The FHA mortgage program is the original U.S. home loan.
The program dates to the National Housing Act of 1934, ten years before the VA loan program for veterans was created, and thirty years before the first conventional mortgage was made.
Before the FHA, mortgage loans were different.
Mortgage loans came from community banks. Banks would pool deposits from a neighborhood, then lend those deposits back out to home buyers for interest. To protect the community’s money and its bottom line, banks required down payments of 40% or more on their home loans, with loan lengths of either three years or five years.
But, during the Great Depression, the economy spiraled downward. As unemployment rates climbed, homeowners defaulted on their mortgage payments, which caused community banks to fail, which, in turn, worsened the depression.
The spiral also put downward pressure on U.S. home prices. In the five years 1928-1933, the housing market lost 29 percent of its value.
The FHA was the government effort to help end the Great Depression.
As part of the New Deal, the Federal Housing Administration (FHA) was formed as an insurance agency. The agency insured mortgage lenders against loans that go bad.
To qualify for the insurance – then as now – a loan must conform to the rules set forth by the FHA.
- Loan lengths of 15 years or longer
- Interest only loans not allowed
- Various income and credit qualifications
Loans meeting the requirements qualify for FHA insurance.
When the FHA announced its plan to re-invigorate lending, community banks immediately resumed lending. Homeownership rates climbed, communities were rebuilt, and the Great Depression ended.
Today, the FHA remains a huge part of U.S. housing. It insures close to 20 percent of new loans made monthly; and, the FHA is the largest insurer of mortgages in the world.
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