FHA stands for Federal Housing Administration, which is a branch of the Department of Housing and Urban Development.The FHA’s most visible role is as a mortgage insurance provider.While the FHA does not work directly with a potential homeowner, the mortgage insurance it offers is vital for some consumers to have a chance at getting a mortgage.
The FHA was originally created by Congress in 1934 to help revive the home construction industry.Originally homeowners had been unable to get a loan without placing at least 20% down, which meant most consumers would never purchase a home.The FHA changed that environment by offering mortgage insurance that protected lenders in case a borrower defaulted on their mortgage.The change made homes far more accessible to all kinds of borrowers.Since the FHA’s creation, home ownership has climbed from 41% in 1934 to nearly 70% today.
As one of the largest mortgage insurers, the FHA has come to dominate the market for riskier borrowers.Banks looking to compete in this niche have responded by making most of their loans meet FHA standards; letting the FHA virtually set lending guidelines for most lenders in this market. The FHA is also active in the equity and refinance markets, for the same reasons as in the general mortgage market.
The FHA was also unique in its response to the Great Recession.Instead of pulling back and tightening their guidelines as many insurers did, the FHA continued to insure most loans, capturing nearly a third of all new mortgage insurance policies during the crisis years. Their prominence today is a large turnaround for an organization that heard calls for its phasing out as recently as 2006.
However, there are many concerns about the FHA’s current course.Acting as a last resort for borrowers during the financial crisis was a risky move, and many now believe the FHA will see record defaults in the future.Some predict these loans could have a price tag as high as $100 billion over the next few decades. Prior to the crisis, the FHA had been unique as a self-funding federal agency, but it had to ask for a government subsidy in 2008, and has continued to do so every year since.