Helping low- and moderate-income and minority families achieve successful homeownership has always been a core goal of the U.S. Department of Housing and Urban Development. As the lead article in this issue of Evidence Matters attests, many HUD programs support homeownership for low-income and low-wealth families and individuals through down payment assistance, counseling, and other activities. But no part of our agency has been more central to this goal — and to the broader goal of stabilizing the housing market — than the Federal Housing Administration (FHA).
FHA was established in 1934 to help stabilize a housing market disrupted by the Great Depression and make home financing attainable for a much larger share of American families. FHA helped end the Depression by providing market liquidity and stimulating housing construction. A hallmark of FHA’s early years was demonstrating the market viability of the long-term, fixed-rate mortgage, which soon became the market standard. It continues to be an important source of capital that increases lending to low-wealth but creditworthy borrowers, including those with higher risk characteristics who are priced out of the conventional market. By the 1950s, FHA demonstrated the feasibility of providing high loan-to-value and low down payment loans by maintaining sound underwriting and appraisal standards. FHA loans have been especially helpful in supporting homeownership for low-wealth, first-time, and minority buyers.
When FHA has faced serious challenges — such as a 1989 actuarial audit that found the administration to be solvent but not actuarially sound — HUD and Congress have acted to ensure its future sustainability. Because the audit found that FHA had long underpriced its mortgage insurance and had gradually undertaken various policies that had raised its risk profile, a series of statutory changes modified minimum equity requirements, changed the price of insurance premiums, and revised policies regarding distributive share. In another case, FHA recently closed a loophole regarding loans with seller-funded down payment gift mortgages, as these products had proven particularly risky.
Never has the FHA’s countercyclical role been more evident than during the housing boom and bust of the 2000s. In the late 1990s, FHA held 10 to 15 percent of the home purchase market. But as the housing bubble grew, that share dropped below 5 percent; while other lenders took on ever-riskier buyers with subprime, alt-A, and other new loan products with low teaser rates, FHA did not participate in exotic mortgages or loosen its underwriting standards to permit anything less than full-documentation loans. When the bubble burst, FHA again stepped in to stabilize the market, and its share of the loan market grew to 30 percent by mid-2008. Some housing experts have argued that, without FHA providing liquidity to the mortgage market, the United States would have faced a double-dip recession and possibly the collapse of the housing market.
FHA’s actions during the crisis took multiple forms. By continuing to lend as the market contracted, the FHA sharply increased its loan originations, mitigating the market’s downward spiral. But FHA also stepped in to enable existing homeowners to refinance their mortgages, refinancing nearly 458,644 conventional mortgages and 367,802 FHA mortgages in 2009 alone. FHA also worked to keep existing homeowners in their homes through loss mitigation activity that served more than 1.4 million homeowners from April 2009 through July 2012.
As officials and policy experts debate the future of the role of government in the mortgage market, the FHA’s traditional role in facilitating homeownership opportunities for low-wealth and minority homeowners will continue to be important in the evolving housing finance system. Recently, HUD’s Office of Policy Development and Research completed a working paper on the history of FHA’s role in the housing market that provides useful information for this debate. This issue of Evidence Matters provides further evidence of successful methods and approaches that have enabled low- and moderate-income families as well as families with limited wealth to build equity and sustain homeownership that provides gains to society.
— Erika C. Poethig, Acting Assistant Secretary for Policy Development and Research
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