When the Great Depression hit in 1929, millions of Americans began to lose their homes to foreclosure. Short term mortgages (3-5 years) and balloon payments were common. The banking crisis during the 1930s forced banks to call in loans, and there were no refinancing options for the average homeowner.
As a result the federal banking system was restructured and in 1934 The National Housing Act was passed. This legislation created the Federal Housing Administration (FHA) with the intent to regulate interest rates and mortgage terms on the loans that it insured. The agency purchased mortgages and insured them, allowing banks to turn around and make another loan without putting out substantial capital of its own.
The new lending practices made home purchase possible for many of the country’s working people. In 1965, the FHA became an arm of the newly formed Department of Housing and Urban Development. Since 1934, the FHA and HUD have insured over 34 million mortgages.
The FHA has also been active in financing the development of multi-family housing. During the 1960s and 1970s the FHA contributed to federal community development projects by financing millions of units of privately owned rental units for the elderly, the handicapped and lower income Americans. Over the last three decades, the FHA has backed most of the loans provided to inner city families and minorities, providing homeowner status to people who have historically struggled to obtain home loans.
When housing prices began to spiral upward in the 1990s, lenders developed mortgage products designed to help people buy homes that had suddenly been priced beyond their reach. The FHA 3% down payment was matched and surpassed by mortgage packages that provided 100% financing for homes to qualified buyers. As home prices continued to rise, the qualifications for loans were loosened accordingly.
The FHA’s caps on conventional loans have also contributed to a diminished role for the agency in today’s mortgage market. However the rising rate of foreclosures on the “exotic” mortgage packages created to push people into the housing market may spark a return to the safety of FHA loans. There is also legislation pending that will allow the FHA to adapt its loan ceilings and develop more flexible loan products for today’s market.