Federal Housing Administration

Federal Housing Administration

Agency overview
Formed	1934 (1934)
Agency executive	Carol J. Galante, Acting Assistant Secretary for Housing - Federal Housing Commissioner
Website	FHA website

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. As of July, 2011, the Acting Commissioner of the FHA is Carol Galante.

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.

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 downpayment

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, 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.

Mortgage insurance

Mortgage insurance protects lenders from mortgage default. If a property purchaser borrows more than 80% of the property's value, the lender will likely require that the borrower purchase private mortgage insurance to cover the lender's risk. If the lender is FHA approved and the mortgage is within FHA limits, the FHA provides mortgage insurance that may be more affordable, especially for higher risk borrowers.

Lenders can typically obtain FHA mortgage insurance for 96.5% of the appraised value of the home or building. FHA loans are insured through a combination of an upfront mortgage insurance premium (UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is a lump sum ranging from 1 – 2.25% of loan value (depending on LTV and duration), paid by the borrower either in cash at closing or financed via the loan. MMI, although annual, is included in monthly mortgage payments and ranges from 0 – 1.15% of loan value (again, depending on LTV and duration).

If a borrower has poor to moderate credit history, MMI probably is much less expensive with an FHA insured loan than with a conventional loan regardless of LTV – sometimes as little as one-ninth as much depending on the borrower's credit score, LTV, loan size, and approval status. Conventional mortgage insurance rates increase as credit scores decrease, whereas FHA mortgage insurance rates do not vary with credit score. Conventional mortgage premiums spike dramatically if the borrower's credit score is less than 620. Due to a sharply increased risk, most mortgage insurers will not write policies if the borrower's credit score is less than 575. When insurers do write policies for borrowers with lower credit scores, annual premiums may be as high as 5% of the loan amount.

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, contributing to the increase in home ownership among these groups.

As the capital markets in the United States matured over several decades, the impact of the FHA decreased. In 2006, FHA made up less than 3% of all the loans originated in the US. This had some in Congress questioning the Government's role in the mortgage insurance business, with a vocal minority calling for the end of FHA. The subsequent deterioration in the credit markets, however, has somewhat muted criticism of the agency. Today, FHA now backs over 40 percent of all new mortgages.

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, known as redlining, 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 disadvantage when it comes to property ownership due to the past FHA regulations during the New Deal era.

See also

• Ginnie Mae

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

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