Real Estate Investing Information Blog

The Federal Housing Administration (FHA) was created as division of The National Housing Act of 1934. The goals of this organization are: to recover housing standards and conditions; to offer an adequate home financing system through insurance of mortgages; and to stabilize the mortgage market.

During the Great Depression, the banking system failed, causing a radical decrease in home loans and ownership. At this time, the majority home mortgages were short-term (three to five years), no amortization, and balloon instruments at loan-to-value (LTV) ratios below fifty to sixty percent. The banking disaster of the 1930’s forced all lenders to retrieve due mortgages. Refinancing was not obtainable, and many borrowers, now unemployed, were not capable to make mortgage payments. Consequently, several homes were foreclosed, causing the housing market to plummet. Banks calm the loan collateral (foreclosed homes) but the low property values resulted in a relation lack of assets. Because there was little confidence in the backing of the U.S. government, few loans were issued and few new homes were purchased.

In 1934, the federal banking system was rationalized. The National Housing Act of 1934 was approved and the Federal Housing Administration was created. Its target was to regulate the rate of interest and the conditions of mortgages that it insured. These new lending practices increased the number of people who could afford a down payment on a house and monthly liability service payments on a mortgage, thereby also increasing the size of the market for single-family homes.

Mortgage insurance is obtainable for housing loan lenders, protecting against homeowner mortgage default. For a small fee, lenders can obtain insurance for a value of ninety percent of the appraised value of the home or building. In the occasion of a mortgage default, this value is transferred to the FHA and the lenders obtain a large percentage of their investment. The other ten percent is received from the unique down payment for the home.