FHA insured mortgages, a disaster for the country?

Fin 180
Erica Mendoza

FHA Insured Mortgages, a disaster for the Country?
When you ask someone what the “American Dream” is to them, most people will respond that owning a home is the “American Dream”. That is precisely what FHA insured mortgages have enabled many Americans to do. I myself included have been given the opportunity to fulfill one of my wishes of owning a home through this program. With the recent real estate market crash many have placed the blame on this program. So is FHA insured Mortgages, a disaster for the country?
After the Market crash of 1929 Congress looked for a way to boost the economy by encouraging hesitant banks to write mortgages. This is how the Federal Housing Administration (FHA) came into play; it was authorized to provide insurance for mortgage loans back by full faith and credit of the Unites States. As well, as becoming the key to the American dream by helping lower income families get into a home that they would have otherwise been unable to afford. Since then, it has become the largest insurer of mortgages in the world. In fact, since its start in 1934 it has insured more than 34 million properties (Jurow, 2010). FHA also became a huge stimulate to the country in the form of home and community development, which like a domino effect brings that down to local communities in the form of building contractors, schools, tax bases, and most importantly jobs. FHA has proved to be one of the best government agency operations. As a matter of fact, it’s the only government agency that operates entirely from its self-generated income, costing the tax payers nothing (2006). The way that it functions is that the money that is collected from the mortgage insurance charged to the homeowners is then set into an account that is used solely to operate the program. This mortgage insurance is what FHA requires in order to provide lenders with the protection against losses, because FHA will pay a claim to the lender in the event of a homeowner’s default.
In the more than 60 years since FHA was created much has changed, with that it’s lending practices. Unlike conventional loans that stick to strict underwriting guidelines, FHA insured loans involve little cash and therefore are considered more lenient. A key component in the economy is the housing market; FHA is a big player in the housing market. That is why many have placed the blame on it for having such lax lending practices and causing the collapse of the real estate market. Could FHA really be the one to blame? Looking at the whole picture it did play a part in the collapse but, it wasn’t the sole reason. What the government is looking to do now is mend the situation by changing some the FHA guidelines. In August of 2010 President Obama signed a bill that would give HUD the flexibility to increase Annual Mortgage Insurance Premiums. “This would allow HUD to increase the amount of Annual Mortgage Insurance Premiums from .5% to 1.5% on loans with a down payment of 5% or more. On loans with less than 5% down payment increase could be from .55% to 1.55%” (2010). What this means to future FHA homebuyers is simply that if they don’t want to have to pay a higher mortgage insurance premium they will need to come in with larger cash down payment. With these new guidelines the government is looking to try to prevent more purchases that could potentially default.

In conclusion, FHA has helped spark the production of many homes that have given some the opportunity to own a home that otherwise would never have been able to through traditional conventional lending. With that opportunity comes the feeling of ownership and that is something so strong and difficult to explain until you have your own home and grasp your set of keys you wouldn’t understand. It’s the feeling of comfort, family, stability and accomplishment. That feeling is something you can’t put a price on. To say that FHA was the sole reason behind the real estate market crash would be foolish. I do think that it played a role in it but, it’s working to mend the situation and prevent that from reoccurring in the future.



REFERENCES

FHA Mortgages Insurance for FHA Loans (2010). Retrieved March 20, 2010. http://www.fhaloan.com/fha_mortgage_insurance.cfm


HUD-The Federal Housing Administration. (September 2006). U.S. Department of Housing and Urban Development Retrieved March 19, 2011
http://www.hud.gov/offices/hsg/fhahistory.cfm

Jurow, Keith (August 9, 2010). World Property Channel. FHA insured mortgages, a disaster in the making? Retrieved March 20, 2010 http://www.worldpropertychannel.com/us-markets/residential-real-estate-1/real-estate-news-fha-mortgages-mortgage-backed-securities-mbs-federal-housing-administration-fha-department-of-veterans-affairs-va-congress-home-loans-keith-jurow-2969.php


Quam, Mike (June 6, 2010).Real Estate News. HR 5072 Good or Bad? Retrieved March 18, 2010. http://mnrealestatenews.com/2010/06/17/hr-5072-fha-reform-good-or-bad/