Federal Housing Administration
The Federal Housing Administration, also known as the Office of Housing within the Department of Housing and Urban Development, 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 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, which oversees government-sponsored enterprises. Presently, the FHA is under the leadership of Assistant Secretary for Housing and Federal Housing Commissioner, Frank Cassidy .
History
The Federal Housing Administration was under the leadership of the Federal Housing Commissioner Raymond M. Foley from 1945 to 1947. and Franklin D. Richards from 1947-1952. In 1954 Norman P. Mason was appointed as the Federal Housing Commissioner.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 ratios for these mortgages generally remained below sixty percent. 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. 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.
Appraisal criteria and race discrimination
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. 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." 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.
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.
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.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. 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. 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, 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. 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. With the collapse of 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. 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.