Federal Housing Administration - Effects

Effects

The creation of the Federal Housing Administration successfully increased the size of the housing market. By convincing banks to lend again, as well as changing and standardizing mortgage instruments and procedures, home ownership has increased from 40% in the 1930s to nearly 70% in 2001. By 1938, only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a twenty-five 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 multi-family 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 didn’t 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. 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 US. This had some in Congress questioning the Government's role in the mortgage insurance business, with a vocal minority calling for the end of FHA. The subsequent deterioration in the credit markets, however, has somewhat muted criticism of the agency. Today, FHA now backs over 40 percent of all new mortgages.