Federal Housing Administration (FHA)

The Federal Housing Administration (FHA) was established by the National Housing Act on June 27, 1934. FHA greatly expanded 1933 legislation, the Home Owners Loan Corporation (HOLC), which set up low-interest loans to help people refinance their home mortgage in an attempt to prevent foreclosure. The FHA legislation established a loan insurance program to rehabilitate properties, established a fund to insure home mortgages, created federal charters for private mortgage associations that would purchase government-insured mortgage loans, and established a federal savings corporation to insure deposits of qualified savings and loan associations. The program was designed by Winfield Riefler, Miles Lanier Colean, [Page 552]Frances Perkins, Marriner Eccles, Averell Harriman, and Henry Wallace as part of President Franklin D. Roosevelt's attempt to stimulate home building and to alleviate unemployment that was especially high in the construction industry following the depression. The stated goals of the legislation were to facilitate home financing, help stabilize the home mortgage system, and improve housing standards.

FHA programs fundamentally restructured the home mortgage market in the United States. FHA did not build houses or loan money, but FHA programs insured mortgage loans made by banks and other lenders. This federal insurance against loss induces banks to lend money for home mortgages. This policy design guaranteed broad political support from interest groups, such as the real estate and banking industry, which were historically opposed to federal government intervention in the housing arena. Prior to FHA, balloon mortgages were the norm and required prospective homeowners to have a down payment of 30% to 50% of the cost of a home in order to secure a loan; however, FHA-secured loans introduced the low down payment home mortgage that reduced the amount of money needed up-front to as low as 10%. The agency also extended the repayment period of home mortgages from 5 to 10 years, up to 20 and 30 years. This reduction in monthly mortgage payments helped to prevent foreclosure, often made buying a home cheaper than renting, and allowed families with stable but modest incomes to qualify for a home mortgage. Government-backed loans also resulted in lower risks for the lender, so interest rates on mortgages went down. In 1938, Congress established the Federal National Mortgage Association, also called Fannie Mae, which fostered the creation of a secondary mortgage market and increased capital flow for mortgages. FHA worked alongside the Serviceman's Readjustment Act, commonly known as the GI Bill, passed in 1944, to consolidate the system of long-term mortgages for the construction and sale of private homes. The Veteran's Administration, created under the GI Bill, required a down payment of only one dollar from veterans. All of these changes contributed to a significant increase in American homeownership. Between 1934 and 1972 families living in owner-occupied homes rose from 44% to 63%.

Although Federal Housing Administration programs dramatically expanded home ownership opportunities, not all segments of the population benefited from the program. FHA-insured mortgages favored new single-family home building over the construction of multifamily units, and in time the nuclear family residing in a single-family home would become synonymous with the American dream. However, the FHA legislation initially did not benefit low-income families, single women unless they were war widows, the non-wage-earning elderly, or racial minorities who were for decades officially excluded from obtaining loans through FHA lending practices. FHA fostered the vision of the self-reliant nuclear family residing in a single-family home, though in reality, the wealth accumulation in the post–World War II period in the United States that contributed to this ideal occurred through intense federal subsidization of white suburban nuclear families. Along with low-density development outside of urban areas came the need for massive federal highway projects and increased reliance on the automobile.

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