Background: The Federal Housing Administration (FHA) is a federal agency created back during the Great Depression as part of the National Housing Act of 1934. The FHA was originally created in response to the dramatic decrease in home loans and homeownership during the Great Depression. It was set up mainly to stimulate construction jobs, not to assist low-income individuals, by providing mortgage insurance for lenders. In the 1950s, the FHA’s mission expanded to promote “community development.” In 1965, the FHA became a subset of the Department of Housing and Urban Development (HUD) and became heavily involved in artificially expanding homeownership.
The FHA is still primarily responsible for running mortgage insurance programs. These programs provide lenders with mortgage insurance on government “approved” loans that may be offered to potential home buyers. Lenders are fully protected by the FHA against default risk associated with these loans in exchange for paying fees. However, these fees often don’t fully cover the funds required to pay lenders for borrowers who default, leaving taxpayers as a backstop – in 2013 the FHA was given a $2 billion bailout from the federal government.
FHA’s most popular program guarantees single-family mortgages through the Mutual Mortgage Insurance Fund (MMIF), but it also guarantees multifamily mortgage projects through the General Insurance Fund and the Special Risk Insurance Fund. The stated goal of the FHA is to increase homeownership rates, especially for the disadvantage.
Problem: While the goal of increasing homeownership sounds like a good idea, the effect of the FHA severely undermines housing market stability by providing borrowers, who are at high risk for default, the means to buy a home. To qualify for a FHA loan, a borrower may have a large amount of debt, poor credit history, and still only make a down payment of as little as 3.5 percent.
Instead of waiting a few years, saving money, and then buying a house that right for them, FHA loans incentivize individuals – of all economic levels – to purchase houses they can’t necessarily afford, the result of which leads to government-caused housing booms and artificially inflated housing prices. Once investors and homeowners realize the true value of the housing market, a housing bust always occurs as the market corrects itself.
This is precisely what occurred leading up to the financial crisis of 2007-08 as the wide-spread availability of FHA loans helped contribute to the housing bubble and subsequent collapse of the financial market. After the crisis was over, more than $9 trillion in home equity was gone and over 7 million Americans lost their homes. Many of these families could have been spared from the crisis by simply waiting a few years to buy.
30-year Fixed Rate Mortgages: Many political leaders and organizations argue that without FHA mortgage insurance, lenders cannot offer attractive loans, such as 30-year fixed rate mortgages (FRM) to potential home buyers. They argue that this would decrease buying and selling in the housing market and hurt American realtors. That is incorrect for a number of reasons.
First, the evidence suggests government intervention in the housing market has not increased homeownership. Despite efforts by the FHA, the U.S. homeownership rate has increased by only 1 percent from 1968 to 2013. Instead of increasing homeownership, what the FHA really does is increase personal debt while discouraging savings.
Second, getting the FHA out of the housing market would increase, not decrease, the availability and diversity of mortgages offered by private lenders. This would certainly include long-term FRMs which have been around since the 1920s and still exist today in parts of the market where there is no government backing.
Solution: Realtors and real estate agents deserve to work and do business in a housing market backed by real value. They shouldn’t be worried about government-caused housing booms and busts that undermine their livelihood.
In its 82 years of existence, the FHA has done more harm than good. The FHA has dangerously expanded federally guaranteed mortgage debt, increased financial risk to both homeowners and taxpayers, seriously undermined stability of the housing market, and failed to increase the U.S. homeownership rate. The evidence clearly suggests that the FHA has outlived its purpose and should be repealed.
Repealing the FHA will empower realtors, real estate agents, lenders, and consumers to create a growing and stable housing market that helps more families responsibly achieve the American dream.