“If you qualify for an FHA loan, you can get a mortgage with just 3.5 percent down and credit scores starting at 580,” Blake DeWitt, CEO of Dallas real estate investor Investorade, told NTD News. That is the Federal Housing Administration’s pitch to buyers who cannot put down much money, and it has been the agency’s job since the 1930s.
The FHA, also called the Office of Housing within the Department of Housing and Urban Development, insures mortgages that private lenders make. If a borrower defaults, the FHA pays the lender a claim for the unpaid principal. Lenders carry less risk, so they write more loans. The insurance covers single-family homes, multifamily rental properties, hospitals and residential care facilities. Frank Cassidy currently leads it as Assistant Secretary for Housing and Federal Housing Commissioner. It should not be confused with the Federal Housing Finance Agency, which supervises the government-sponsored enterprises.
Why Congress created it
Before 1934, most home mortgages ran three to five years, did not amortize and carried a large balloon payment at the end. Loan-to-value ratios stayed below 60 percent, so buyers needed down payments of 30 to 50 percent. Then banks failed in the Depression, lenders called in mortgages, unemployed borrowers could not pay, and foreclosures dragged down property values.
Congress passed the National Housing Act of 1934, and President Franklin Roosevelt’s administration set up the FHA. Down payments fell to as little as 10 percent, and repayment terms stretched from 5 to 10 years to 20 to 30 years. The share of families living in homes they owned rose from 44 percent to 63 percent between 1934 and 1972.
Redlining
The benefits did not reach everyone. The FHA hired Homer Hoyt as chief land economist in 1934 to write its first underwriting criteria, and those criteria led to redlining. Its 1935 Underwriting Manual told appraisers that “a change in social or racial occupancy generally leads to instability and a reduction of values.” Appraisers were to give higher ratings where there was protection from adverse influences, which the manual defined as “infiltration by inharmonious racial or nationality groups.”
The new lending practices were restricted to white Americans. The FHA often judged properties in racially mixed neighborhoods, or near black neighborhoods, as high-risk, which made segregation an official requirement of the federal mortgage insurance program.
Boom, bust and rescue
Subprime products arrived in the late 1990s and took business from the FHA. It insured 14 percent of home-purchase loans in 2001 and fewer than 3 percent by 2005. When the subprime crisis hit and conventional lending dried up, the FHA’s share of home purchases rose from about 2 percent to over a third, and by 2011 it backed about 40 percent. Potential losses were estimated at up to $100 billion. By early 2012 its capital reserve had fallen below the congressionally mandated minimum of 2 percent, down from more than 6 percent two years earlier.
Since 1934, the FHA and HUD have insured almost 50 million home mortgages. The portfolio today includes about 8.5 million single-family mortgages, more than 11,000 multifamily mortgages and over 3,900 loans for hospitals and care facilities. About 46 percent of first-time buyers use FHA loans.
Other help for buyers
DeWitt said the U.S. is anywhere from 1.2 million to 5.5 million homes short, with median list prices in most big metro areas above $400,000 against a median household income of $84,000. Mortgage rates of 6 to 7 percent, he said, have made monthly payments about 40 percent higher than two years ago for the same home.
VA loans for service members and veterans can need no money down and no private mortgage insurance. USDA loans target rural and eligible suburban areas. The HomeReady program from Fannie Mae and Home Possible from Freddie Mac require income at or below 80 percent of the area median and a credit score of at least 620. State housing finance agencies in all 50 states offer some down payment help, and DeWitt said many programs give $5,000 to $25,000 in forgivable grants for owners who stay 5 to 10 years.
