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Definition: Federal Housing Administration – FHA
Federal Housing Administration- FHA is a US government agency which provides mortgage insurance on loans given by FHA approved lenders across USA. It was started in 1934 after the Great Depression, that had caused many of the home loans to be foreclosed and the terms were difficult for the homebuyers seeking mortgages.
In 1960’s and 70’s FHA played a prominent role in the construction of millions of privately owned apartments for the elderly and lower income groups. This resulted in an increase in homeownership rate from 40% in 1934 to 69% in 2001. FHA became a part of the Department Of Housing and Urban Development (HUD) in 1965 and since its inception it has insured around 34 million home mortgages.
FHA’s mortgage insurance provides protection to the lenders in case the homeowners default on their mortgage loans. The lenders can claim money from FHA in case of default, but the loans will have to meet certain requirements in order to qualify for the mortgage insurance. It operates entirely from the income that it generates out of the mortgage insurance premium paid by the homeowners and is not dependent on the tax payer’s money.
After the sub-prime crisis FHA’s share of mortgages went up from 2% to over 33% due to the non-availability of conventional mortgage lending. Many of the riskiest borrowers started borrowing from FHA and since many of them defaulted it resulted in huge losses to FHA. But after 2012 FHA has stabilized and the percentage of bad loans to its capital reserve was well within the government mandated figure of 2%.