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The Federal Housing Administration (FHA), also known as the Office of Housing within the Department of Housing and Urban Development (HUD), 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. The organization aims 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 (FHFA), which supervises government-sponsored enterprises. The U.S. Senate confirmed Dana T. Wade on July 28, 2020 as the FHA Commissioner[1] and she subsequently resigned on January 20, 2021. The FHA is currently led by a Senior Official Performing the Duties of Assistant Secretary and Commissioner, Lola Kolluri.[2] The Federal Housing Administration is one of the few government agencies that is largely self-funded.[3]

History

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New Deal Origins

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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.[4] 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. with the intention to regulate the rate of interest and the terms of insured mortgages. Prior to the creation of the FHA, ballon mortgages (home loans with large payments due at the end of the loan) were normal and buyers had to put down 30 to 50 percent of the cost of a house to secure a mortgage. FHA secured loans reduced the amount of money needed as down payment to as little as 10 percent and the agency extended the repayment period of home mortgages from 5-10 years to 20-30 years.[5]

Appraisal Criteria and Restrictions by Race

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The new practices were restricted only to white Americans.[6] The number of white Americans who could afford a down payment on a house and monthly debt service payments on a mortgage increased, thereby also increasing the size of the market for single-family homes.[7] 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 criterion 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." [8] 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.[6]

Fannie Mae and G.I. Bill

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In 1938 Congress created the Federal National Mortgage Association (Fannie Mae) which helped establish a secondary mortgage market in which banks and investors could buy and sell current home loans. After the adoption of the Serviceman's Readjustment Act (known as the GI Bill) in 1944, the FHA brought together a system of long-term mortgages for the construction and sale of private homes. The Veteran's Administration's home-loan guarantee program through the GI Bill allowed veterans to put down a payment of only one dollar. These changes helped fuel a surge in American home ownership, with families living in owner-occupied homes increasing 44 percent to 63 percent from 1934 and 1972.[5]

Major Housing Projects

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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.[9] During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York.[10] During the Great Depression, Ohio Cities used federal government funds for building housing projects and first two of those projects completed in the United States were in Cincinnati and Cleveland. [4]

Establishment of HUD and similarities and differences

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The Federal Housing Administration became part of the Department of Housing and Urban Development with the Passage of the Department of Housing and Urban Development Act of 1965.[11] When the FHA became part of HUD, the FHA became a separate entity within HUD. A Federal Housing Commissioner who would also be an Assistant Secretary would head the FHA. The FHA and HUD have their similarities and differences. The Commissioner designated would administer all other departmental programs that relate to the private mortgage market in addition to duties as Assisstant Secretary and FHA head.[12] The FHA and HUD help borrowers with bad credit and insufficent down payment cash or equity to be able to purchase or reifinance residential real estate. Both Agencies offer programs the give borrowers the funds needed to rehabilitate and repair substandard properties. The Differences between the FHA and HUD are that they both have seperate qualification requirements and loan terms but their differences affect specific borrowers. HUD has more conventional borrower qualification rules, but the FHA has more flexibility in interest rates, credit worthiness and low down payments for people to buy primary residences. HUD tends to deal with real estate investors wanting monthly income because it focuses on multi-family homes and apartment complexes. FHA Programs are mean't for individuals wanting to purchase, refinance or rehabilitate homes the the borrowers will use[13]

Role in Subprime Mortgage Crisis

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Main article: Subprime Mortgage Crisis

In the late 1990s and and early 2000s the mortgage market changed dramatically. New subprime mortgage products backed by Wall Street emerged and competed with the standard mortgages financed by the FHA. These products were typically poorly underwritten (if it all) and were easier to process than loans backed by the FHA, which usually translated to much better compensation for their originators. As a result lenders were motivated to turn borrowers toward higher risk and higher-cost subprime products even when qualified for FHA loans which were safer. As the subprime mortgage market boomed, the FHA's market share of mortgages fell; in 2001 the FHA insured 14% of home-purchase loans, but by 2005 that number fell to less than 3%. The influx of these unregulated subprime loans helped fuel a massive bubble in the U.S. housing market, which burst in 2008 which caused a massive wave of foreclosures and a near-collapse of the housing market.[14] 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% to over one-third of mortgages in the United States, as conventional mortgage lending dried up in the credit crunch. By 2011 the FHA backed about 40% of all home purchase loans in America. The FHA was able to ensure that middle-class families could still buy homes which prevented a worse market downturn due to a halt in home sales. Since 2008 the FHA has backed more than $4 million loans and helped 2.6 million families lower monthly payments through refinancing. Without the FHA's help millions of homeowners might not have been able to keep their homes through the mortgage crisis, which would have sent devastating ripples throughout the economy.[14] Many of the riskiest buyers borrowed from the FHA instead of the private subprime market, exposing the FHA to substantial potential losses. At the time, these possible losses were estimated to be as much as $100 billion.[15][16] 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.[17][18][19]

FHA Mortgages and Insurance

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

Full article: Mortgage insurance

FHA down payment

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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, gift funds, investments and more[20]

FHA Mortgage Insurance

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The FHA insurance payments include two parts: the upfront mortgage insurance premium and the annual premium remitted on a monthly basis—the mutual mortgage insurance. [21]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. [20] If someone takes out a typical 30-year mortgage, the annual insurance premium will be like this, if the base loan amount is less than or equal too $625,500, and the LTV is greater than or equal to 95%, than the annual MIP will be 80 bps (0.80%). If the base loan amount is less than or equal too $625,500, and the LTV is greater than 95%, than the annual MIP will be 85 bps (0.85%). If the base loan amount is greater than $625,500, and the LTV is less than or equal to 95%, than the Annual MIP will be 100 bps (1.00%). If the base loan amount is greater than $625,500, and the LTV is more than 95%, than the annual MIP is 105% (1.05%). Homebuyers who are able to payoff their loans quicker, and want a 15-year mortgage, will have lower mortgage insurance premiums, like this if the base loan amount is less than or equal too $625,500, and the LTV is less than or equal to 90%, than the annual MIP is 45 bps (0.45%). If the base loan amount is less than or equal too $625,500, and the LTV is greater than 90%, thean the annual MIP is 70 bps (0.70%). If the base loan amount is more than $625,500, and the LTV is less than or equal to 78%, than the annial MIP will be 45 bps (0.45%). If the base loan amount is more than $625,500, and the LTV is 78.01% to 90%, than annual MIP will be 70 bps (0.70%). If the base loan amount is more than $625,500, and the LTV is greater than 90%, than the LTV will be 95 bps (0.95%). For loans with FHA Case Numbers assigned on or after June 3, 2013, The FHA will take the annual MIP and this is when people will pay for the FHA Mortgage Insurance Premiums on your FHA loan, it goes like this, when the term is less than or equal to 15 years, when the LTV is less than or equal to 78% and there was previously no annual MIP, than the new time to pay is 11 years. When the term is less than or equal to 15 years, when the LTV is 78.01% to 90%, and previously cancelled at 78% LTV, than the new time to pay is 11 years. When the term is less than or equal to 15 years, when the LTV is more than 90%, and previously was paid at loan term, than norhing changes. When the new term is greater than 15 years, when the LTV is less than or equal to 70% and the previous time to pay was 5 years, than the new time to pay is 11 years. When the new term is greater than 15 years, when the LTV is 78.01% to 90%, and previously cancelled at 78% and 5 years, than new payment time is 11 years. When the new term is greater than 15 years, when the LTV is greater than 90%, and previously cancelled at 78% and 5 years, than the new payment time is the loan term. The current up-front mortgage insurance premium is 1.75% of the base loan amount. This is the case regardless of the amorization term or LTV ratio. [21]

FHA Borrower Statistics

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Today 46% of all first-time home buyers use FHA loans. 1 in 16 FHA loan borrowers have a credit score bellow 600 and the average credit score of first-time FHA loan borrowers is 677. First-time home buyers used 82 percent of all FHA purchase loans. 23 percent of home buyers use an FHA loan as well as 28 percent of home buyers 37 and younger used an FHA loan. 13% of buyers and 24% of buyers under 37 said that the most difficult task. the average amount for a down payment is $6,624. The average debt-to-income ration for FHA Borrowers is 40.34%. The average FHA loan amount is $191,650. The minimum credit score required for an FHA loan with a down payment of 10 percent is 500.[22]

Legacy

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Home ownership rates

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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%- 65% in 1995. Home ownership peaked at nearly 69% in 2005, near the crest of the U.S. 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 loans. 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.[23][failed verification] 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.[24] 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.[25] 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.[26]

Redlining

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Main article: Redlining

The Federal Housing Authority established mortgage underwriting standards that significantly discriminated against minority neighborhoods. After 1935, the FHA established guidelines to steer private mortgage investors away from minority areas. Between 1945 and 1959, African Americans received less than 2 percent of all federally insured home loans.[27][28] 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. This practice, known as redlining, was made illegal by the Fair Housing Act of 1968.[29] Redlining has had long-lasting effects on minority communities.[30][31] The legacy of redlining can still be felt today as redlining is responsible for the modern wealth gap African and White Americans. [29]

See also

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References

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  1. ^ "Senate confirms Wade as FHA commissioner". American Banker. 2020-07-28. Retrieved 2020-08-21.
  2. ^ "Leadership | HUD.gov / U.S. Department of Housing and Urban Development (HUD)". www.hud.gov.
  3. ^ Homes and Communities. "The Federal Housing Administration." U.S. Department of Housing and Urban Development. [1] Archived 2010-01-05 at the Wayback Machine
  4. ^ a b "Federal Housing Act". Ohio History Central. Retrieved March 3 2022. {{cite web}}: Check date values in: |access-date= (help)CS1 maint: url-status (link)
  5. ^ a b Fritz, Marie Justine (October 4th 2016). "Federal Housing Administration (FHA)". britannica.com. Retrieved March 3 2022. {{cite web}}: Check date values in: |access-date= and |date= (help)CS1 maint: url-status (link)
  6. ^ a b Rothstein, Richard (2017). The Color of Law: A Forgotten History of How Our Government Segregated America. New York: Liverlight Publishing. p. PT 51. ISBN 9781631492860. OCLC 959808903.
  7. ^ Garvin 2002
  8. ^ "UNDER WRITING MANUAL UNDER WRITING AND VALUATION PROCEDURE UNDER TITLE II OF THE NATIONAL HOUSING ACT FEDERAL HOUSING ADMINISTRATION" (PDF). Federal Housing Administration Under Writing Manual. HA Form NO.2019: 439. 2019.
  9. ^ Virginia Historic Landmarks Commission Staff (May 1980). "National Register of Historic Places Inventory/Nomination: Monroe Courts Historic District" (PDF).
  10. ^ Jason Wilson; Tom Yots; Daniel McEneny (June 2010). "National Register of Historic Places Registration: Kensington Gardens Apartment Complex". Retrieved December 22, 2010.
  11. ^ "HUD History". HUD.gov / U.S. Department of Housing and Urban Development (HUD). 2017-09-20. Retrieved 2022-05-02.
  12. ^ "CQ Almanac Online Edition". library.cqpress.com. Retrieved 2022-05-05.
  13. ^ Pirraglia, William. "FHA vs HUD". homeguides.sfgate.com. Retrieved 5 May 2022.{{cite web}}: CS1 maint: url-status (link)
  14. ^ a b Griffith, John (October 11 2012). "The Federal Housing Administration saved the Housing Market". americanprogress.orh. Retrieved March 3 2022. {{cite web}}: Check date values in: |access-date= and |date= (help)CS1 maint: url-status (link)
  15. ^ Joshua Zumbru, Maurna Desmond. "Lending Over Backward", Forbes, 25 August 2008.
  16. ^ "The Next Hit: Quick Defaults", Washington Post, 7 March 2009.
  17. ^ "F.H.A. Hopes to Avoid a Bailout by Treasury". New York Times. Nov 16, 2012.
  18. ^ "F.H.A. Audit Said to Show Low Reserves". New York Times. Nov 14, 2012.
  19. ^ "Bet the house: why the FHA is going (for) broke". American Enterprise Institute. Jan 19, 2012.
  20. ^ a b "FHA Rules: Sources of Your Down Payment". www.fha.com. Retrieved 2022-05-09.
  21. ^ a b "FHA Requirements: Mortgage Insurance for 2022". www.fha.com. Retrieved 2022-05-09.
  22. ^ "HOW TO QUALIFY FOR A FHA LIAN -- FHA loans require a 500 credit score with 10% down, or 3.5% down with a 580 score. See all requir… | Fha loans, Mortgage loans, Fha". Pinterest. Retrieved 2022-05-02.
  23. ^ "HUD – Federal Housing Administration". Washington, D.C.: U.S. Department of Housing and Urban Development. 6 September 2006. Archived from the original on 5 January 2010. Retrieved December 10, 2009.
  24. ^ Monroe, Albert. "How the Federal Housing Administration Affects Homeownership." Harvard University Department of Economics. Cambridge, MA. November 2001.
  25. ^ Elboghdady, Dina. "The FHA's balancing act". washingtonpost.com. Retrieved May 9 2022. {{cite web}}: Check date values in: |access-date= (help)
  26. ^ "FHA Loan - Federal Housing Administration home mortgage- The Texas Mortgage Pros". 2022-01-25. Retrieved 2022-05-09.
  27. ^ Hanlon, Bernadette; Short, John Rennie (2020). "Housing Policy and the Suburban Metropolis: A Focus on the United States and France". In Anacker, Katrin B.; et al. (eds.). The Routledge Handbook of Housing Policy and Planning. New York: Routledge. ISBN 978-1-1381-8843-3.
  28. ^ Hanchett, Thomas W. (2000). "The Other 'Subsidized Housing': Federal Aid to Suburbanization 1940s-1960s". In Bauman, John F.; et al. (eds.). From Tenements to the Taylor Homes: In Search of an Urban Housing Policy in Twentieth Century America. Pennsylvania State University Press. pp. 163–179. ISBN 0-2710-2012-1.[page range too broad]
  29. ^ a b "Housing discrimination underpins the staggering wealth gap between Blacks and whites". www.louisianaweekly.com. April 15, 2019. Retrieved 2021-01-19.
  30. ^ Hillier, Amy. "Redlining in Philadelphia". Cartographic Modeling Laboratory. University of Pennsylvania. Archived from the original on March 3, 2007.
  31. ^ Coates, Ta-Nehisi (June 2014). "The Case for Reparations". The Atlantic.

Further reading

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