The Federal Housing Administration, or FHA for short, is a government agency that was created as part of the National Housing Act of 1934. Its purpose was to stimulate homeownership and make it more easily accessible for consumers while offering added protection for banks.
After the Great Depression, home ownership rates dropped significantly, and the home loans that did exist were mostly short-term mortgages for only three to five years. Refinancing was not available and many borrowers were unable to make their payments, due to the majority of them being unemployed. The U.S. economy needed saving, and fast.
In 1934, the federal banking system was restructured and the National Housing Act of 1934 was created. The act would begin to regulate interest rates and mortgage terms, completely reforming the way banks lent out money. Thanks to these new lending practices, more people were able to afford down payments for homes and monthly mortgage payments become more affordable as well, namely due to the fact that mortgages were now being offered at longer terms (the 30 year fixed rate mortgage, which is the standard today, did not commonly exist before the mid-1930s).
Now that housing became more affordable, the market for single family homes was now much wider. People who could only rent before were now able to purchase their own homes, which meant the demand for new housing would soon increase. Home building picked up and soon, the economy was on the path to recovery.
The FHA not only helped bring home ownership to millions of Americans through more affordable terms, it insured loans so that the banks would be less vulnerable to loss in the event that a borrower might default on their loan. Without this added protection, most banks would have probably been reluctant to hand out loans.
Considering the major role housing plays in the overall economy, it’s hard to imagine our nation without the FHA – especially in the aftermath of the most recent economic downturn. According to a news release from the National Association of Realtors (NAR), “the Federal Housing Administration has played a critical role by helping make mortgage insurance available to millions of qualified home buyers.”
NAR President Gary Thomas testified before the Senate Banking Committee that without the FHA, the housing downturn and economic recession would have been far worse for the nation.
“FHA helped fill the void over the past five years after private lending fled the market by providing safe, affordable access to mortgage credit to millions of Americans who wanted to purchase a home,” said Thomas, broker-owner of Evergreen Realty, in Villa Park, Calif. “Had FHA not stepped in to fill the market gap, many families would have been unable to purchase homes, current homeowners would have experienced far greater drops in equity and their home’s value, and our nation’s economy would be much further from a recovery.”
To learn more about the FHA and its impact on our economy, check out the original NAR press release.