Looking back at the origins of FHA

The right margin of this interesting article from Woman’s Day about an early FHA backed mortgage is missing because my grandmother who clipped it was interested in the quilt pattern on the other side (Star and Ring). From the clothing and hair styles, I’d place it about 1948 because the husband isn’t in uniform and those drapes look familiar.

FHA has had an interesting history. On the one hand, it allowed generations of Americans to own their own homes, but the unintended consequences are it contributed mightily to our current recession brought on by the collapse of the housing market.

It was created in 1934 during the Great Depression because housing loan periods used to be much shorter with a final balloon payment, and when the economy failed, many people lost their homes. But there were also some fairly stiff standards on the quality of the home, a modest down payment and the ability of the buyers to pay. After 25 years or so, politicians decided this was unfair to African Americans who were being left behind in the decaying inner cities as whites moved out to newer housing stock (like in the picture of the Knudsen family home near Washington D.C.).

So that’s how we got all this “creative financing” with the seller, instead of the buyer, providing the down payment, but not really, because it actually came from a non-profit organization like a church or community group (think ACORN) which got the money from the government. In 2000, these types of mortgages made up less than 2% of FHA insured mortgages. By 2007, that percentage jumped to 35%. And I guess you know the rest of the story.

“The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.” WSJ, Aug. 11, 2009

To be fair, conventional loans during the same time period were also requiring nothing down, so there’s plenty of blame to go around when mortgage lenders, non-profits dependent on government grants, home flippers with venture capital and politicians collude.

But this is just a reminder that more government interference in the housing market is not necessarily a good thing. The current housing credit of $8,000 for “first time buyers” (and there’s tremendous fraud in this) is costing us taxpayers something like $48,000 for each one.

Incidentally, Dorothy Ducas, the author of the Woman's Day article had a very interesting career and would make an interesting topic for a thesis if it hasn't been done.