Federal Housing Commissioner Raymond M. Foley from 1945 to 1947.[2] and Franklin D. Richards from 1947-1952.[3] In 1954 Norman P. Mason was appointed as the Federal Housing Commissioner.[4]
New Deal origins
Amid the Great Depression, a period marked by numerous bank failures, there was a substantial decline in both the availability of home loans and the rate of home ownership. During this era, the majority of home mortgages were characterized by short-term durations, typically spanning from three to five years. These mortgages lacked amortization features and often featured balloon payment structures. Additionally, the loan-to-value (LTV) ratios for these mortgages generally remained below sixty percent.[5] This situation posed a significant obstacle for many working and middle-class families, rendering home ownership financially unattainable. During the banking crisis of the 1930s, all lenders were compelled to call in their outstanding mortgages, leaving no room for refinancing. Consequently, numerous borrowers, who were now unemployed and grappling with financial hardships, found themselves unable to meet their mortgage obligations. This unfortunate circumstance led to a substantial number of homes being foreclosed upon, which, in turn, precipitated a sharp decline in the housing market.
Banks, in the process of foreclosure, acquired the collateral in the form of foreclosed homes. However, the depressed property values at that time meant that these assets had limited value. In response to these challenges, a comprehensive restructuring of the federal banking system took place in 1934. This overhaul culminated in the enactment of the National Housing Act of 1934, which gave rise to the Federal Housing Administration (FHA). The FHA was established with the specific aim of regulating the interest rates and terms associated with insured mortgages.
Prior to the establishment of the FHA, the prevailing mortgage landscape featured predominantly balloon mortgages, which necessitated substantial lump-sum payments at the conclusion of relatively short mortgage terms, typically spanning 5 to 10 years. Moreover, prospective homebuyers were required to make substantial down payments, often ranging from 30% to 50% of the property's value. With the advent of FHA-insured loans, the down payment requirement was significantly reduced, with borrowers now only needing to provide as little as 10% down. Furthermore, the mortgage repayment period was extended, spanning from 20 to 30 years.
In 1934, following its establishment, the FHA enlisted the expertise of Homer Hoyt as Chief Land Economist. His role was pivotal in formulating the initial underwriting criteria for FHA-insured mortgages, a process that ultimately led to the development of the Redlining policy.[6]
It is important to note that these innovative lending practices were, in some regions, exclusively available to white Americans. These practices effectively expanded the pool of white Americans who could manage both the initial down payment for a house and the ongoing monthly mortgage payments. Consequently, this expansion significantly enlarged the market for single-family homes.[7] The FHA employed a specific methodology for assessing the appraisal value of properties, relying on eight distinct criteria. It instructed its agents, known as "appraisers," to allocate more funding to projects with higher appraised values, up to a predetermined maximum limit. Among these criteria, the two most pivotal were "Relative Economic Stability," accounting for 40% of the appraisal value, and "protection from adverse influences," contributing an additional 20%.
In 1935, the FHA furnished its appraisers with an Underwriting Manual, which included the following directive: "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 further instructed to assign superior property and zoning ratings in areas deemed to have "protection against some adverse influences." The manual characterized these adverse influences as "infiltration by inharmonious racial or nationality groups."[8] Due to the FHA's appraisal criteria, which stipulated a whites-only occupancy requirement, racial segregation became an integral component of the federal mortgage insurance program. This occurred because the FHA often classified properties in racially mixed neighborhoods or those in close proximity to black neighborhoods as high-risk, effectively endorsing and enforcing racial segregation as an official requirement.[9]
Fannie Mae and G.I. Bill
In 1938, Congress established the Federal National Mortgage Association, commonly known as Fannie Mae. This creation played a pivotal role in setting up a secondary mortgage market, enabling banks and investors to buy and sell existing home loans. Following the enactment of the Serviceman's Readjustment Act, popularly known as the GI Bill, in 1944, the FHA orchestrated a system of long-term mortgages to facilitate the construction and sale of private homes.
Under the GI Bill, the Veteran's Administration introduced a home-loan guarantee program that allowed veterans to make a down payment of only one dollar, making homeownership more accessible to them. These transformative changes contributed significantly to a surge in American homeownership, with the percentage of families residing in owner-occupied homes increasing from 44% to 63% between 1934 and 1972.[6]
Major housing projects
FHA project great depression
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.[10] During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York.[11] 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.[12]
Establishment of HUD
In 1965, the Federal Housing Administration was integrated into the Department of Housing and Urban Development following the enactment of the Department of Housing and Urban Development Act of 1965.[13] With the integration of the FHA into HUD, it transformed into a distinct entity within the larger HUD framework. Under this arrangement, the FHA would be overseen by a Federal Housing Commissioner who concurrently held the position of Assistant Secretary. This Commissioner would be responsible for both FHA-specific functions and the administration of other HUD programs related to the private mortgage market.
While the FHA and HUD share some commonalities, they also exhibit differences in their roles and responsibilities. The designated Commissioner would assume authority over all departmental programs pertaining to the private mortgage market, in addition to their dual roles as Assistant Secretary and head of the FHA.[14] The FHA and HUD both help borrowers with bad credit and insufficient down payment to be able to buy or repair a house.[15]
In the late 1990s, a new category of mortgage products known as subprime mortgages emerged and began to compete with the traditional mortgages that were financed by the FHA. These subprime products were often poorly underwritten, if they were underwritten at all, and offered higher profits for lenders. Consequently, lenders had a strong incentive to steer borrowers towards these subprime products, even when these borrowers qualified for FHA loans, which were considered safer.
As the subprime mortgage market experienced significant growth, the FHA's share of the mortgage market declined. For instance, in 2001, FHA-insured loans accounted for 14% of home-purchase mortgages. However, by 2005, this percentage had dropped to less than 3%. The surge in these unregulated subprime loans played a role in inflating the United States housing bubble, which ultimately led to the subprime mortgage crisis and nearly caused the collapse of the housing market.[16] Following the subprime mortgage crisis, The FHA, in conjunction with Fannie Mae and Freddie Mac, emerged as a substantial provider of mortgage financing in the United States. Notably, the proportion of home purchases funded through FHA mortgages saw a substantial increase, rising from a mere 2 percent to over one-third of all mortgages in the United States. This growth was in response to a contraction in conventional mortgage lending during a credit crunch period. By the year 2011, the FHA was responsible for backing approximately 40% of all home purchase loans in America. Since the year 2008, the FHA has supported more than 4 million loans and facilitated mortgage refinancing for 2.6 million families, resulting in reduced monthly payments.[16] 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.[17][18] 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.[19][20][21]
Since its establishment in 1934, the FHA and HUD have collectively provided insurance for nearly 50 million home mortgages. Presently, the FHA holds a portfolio that includes approximately 8.5 million insured single-family mortgages, as well as more than 11,000 insured multifamily mortgages. Additionally, it encompasses over 3,900 mortgages dedicated to hospitals and residential care facilities.[22]
FHA down payment
A borrower has several options for sourcing their down payment. The 3.5% requirement can be met by using the borrower's personal funds or by receiving a qualified gift from a family member or another eligible source.[23]
FHA mortgage insurance
FHA insurance payments consist of two components: the upfront mortgage insurance premium (UFMIP) and the annual premium, which is paid monthly and referred to as the mutual mortgage insurance (MMI).[24] The UFMIP is a mandatory payment that can be paid in cash at the time of closing or included in the loan amount.[23] The annual Mortgage Insurance Premium (MIP) for FHA-insured mortgages varies depending on factors such as the base loan amount, loan-to-value (LTV) ratio, and loan term. For a typical 30-year mortgage, the annual MIP rate ranges from 0.80% to 1.05%. Homebuyers who opt for a 15-year mortgage experience lower MIP rates, ranging from 0.45% to 0.95%. For loans with FHA Case Numbers assigned on or after June 3, 2013, the duration of MIP payments is determined by factors including loan term, LTV ratio, and previous payment history. The upfront mortgage insurance premium (UFMIP) is a fixed 1.75% of the base loan amount and is mandatory, payable in cash at closing or financed into the loan. These MIP payments are a fundamental component of FHA mortgage insurance, serving to protect lenders from potential losses.[24]
In the present day, approximately 46% of first-time homebuyers in the United States utilize FHA loans for their home purchases. Notably, 1 in 16 FHA loan borrowers maintains a credit score below 600, while the average credit score among first-time FHA loan borrowers stands at 677. These first-time homebuyers account for 82% of all FHA purchase loans. Additionally, 23% of all homebuyers opt for an FHA loan, with 28% of those aged 37 or younger choosing this financing option. Among the challenges faced by homebuyers, 13% of all buyers and 24% of those under the age of 37 find the down payment requirement to be the most daunting task. On average, the down payment amount is $6,624. FHA borrowers have an average debt-to-income ratio of 40.34%, and the typical FHA loan amount is $191,650. It's worth noting that a minimum credit score of 580 with a down payment of 3.5% is required to qualify.[25]
Legacy
The establishment of the Federal Housing Administration (FHA) had a significant impact on the housing market in the United States. Homeownership rates experienced a notable increase, rising from 40% in the 1930s to 61% and 65% by 1995. The peak of homeownership was nearly 69% in 2005, coinciding with the height of the US housing bubble. Within just four years of the FHA's inception in 1934, prospective homeowners could secure a house with a mere ten percent down payment, with the remaining ninety percent financed through a 25-year, self-amortizing, FHA-insured mortgage loan.
Following World War II, the FHA played a pivotal role in financing homes for returning white veterans and the families of white soldiers. Its assistance extended to the purchase of both single-family and multifamily homes. During the 1950s, 1960s, and 1970s, the FHA played a crucial role in catalyzing the construction of millions of privately owned apartments designed for elderly, handicapped, and lower-income Americans. In the 1970s, amid soaring inflation and energy costs that threatened the viability of numerous private apartment buildings, the FHA's emergency financing provided essential support to financially struggling properties. Additionally, during the 1980s, when economic conditions did not favor increased homeownership, the FHA helped stabilize falling property prices, enabling potential homeowners to secure financing, especially in regions where private mortgage insurers had withdrawn due to economic challenges, such as oil-producing states.[22][failed verification] The Federal Housing Administration (FHA) has had its most pronounced impact on minority populations and urban areas. In particular, nearly half of the FHA's business in metropolitan areas is concentrated in central cities, a significantly higher proportion than that observed with conventional loans.[26] The FHA has also extended loans to a larger proportion of African Americans, Hispanic Americans, as well as younger borrowers with limited credit, playing a role in the growth of homeownership within these demographic groups. However, as the capital markets in the United States evolved over the course of several decades, the influence of the FHA waned. By 2006, FHA loans constituted less than 3% of all loans originated in the United States.[27] In the fiscal year 2019, FHA-insured mortgages represented 11.41% of the total dollar volume for single-family residential mortgage originations. Notably, 82.84% of these FHA-insured single-family forward purchase transaction mortgages in fiscal year 2019 were availed by first-time homebuyers. Furthermore, minorities accounted for 36.24% of FHA purchase mortgage borrowers in the calendar year 2018, a significant contrast to the 19.94% observed through conventional lending channels.[28]
The Federal Housing Administration (FHA) implemented mortgage underwriting standards that had a discriminatory impact on minority neighborhoods. This discriminatory practice is evident in the fact that between 1945 and 1959, African Americans received less than 2 percent of all federally insured home loans.[29][30] As subsidized mortgage insurance became increasingly significant in the housing market, property values in minority neighborhoods within inner cities experienced a sharp decline. Additionally, approval rates for mortgage loans among minority applicants remained exceedingly low. Beginning in 1935, the FHA instituted guidelines designed to discourage private mortgage investors from extending loans to properties in minority areas. This practice, known as redlining, was made illegal by the Fair Housing Act of 1968.[31] Redlining has had long-lasting effects on minority communities.[32][33] The legacy of redlining continues to exert its influence today in certain regions of the United States. Redlining has had a detrimental impact on the contemporary wealth gap between African Americans and White Americans.[34]
^Hanlon, Bernadette; Short, John Rennie (2020). "Housing Policy and the Suburban Metropolis: A Focus on the United States and France". In Anacker, Katrin B.; et al. (eds.). The Routledge Handbook of Housing Policy and Planning. New York: Routledge. ISBN978-1-1381-8843-3.
^Hanchett, Thomas W. (2000). "The Other 'Subsidized Housing': Federal Aid to Suburbanization 1940s-1960s". In Bauman, John F.; et al. (eds.). From Tenements to the Taylor Homes: In Search of an Urban Housing Policy in Twentieth Century America. Pennsylvania State University Press. pp. 163–179. ISBN0-2710-2012-1.[page range too broad]
"Homes and Communities". Federal Housing Administration, U.S. Department of Housing and Urban Development. Archived from the original on January 5, 2010. Retrieved November 21, 2006.
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