What is the purpose of the FHA?
The purpose of FHA is to provide mortgage insurance for loans made by FHA-approved lenders in order to enhance opportunities for home ownership among Americans.
It is important to note that FHA itself is not a lender, but rather a government entity that provides the insurance needed for private lenders to make loans requiring a low down payment. In case of default, FHA mortgage insurance protects the lender from losses.
FHA, whose full name is the Federal Housing Administration, was created by Congress in 1934 as part of the National Housing Act and became part of the U.S. Department of Housing and Development when HUD was created in 1965. It was established during the Great Depression in similar economic times as today (2010) with the housing industry in severe distress. FHA bridged the gap between lenders and homeowners by providing a new form of financing that provided longer-term affordable mortgages.
Unlike today, the mortgage industry was in its infancy with mortgage financing extremely scarce. Loans at the time required a 50% down payment and were limited to repayment schedules of 3-5 years followed by a balloon payment of the outstanding balance. Home ownership rates at the time were only about 40% compared to today's rate of 67.6% (as of the 3rd quarter of 2009).
The importance of FHA should not be underestimated during hard economic times as evident in FHA's share of the mortgage market which stands at nearly 30% compared to 3% two years ago.