Federal Housing Administration

The FHA's logo

The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying. The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market.

History

During the Great Depression, the banking system failed, causing a drastic decrease in home loans and ownership. At this time, most home mortgages were short-term (three to five years), no amortization, balloon instruments at loan-to-value (LTV) ratios below fifty to sixty percent. 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. Because there was little faith in the backing of the U.S. government, few loans were issued and few new homes were purchased.

In 1934 the federal banking system was restructured. The National Housing Act of 1934 was passed and the Federal Housing Administration was created. Its intent was to regulate the rate of interest and the terms of mortgages that it insured. These new lending practices increased the number of people 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 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%.

During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York.

The FHA Today

In 1965, the Federal Housing Administration became part of the Department of Housing and Urban Development (HUD). Since 1934, the FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages. Currently, the FHA has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. The Federal Housing Administration is the only government agency that is completely self-funded. However, although it claims to operate solely from its own income at no cost to taxpayers, there is an implicit guarantee that the taxpayer will help them in times of need.

During budget planning for 2008 HUD had been projecting $143,000,000 budget shortfall stemming from the FHA program. This is the first time in three decades HUD had made a request to Congress for a taxpayer subsidy. Even though FHA is statutorily required to be budget neutral, the GAO is projecting taxpayer funded subsidies of half a billion dollars over the next three years, if no changes are made to the FHA program.

Following the Subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became the source of much of the United States mortgage financing. The share of home purchases financed with FHA mortgages went from 2 percent to over one-third of mortgages in the country as conventional mortgage lending dried up in the credit crunch. Without the subprime market, many of the riskiest borrowers ended up borrowing from the Federal Housing Administration, and the FHA could suffer substantial losses. Joshua Zumbrun and Maurna Desmond of Forbes have written that eventual government losses from the FHA could reach $100 billion.

The troubled loans are now weighing on the agency’s capital reserve fund, which has fallen to below its Congressional mandated minimum of 2 percent, from over 6 percent two years ago.

FHA Down Payment

A borrower's downpayment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, non-profit or government entity. Since 1998, non-profits have been providing downpayment gifts to borrowers who purchase homes where the seller has agreed to reimburse the non-profit and pay an additional processing fee. In May 2006, the IRS determined that this is not "charitable activity" and has moved to revoke the non-profit status of groups providing downpayment assistance in this manner. FHA has since stopped down payment assistance program through 3rd party non profits. There is a bill currently in congress that hopes to bring back down payment assistance programs through non profits.

FHA Mortgage Insurance

The FHA insures only a limited range of mortgages provided by FHA-approved lenders. Private Mortgage Insurance ("PMI") insurers service mortgages of the conventional market. PMI is required if a homebuyer borrows more than 80% of the property’s purchase price in one loan; the FHA insurance is required for any FHA mortgage, irrespective of the size of the down payment provided. The premiums for both insurances get cancelled at a certain point (was not true of FHA premiums before Jan. 1, 2001), but the conditions for this to happen are different (see below).

Mortgage insurance is available for housing loan lenders, protecting against homeowner mortgage default. For a small fee, lenders can obtain insurance for a value of ninety seven percent of the appraised value of the home or building. FHA loans are insured through a combination of a small upfront mortgage insurance premium (UFMIP), as well as a small monthly mortgage insurance (MMI) premium.

The (UF)MIP or (Up-Front) Mortgage Insurance Premium is the upfront fee you pay either in cash at close or financed into the loan. The MMI or Mutual (sometimes called Monthly) Mortgage Insurance is your monthly premium which is included in your payment. This MMI is an annual premium which is to be remitted monthly, it must be paid for 5 years regardless of your LTV (loan to value) if after 5 years your LTV is 78% or less it may be canceled on loans originated after 1/1/01. If your loan term is 15 years or less the 5 year rule does not apply.

In instances where the home owner has a poor to moderate credit history, the monthly mortgage insurance premium will be substantially less expensive with an FHA loan than with a conventional loan regardless of LTV - sometimes as little as one-ninth as much per month depending on the borrower's exact credit score, LTV, loan size, and approval status. A borrower with an FHA loan always pays the same mortgage insurance rate regardless of their credit score. This is especially of benefit to borrowers who have less than 22% equity in their homes and credit scores under 620. Conventional mortgage insurance premium rates factor in credit scores, whereas FHA mortgage insurance premiums do not. When a borrower has a credit score under 620, conventional mortgage premiums spike dramatically. If a borrower has a credit score under 575, they may find it impossible to purchase a home for less than 20% down with a conventional loan, as the majority of mortgage insurance companies no longer write mortgage insurance policies on borrowers with credit scores under 575 due to a sharply increased risk. When they do write mortgage insurance policies for borrowers with lower credit scores, the annual premiums are sometimes as high as 4% to 5% of the loan amount. Based on this, if a consumer is considering purchasing a new home or refinancing an existing home, they would often be well-advised to look into the FHA loan program.

Cancelling FHA Mortgage Insurance

The FHA insurance payments include 2 parts: the upfront mortgage insurance premium (UFMIP) and the annual premium remitted on a monthly basis - the mutual mortgage insurance (MMI). The UFMIP is an obligatory payment, which can either be made in cash at closing or financed into the loan, so that you really pay it over the life of the loan. It adds a certain amount to your monthly payments, but this is not PMI, nor is it the MMI. When a homeowner purchases a home utilizing an FHA loan, they will pay monthly mortgage insurance for a period of five years or until the loan is paid down to 78% of the appraised value - whichever comes later. The MMI premiums come on top of that for all FHA Purchase Money Mortgages, Full-Qualifying Refinances, and Streamline Refinances, (except for < 15-year FHA mortgages with loan-to-value ratio (LTV) < 90).

When we talk about canceling the FHA insurance, we talk only about the MMI part of it. Unlike other forms of conventional financed mortgage insurance, the UFMIP on an FHA loan is prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the UFMIP paid at loan inception. If you have financed the UFMIP into the loan, you cannot cancel this part. The insurance premiums on a 30-year FHA loan must have been paid for at least 5 years. The MMI premium gets terminated automatically once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value.

A 15-year FHA mortgage annual insurance premium will be cancelled at 78% loan-to-value ratio regardless of how long the premiums have been paid. The FHA’s 78% is based on the initial amortization schedule, and does not take any extra payments or new appraisals into account. This is the big difference between PMI and FHA insurance: the termination of FHA premiums can hardly be accelerated.

Borrowers who do make additional payments towards an FHA mortgage principal, may take the initiative through their lender to have the insurance terminated using the 78% rule, but not sooner than after 5 years of regular payments for 30-year loans. PMI termination, however, can be accelerated through extra payments or a new appraisal if the house has appreciated in value.

Effects

The creation of the Federal Housing Administration successfully increased the size of the housing market. By convincing banks to lend again, as well as changing and standardizing mortgage instruments and procedures, home ownership has increased from 40% in the 1930s to nearly 70% in 2001. By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a twenty-five year, self amortizing, FHA-insured mortgage loan. After World War II, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multi-family homes. 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 the 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. In the 1980s, when the economy didn’t support an increase in homeowners, the FHA helped to steady falling prices, making it possible for potential homeowners to finance when private mortgage insurers pulled out of oil producing states.

The greatest effects of the Federal Housing Administration can be seen within minority populations and in cities. Nearly half of FHA’s metropolitan area business is located in central cities,[1] a percentage that is much higher than that of conventional loans. The FHA also lends to a higher percentage of African Americans and Hispanic Americans, as well as younger, credit constrained borrowers. Because some feel that these groups include riskier borrowers, it is believed that this is part of the reason for FHA’s contribution to the homeownership increase.

As the capital markets in the United States matured, FHA had less and less of an impact on the US Housing market for several decades. In 2006, FHA made up less than 3% of all the loans originated in the US. This had some members of Congress wondering why the Government is still in the mortgage insurance business. A vocal minority of congressional leaders has even been calling for the end of FHA. But this ideal has almost completely lost sense and is barely even mentioned now as FHA has once again began to play a major and increasingly larger role in the housing market over the past 2 years by helping fight the effects of the recent deterioration in the credit markets, the mortgage melt-down, and the overall economic recession. Today, FHA now backs over 40 percent of all new mortgages.

Now, most members of Congress support, and have been helping reform, FHA in order to make it more competitive in the for-profit industry, and to make it a greater positive force in the housing market which is crucial to the overall economy. FHA has significantly increased its mortgage relief efforts by helping at-risk borrowers avoid foreclosure with its refinance programs such as: FHA Secure and Hope For Homeowners (H4H). Specifically designed for this purpose, the FHA Secure and H4H programs have already facilitated foreclosure prevention for hundreds of thousands of distressed homeowners like: under-water borrowers, people affected by risky adjustable-rate mortgages and others experiencing temporary economic hardship.

Redlining

In the 1930s, the Federal Housing Authority established mortgage underwriting standards that significantly discriminated against minority neighborhoods. As the significance of subsidized mortgage insurance on the housing market grew, home values in inner-city minority neighborhoods plummeted. Also, the approve rates for minorities were equally low. After 1935, the FHA established guidelines to steer private mortgage investors away from minority areas. This practice was made illegal by the Fair Housing Act of 1968. This had long lasting effects on the Black and minority communities, due to the lack of being able to pass on the wealth to the next generations. Minorities are still at a disavantage when it comes to property ownership due to the past FHA regulations during the New Deal era.

Notes

To date, FHA is one of two mortgage programs available to home buyers that will allow a purchase with only 3% (or 0%) down payment. That is legislated to change to 3.5% as of October 1, 2008. FHA also has the most affordable monthly mortgage insurance available, and as mentioned previously in this article, mortgagees that do not have 20% for a down payment may be required to pay a monthly mortgage premium that is quoted by private (for profit) mortgage insurance companies. The monthly mortgage insurance premiums offered by private mortgage insurance companies can quickly make a home unaffordable to a less than perfect credit borrower.

See also

• Mortgage loan
• Redlining
• Department of Housing and Urban Development
• National Mortgage Crisis of the 1930s
• Fannie Mae
• Freddie Mac
• Ginnie Mae
• Mortgage GSE controversy
• FHA loan
• FHA-Secure

In 2006 FHA loans accounted for a mere 1.7% of all mortgages. The maximum FHA loan amount for a condominium was limited to $369,000. The wide availability of conventional mortgages with 1) higher loan limits, 2) little or no down payment required and 3) insubstantial income documentation requirements made FHA loans unattractive by comparison. (www.fhaprosllc.com)

References

• Monroe, Albert. “How the Federal Housing Administration Affects Homeownership.” Harvard University Department of Economics. Cambridge, MA. November 2001. http://www.jchs.harvard.edu/publications/governmentprograms/monroe_w02-4.pdf
• Homes and Communities. “The Federal Housing Administration.” U.S. Department of Housing and Urban Development. http://www.hud.gov/offices/hsg/fhahistory.cfm
• Brown, Christopher C. “Federal Housing Administration.” The Virtual Reference Desk. http://www.virtualref.com/govagency/364.htm
• Garvin, Alexander. The American City: What Works, What Doesn’t. 2nd Edition. McGraw-Hill, New York. 2002.
• Jackson, Kenneth. Crabgrass Frontier: The Suburbanization of the United States. Oxford University Press, Oxford. 1985.

External links

• FHA Website
• Federal Housing Finance Board Meeting Notices and Rule Changes from The Federal Register RSS Feed
• National Housing Institute
• More Mortgage Madness by Kai Wright, The Nation, April 29, 2009
• An Option for the Ages