Federal Housing Administration

The United States government created the Federal Housing Administration (FHA) in 1934 to address an economic crisis. By that year, the Great Depression had wreaked havoc on the nation's housing industries, triggering a precipitous decline in both home sales and new housing starts, as well as a spate of mortgage foreclosures, that together placed the construction, real estate, and home finance sectors on the verge of collapse. By 1934, nearly one third of the nation's unemployed were in the building trades. Earlier federal efforts to shore up these markets—through creation of the Federal Home Loan Bank system in 1932 and the Home Owners' Loan Corporation (HOLC) in 1933—had provided some relief, yet neither stopped the deepening crisis. Therefore, the Roosevelt administration responded with the FHA, a regulatory and mortgage insurance program designed not simply to revive and stabilize these industries, but to create and sustain a new kind of market for homes. By changing the structure of the mortgage industry and its day-to-day operations, the FHA created a more accessible, flexible, and expansive market for housing and related products. By doing so, it revolutionized the ways that most Americans lived.

Two innovations proved critical to the FHA's success. First, the program insured institutional lenders (including banks, mortgage companies, and insurance companies) who agreed to issue FHA-approved mortgage loans—for home improvement or purchase—to individual borrowers. In case of default, the government indemnified the lenders, making their involvement essentially risk free. Second, participating lenders were required to use a particular type of financial instrument: the long-term, low-interest, fully amortized mortgage that had been pioneered by the Savings and Loans industry but that remained largely untested by other financial institutions. Among this loan's advantages—from the FHA's perspective—was its comparatively liberal terms, which promised to draw more businesspeople and consumers into the market for housing. Traditional mortgages required large down payments (up to 50 percent of the principal) and short repayment periods (often as little as 5 years), terms that generally restricted homeownership to the affluent. By contrast, the new, FHA-approved mortgage had very low interest rates, required small down payments (as little as 10 percent), and allowed [Page 264]borrowers 20 (and eventually up to 35) years to pay off both the principal and interest, terms that made homeownership feasible for most middle-income Americans. Another advantage of the mortgage insurance program was that it required a minimal government expenditure. The FHA did not lend money directly, while most of its operational costs were covered by a nominal fee charged to participating lenders. The program's cost-effectiveness enabled supporters to promote it as a market-friendly alternative to “socialistic” schemes like public housing.

The FHA's promotion of the long-term, low-interest mortgage quickly made it a national standard, in both the government-insured and “conventional” (or noninsured) markets for home finance. If builders qualified for an FHA-approved loan, they were virtually ensured financing for their projects, so the agency's Underwriting Manual, first issued in 1936, quickly standardized appraisal practices and construction standards nationwide. And by the 1940s, FHA insurance activity had facilitated a dramatic resurgence of new construction, home improvement, and sales, while giving the “average” American, for the first time, the opportunity to purchase a home. When combined in 1944 with the Veterans Administration's mortgage “guarantee” program—which operated similarly to FHA insurance—the housing-related industries began to thrive, and homeownership rates skyrocketed throughout the postwar decades.

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