Earlier this morning at the Austin Chamber of Commerce, Fed Chairman Ben Bernanke commented that “there’s no comparison in terms of severity” between our economy and the previous Great Depression. As growing concerns surround our fragile economy, Bernanke noted that we have social programs and government policies set in place to protect us from such devastating results. While it may not be as severe as The Great Depression, the current forecast still has individuals worrying and concerned for our weakening economy. 

As FHA continues to be one of the major sources of mortgage lending in this housing market, it may be helpful to note the correlation between today’s FHA and our previous Great Depression. Despite our own Fed Chairman’s statement, and his decorated Great Depression studies merit, the correlation between the two issues can give individuals further insight into today’s economy and today’s FHA program.

A Little FHA History
The original FHA program began in 1934 as part of the National Housing Act to help rescue the housing markets from failing banks and mortgage lenders. The goal of FHA was to provide a form of federal assisted mortgages through a program that would eventually become self-supporting. In recent years, FHA was unable to keep up with appreciating home values in certain areas and found itself behind lenders who would offer 100% home financing (compared to FHAs 97%). Although FHA still existed, many individuals turned to alternative financing options because they were simply easier to qualify for. But, with our current economy tying the hands of many mortgage lenders, FHA has begun to emerge once again as a major source of mortgage lending.

– Rising Rates Of Foreclosure And Default
During the Great Depression, the rates of foreclosure and defaults rose sharply, and FHA stimulated the lending industry by providing a form of insurance to these mortgage lenders. As banks and lenders continue to fail across the nation, today’s lenders have learned their lesson and are shifting their business models towards safer lending practices. With respect to our current economy, an identical shift has taken place as mortgage lenders and investors scurry back to these FHA insured mortgages.

– Slower Economy Means Smaller Down Payments
Although the severity of our current economic slowdown still pales in comparison to the The Great Depression, many potential homebuyers and homeowners are still struggling to come up with significant down payments. While the FHA temporarily struggled to keep up with increasing median home prices, their required down payments have stayed relatively constant at 3% (soon to be 3.5%). 

– FHA Balances Risk With Regulated Documentation
We’ve seen the consequences of lax lending and 100% home financing, and many have grown wary of the FHAs added risk burden. One thing to keep in mind is that the FHA has always strived to balance its risk with tighter underwriting standards compared to these other subprime offerings. Specific income and asset qualifications must be met, but FHA lenders also require proper documentation to prove these statements. In addition, FHA lenders can continue to offer aggressive pricing on their mortgage rates since the insurance premiums paid by the borrowers help offset the underlying risk. 

FHA loans have been around for quite a long time, but the recent changes in our economy have simply brought the spotlight back to the FHAs strengths. As we’re seeing more and more individuals turn to FHA, the original goal of FHA is being fulfilled as it keeps money flowing into mortgages during times of need. While we may be fortunate to avoid another Great Depression, we’re simply seeing FHA address the problems to which it was created for in the first place.

This entry was posted on Monday, December 1st, 2008 at 3:39 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.