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The Federal Housing Administration (FHA), also known as the Office of Housing within the
Department of Housing and Urban Development The United States Department of Housing and Urban Development (HUD) is a Cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture wi ...
(HUD), is a United States government agency founded by President
Franklin Delano Roosevelt Franklin Delano Roosevelt (, ; January 30, 1882April 12, 1945), often referred to by his initials FDR, was an American politician and attorney who served as the 32nd president of the United States The president of the United States ...

Franklin Delano Roosevelt
, created in part by the
National Housing Act of 1934 The National Housing Act of 1934, , , also called the Capehart Act and the Better Housing Program, was part of the New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President ...
. 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 The Federal Housing Finance Agency (FHFA) is an independent federal agency in the United States created as the successor regulatory agency of the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), and ...
(FHFA), which supervises
government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of Credit (finance), credit to targeted sectors of the economy, to make thos ...
s. Dana T. Wade was confirmed by the
U.S. Senate The United States Senate is the upper chamber of the United States Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, comprising a lower body, the ...
on July 28, 2020 as the FHA Commissioner and resigned on January 20, 2021. The FHA is currently led by a Senior Official Performing the Duties of Assistant Secretary and Commissioner, Lola Kolluri.


History

During the
Great Depression The Great Depression was a severe worldwide economic depression An economic depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a economic recession, recess ...
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 Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academ ...
, and
balloon A balloon is a flexible bag that can be inflated with a gas, such as helium Helium (from el, ἥλιος, helios Helios; Homeric Greek: ), Latinized as Helius; Hyperion and Phaethon are also the names of his father and son respectiv ...
instruments at loan-to-value (LTV) ratios below sixty percent. 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 Refinancing is the replacement of an existing debt obligation with another debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as in ...
was not available, and many borrowers, now unemployed, were unable to make mortgage payments. Consequently, many homes were
foreclosed Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), collat ...
, 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 The National Housing Act of 1934, , , also called the Capehart Act and the Better Housing Program, was part of the New Deal The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President ...
created the Federal Housing Administration. Its intention was to regulate the rate of interest and the terms of mortgages that it insured; however, 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 Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transaction ...
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. While this practice is no longer official policy, its practices are still widely implemented in measures of de facto segregation. In 1935,
Colonial Village Colonial Village was an area in Washington, D.C. (northwest), northwest Washington, D.C., built in 1931 with 80 residences. The homes are reproductions of Colonial architecture, colonial buildings, such as the Moore House (Yorktown, Virginia), Moor ...
in
Arlington, Virginia Arlington County is a county A county is a geographical region of a country used for administrative or other purposesChambers Dictionary The ''Chambers Dictionary'' (''TCD'') was first published by William Chambers (publisher), Willia ...
, 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 Buffalo is the second-largest city in the U.S. state In the , a state is a , of which there are currently 50. Bound together in a , each state holds al jurisdiction over a separate and defined geographic territory where it shares its ...

Buffalo, New York
. In 1965 the Federal Housing Administration became part of the
Department of Housing and Urban Development The United States Department of Housing and Urban Development (HUD) is a Cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture wi ...
. Following the
subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
, FHA, along with
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United St ...
and
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited com ...

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 A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cru ...
. 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. 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.
Mortgage insurance Mortgage insurance (also known as mortgage guarantee and home-loan insurance) is an insurance policy which compensates lenders or investors in Mortgage-backed security, mortgage-backed securities for losses due to the Default (finance), default of ...
protects lenders from the impacts of a mortgage default. If a single family property purchaser borrows more than 80% of the property's value, the lender will likely require that the borrower purchase
private mortgage insuranceLenders mortgage insurance (LMI), also known as private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses i ...
to cover the lender's risk. If the lender is FHA approved and the mortgage meets FHA requirements, 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 loan An FHA insured loan is a US Federal Housing Administration The Federal Housing Administration (FHA) is a United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contigu ...
s are insured through a combination of an upfront mortgage insurance premium (UFMIP) and annual mortgage insurance 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. Annual mortgage insurance premiums are included in monthly mortgage payments and range from 0 – 1.35% of loan value (again, depending on LTV and duration). If a borrower has poor to moderate credit history, FHA mortgage insurance may be less expensive with an
FHA insured loan An FHA insured loan is a US Federal Housing Administration The Federal Housing Administration (FHA) is a United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contigu ...
than with a conventional loan regardless of LTV – sometimes as little as one-ninth as much depending on the borrower's
credit score A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness A credit risk is risk of default (finance), default on a debt that may arise from a borrower failing to make requi ...
, 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 lower 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.


FHA down payment

A borrower's
down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transaction ...
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

The FHA insurance payments include two 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, and thus paid over the life of the loan. It adds a certain amount to your monthly payments. Unlike other forms of conventional financed mortgage insurance, the UFMIP on an FHA loan is prorated over a three-year period, meaning should the homeowner refinance or sell during the first three 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 which began before 6/3/2013 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. After 6/3/2013 for both 30 and 15-year loan term, the monthly insurance premium must be paid for 11 years if the initial loan to value was 90% or less. For loan to value greater than 90% the insurance premium must now be paid for the entire loan term. 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. For loans begun after 6/3/2013, the 15-year FHA insurance premium follows the same rules as 30-year term (see above.) 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. For the 78% rule the FHA uses the original value or purchase price, whichever is lower, they will not go off a new appraisal even if the value has increased.


Legacy

The creation of the Federal Housing Administration successfully increased the size of the housing market. Home ownership increased from 40% in the 1930s to 61% and 65% in 1995. Home ownership peaked at nearly 69% in 2005, near the peak of the US housing bubble. By 1938 only four years after the beginning of the Federal Housing Administration, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by 25-year, self-amortizing, FHA-insured mortgage loan. After
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a World war, global war that lasted from 1939 to 1945. It involved World War II by country, the vast majority of the world's countries—including all of the g ...
, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multifamily 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 In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a r ...

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 did not 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, a percentage that is much higher than that of conventional loans.Monroe, Albert
"How the Federal Housing Administration Affects Homeownership."
Harvard University Harvard University is a private Private or privates may refer to: Music * "In Private "In Private" was the third single in a row to be a charting success for United Kingdom, British singer Dusty Springfield, after an absence of nearly t ...

Harvard University
Department of Economics.
Cambridge Cambridge ( ) is a university city and the county town In the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' ...
, MA. November 2001.
The FHA also lends to a higher percentage of
African American African Americans (also referred to as Black Americans or Afro-Americans) are an ethnic group An ethnic group or ethnicity is a grouping of people A people is any plurality of person A person (plural people or persons) is a being t ...

African American
s and
Hispanic Americans Hispanic and Latino Americans ( es, Estadounidenses hispanos y latinos; pt, Estadunidenses hispânicos e latinos) are Americans Americans are the citizens Citizenship is a relationship between an individual and a state to which th ...
, 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 United States. In fiscal year 2019, FHA-insured mortgages comprised 11.41% of all single family residential mortgage originations by dollar volume. 82.84% of FHA insured single family forward purchase transaction mortgages in fiscal year 2019 were for first-time homebuyers. Overall, minorities made up 36.24% of FHA purchase mortgage borrowers in calendar year 2018, compared to 19.94% through conventional lending channels


Redlining

The Federal Housing Authority established
mortgage underwriting Mortgage underwriting is the process a lender uses to determine if the risk (especially the risk that the borrower will default (finance), default ) of offering a mortgage loan to a particular borrower is acceptable and is a part of the larger mortg ...
standards that significantly discriminated against minority neighborhoods. Between 1945 and 1959, African Americans received less than 2 percent of all federally insured home loans. As the significance of subsidized mortgage insurance on the housing market grew, home values in inner-city minority neighborhoods plummeted. Also, the approval 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 Redlining is the systematic denial of various services or goods by governments or the private sector either directly or through the selective raising of prices. The word itself is rooted back to the early 1930's after the color correlating prope ...
, was made illegal by the
Fair Housing Act of 1968 The Civil Rights Act of 1968 () is a landmark law in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North ...
. Redlining has had long-lasting effects on minority communities.


Operations

The Federal Housing Administration is one of the few government agencies that is largely self-funded.Homes and Communities. "The Federal Housing Administration." U.S. Department of Housing and Urban Development


See also

*
Ginnie Mae The Government National Mortgage Association (GNMA), or Ginnie Mae, is a government-owned corporation A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise Business is the activity of making on ...
*
Levittown Aerial view of Levittown, Pennsylvania circa 1959 Levittown is the name of seven large suburb The Swedish suburbs of Husby/Kista/Akalla are built according to the typical city planning of the Million Programme. A suburb (or suburban area or ...


References


Further reading

* * * *


External links

*
National Housing Institute
{{Authority control New Deal agencies Financial services companies established in 1934 Government agencies established in 1934 Mortgage industry of the United States
Insurance companies of the United States Insurance Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, an ...
United States Department of Housing and Urban Development agencies 1934 establishments in the United States Financial services companies of the United States 1934 establishments in Washington, D.C. American companies established in 1934