The FHA is an acronym for the Federal Housing Administration. Created as part of the National Housing Act of 1934 it has been part of the Department of Housing and Urban Development (HUD) since 1965. In 2011 FHA loans accounted for 27% of the total home loans originated and since its founding it has insured 34 million home mortgages along with 47,205 mortgages for multifamily projects. The FHA is heavily utilized by first time home buyers as in 2012 78% of its supported loans served that segment of the population.
FHA mortgages allow borrowers to obtain loans in situations where they might not qualify otherwise for traditional financing. One of the main advantages is that the down payment required can be as low as 3.5% as opposed to traditional mortgages which may require 10-20% or higher. The reason that lenders can lend in this fashion as opposed to their non-FHA loans is because the loans are insured through the FHA, which limits their risk on the loans.
The funds for the FHA Insurance Fund (which pays for the defaulted mortgages) come from an insurance premium that borrowers are required to pay to the FHA. This premium consists of two parts, one is a one time fee called upfront mortgage insurance premium (UFMIP) which occurs at the time of closing and the other portion is an annual premium known as annual mutual mortgage insurance (MMI). The annual premium length depends on the original LTV (loan-to-value) of the loan. Those that begin at 90% or less must pay the fee for 11 years while those above 90% must pay it for the complete loan term. This is a fairly new policy which began in 2013 and replaced the policy that it could be cancelled after 5 years as long as the LTV was below 78% at the time of cancellation.
The changes to the premium policy came about soon after the FHA Insurance Fund was found in 2009 to have reserves below the 2% level required by Congress. This worried many people as the FHA had never required a bailout before 2013 when it accepted a cash infusion of $1.7 billion from the Treasury Department.
Ross Garner, WalletHub Community Manager
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.
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