Federal Housing Administration

The Federal Housing Administration (FHA) is a United States government agency founded by President Franklin Delano Roosevelt, created in part by the National Housing Act of 1934. 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.

Federal Housing Administration
Agency overview
Formed1934 (1934)
JurisdictionUnited States
HeadquartersRobert C. Weaver Federal Building
Washington, D.C.
Agency executive
  • Dana T. Wade, Assistant Secretary for Housing and Federal Housing Commissioner
Parent departmentDepartment of Housing and Urban Development
Key document
Websitewww.hud.gov/federal_housing_administration

Dana T. Wade was confirmed by the U.S. Senate on July 28, 2020 as the FHA Commissioner.[1]

It is different from the Federal Housing Finance Agency (FHFA), which supervises government-sponsored enterprises.

History

During the Great Depression 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, and balloon instruments at loan-to-value (LTV) ratios below sixty percent.[2] 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 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.

In 1934 the federal banking system was restructured. The National Housing Act of 1934 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 on a house and monthly debt service payments on a mortgage, thereby also increasing the size of the market for single-family homes.[3]

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.[4]

In 1935, Colonial Village in Arlington, Virginia, was the first large-scale, rental housing project erected in the United States that was Federal Housing Administration-insured.[5] During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York.[6]

In 1965 the Federal Housing Administration became part of the Department of Housing and Urban Development (HUD).

Following the subprime mortgage crisis, FHA, along with Fannie Mae and 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.

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.[7][8]

The troubled loans are now weighing on the agency'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.[9] By November 2012, the FHA was essentially bankrupt.[10][11][12]

Mortgage insurance
Visualization by the Government Accountability Office of FHA mortgage insurance claims from 2007 to 2015

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.[13]

Mortgage insurance 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 insurance 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 loans 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 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 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 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, 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 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.[13]

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.[14] 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 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
Main article: Redlining

In the 1930s, the Federal Housing Authority established mortgage underwriting standards that significantly discriminated against minority neighborhoods.[15] Between 1934 and 1968, African Americans received only 2 percent of all federally insured home loans.[16] 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, was made illegal by the Fair Housing Act of 1968.[17] Redlining has had long-lasting effects on minority communities.[18][19]

Operations

The Federal Housing Administration is one of the few government agencies that is largely self-funded.[20]

See also

References
  1. "Senate confirms Wade as FHA commissioner". American Banker. July 28, 2020. Retrieved August 21, 2020.
  2. Monroe 2001, p. 5
  3. Garvin 2002
  4. Rothstein, Richard (2017). The Color of Law: A Forgotten History of How Our Government Segregated America. New York. ISBN 9781631492853. OCLC 959808903.
  5. Virginia Historic Landmarks Commission Staff (May 1980). "National Register of Historic Places Inventory/Nomination: Monroe Courts Historic District" (PDF).
  6. Jason Wilson; Tom Yots; Daniel McEneny (June 2010). "National Register of Historic Places Registration: Kensington Gardens Apartment Complex". Retrieved December 22, 2010.
  7. Lending Over Backward, Forbes
  8. The Next Hit: Quick Defaults, The Washington Post
  9. "House Bill Aims to Save FHA Mortgage Insurance Fund in "Crisis"". Reverse Mortgage Daily. February 8, 2012.
  10. "F.H.A. Hopes to Avoid a Bailout by Treasury". New York Times. November 16, 2012.
  11. "F.H.A. Audit Said to Show Low Reserves". New York Times. November 14, 2012.
  12. "Bet the house: why the FHA is going (for) broke". January 19, 2012.
  13. "HUD – Federal Housing Administration". Washington, D.C.: U.S. Department of Housing and Urban Development. September 6, 2006. Archived from the original on January 5, 2010. Retrieved December 10, 2009.
  14. Monroe, Albert. "How the Federal Housing Administration Affects Homeownership." Harvard University Department of Economics. Cambridge, MA. November 2001.
  15. Rothstein, Richard (October 15, 2014). "The Making of Ferguson: Public Policies at the Root of its Troubles". Economic Policy Institute.
  16. Hanchett, Thomas W., "The Other 'Subsidized Housing': Federal Aid to Suburbanization 1940s-1960s." in John F. Bauman, Roger Biles and Kristin M. Szylvian, From Tenements to the Taylor Homes: In Search of an Urban Housing Policy in Twentieth Century America (University Park, Pa.: Pennsylvania State University Press, 2000), pp. 163-179.
  17. "Housing discrimination underpins the staggering wealth gap between Blacks and whites". www.louisianaweekly.com. April 15, 2019. Retrieved January 19, 2021.
  18. Hillier, Amy. "Redlining in Philadelphia". Cartographic Modeling Laboratory. University of Pennsylvania. Archived from the original on March 3, 2007.
  19. Coates, Ta-Nehisi (June 2014). "The Case for Reparations". The Atlantic.
  20. Homes and Communities. "The Federal Housing Administration." U.S. Department of Housing and Urban Development. Archived 2010-01-05 at the Wayback Machine

Further reading
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