When the Federal Housing Authority was created on June 27, 1934, the goal of the first government mortgage insurance program was to stimulate the housing industry and bring within reach of every American family "a decent home in a decent neighborhood."
Next week FHA staff will celebrate the 50th anniversary of the program and, while FHA officials admit the housing market has changed significantly since the Depression, they say they believe the basic mission of FHA is still intact.
"Not having been here during the Depression I don't really know what the mission of FHA was," said Shirley McVay Wiseman, general deputy assistant secretary for the Housing and Urban Development Department and second in command of FHA today. "But if it was providing families with the opportunity of homeownership, I would say that that is still our mission."
FHA was launched at a time when mortgage money had dried up and the housing industry was on its knees. More than 2 million construction workers were unemployed, and banks were wary of making the loans necessary to revive the industry and improve housing conditions.
The basic concept behind FHA was that by providing government insurance for mortgages, the government could entice lenders into writing loans for housing, even to the extent of writing loans with 30-year paybacks instead of the traditional five-year balloon mortgage which, before the Depression, had kept homeownership out of reach for most Americans. The lender then paid a premium to the government for the insurance, the cost of which was included as part of the loan.
Since 1934, many housing experts agree, FHA's insurance programs for both mortgages and home improvement loans have changed the course of housing in this country. More than 14 million individual home mortgages have been insured by the government for a total dollar figure of nearly $250 billion. More than 33 million property improvement loans have been insured, totaling over $33 billion in repair and modernization funds.
The average home improvement loan insured by FHA today is $5,000. The first home improvement loan FHA ever made went to John P. Power of Cloquet, Minn., who borrowed $125 from the First National Bank of Cloquet in August of 1934 to paint his house, repair the roof and install a water tank.
The first house to be built with FHA-insured financing was for the family of Warren H. Newkirk of 30 Hopper Ave., Pompton Plains, N.J. The Newkirks got a $4,800 mortgage insured by FHA. And the first existing house to be bought with an FHA-insured loan is here in the Washington area, at 319 East Howell Ave. in Alexandria.
Limits on loans FHA will insure today are still high enough to allow moderate-income families to benefit from them. FHA insures conventional loans made by private lenders for up to 95 percent of the property value and for terms of up to 30 years. The loan limit in most parts of the country is $67,500, but in areas with high-cost housing markets the limit may be as high as $90,000 in the continental United States and even higher in Alaska and Hawaii.
After years of administratively setting the interest rate allowed on FHA-insured loans, FHA deregulated allowable rates this year. FHA will now insure a loan with any rate lenders are willing to write.
FHA officials, admit, however, that although the mechanisms for the program have changed little over the years, the target population for FHA programs has shifted as private lenders have become increasingly active in providing loans not insured by the government.
"Our target population now is the first-time buyer and low- and moderate-income families not being served by the private sector," said Wiseman. "We certainly are not in competition with the private sector and have aimed our programs to meet the needs of those people private lenders are unwilling to back." While there are few outright critics of the FHA insurance programs, some private lenders question whether there really is much of a market segment left that is served only by FHA. The introduction into the marketplace recently of adjustable-rate mortgages with low qualifying rates and low down payments has reduced the number of mortgagees looking for FHA-insured money.
R. Stephen Polley, president of the computer loan shopping service Loan Express, said that the volume of FHA-insured loans processed through his office has dropped precipitously since the adjustable mortgages came on the market.
He said, however, that in general the interest rate on an FHA-insured mortgage is still about a quarter- to a half-percentage point lower than that for a comparable conventional mortgage.
"That is still true basically because the lender has less risk with an FHA-insured loan," said Polley. He did say, though, that the points being asked on FHA-insured loans are high and that because the responsibility for those points is now a negotiable item between the buyer and seller it can often mean an increase in the price of the house if the seller gets stuck paying them.
Wiseman said that according to HUD statistics most of the loans FHA insures fall close to market rates for conventional mortgages. Wiseman said that more than 500,000 single-family loans were insured last year for a total dollar figure of over $26 billion.
FHA officials maintain that there are individuals who can only get loans with FHA help. William A. Rolfe, deputy director for the office of single-family housing, said that many lenders will not make loans to people who have not established a good credit history but that FHA is willing to insure loans to first-time buyers, many of whom are too young to have sufficient credit records to get loans from the private sector.
He also stressed the low down-payment requirements for FHA-insured loans as a mechanism that makes homeownership affordable to more people and said the fact that FHA-insured mortgages are assumable makes them more attractive than many private sector loans.
"We still insure many of the marginal families, the people the private sector find too risky," said Rolfe.
In some ways, FHA has changed over the 50 years. Instead of FHA being a program that supports the construction industry as it did in the beginning, fewer than 15 percent of the FHA single-family loans insured last year went for new houses, and Wiseman said FHA today does not consider supporting the industry part of its mission.
In an effort to keep up with market demands, FHA officials said they are ready to launch a program to insure some adjustable-rate mortgages.
The adjustables FHA will insure will be loans with a 5 percent overall cap and with no more than a 1 percentage point adjustment per year. The loan will have to be indexed to one-year Treasury bonds, but FHA officials said that the margin between the rate for Treasuries and the rate the loan starts at is negotiable between the lender and the home buyer. Wiseman said the program would go into effect July 30th of this year.
FHA is also implementing a program to have the initial processing for FHA-insured loans done by the lenders as a way of expediting approvals. Wiseman said that 40 percent of FHA-insured loans are already being handled primarily by the lenders.
While FHA has largely been in the business of insuring mortgages for single-family homes, during the Great Society period 20 years ago a number of FHA programs were expanded to include insurance for multifamily projects and direct subsidies for programs that assisted in the creation of multifamily housing in lower-income areas.
Stuart Davis, executive assistant to Wiseman, said that one of the policy positions of the current administration has been to reduce the amount of overlap of direct subsidy and government insurance.
Because many of the new construction subsidies have been reduced in the past few years, said Davis, the amount of new construction multifamily loans being insured by FHA has also dropped. He said that only 15 percent of new multifamily construction is now insured by FHA.