This article was written by Phin Upham
The failure of the banking system during the Great Depression caused a drastic decrease in the availability of home loans, which directly impacted home ownership in the United States. At the time, most mortgages were very short term, covering the span of only three to five years. The loan to value ratio was also on the high side at nearly 60%.
Because there was no form of refinancing, borrowers who had lost their jobs were especially susceptible to the changing conditions. Foreclosures sky-rocketed and the housing market completely collapsed. Banks tried to collect the collateral of the loan, but the homes they took in had low property values and were not enough to make up for the losses.
Federal banking was restructured in 1934, which led to the creation of the Federal Housing Administration. The goal of the agency was to try and regulate the rate of the mortgage and interest for loans.
The FHA eventually became part of HUD in 1965. Since 1934, the two organizations have insured over 34 million home mortgages and 47,000 multi-family projects. The two agencies are entirely self-funded, but there is an implicit agreement that taxpayers will bail them out if the need arises. This occurred most recently in the housing bubble of 2008.
Under FHA requirements, a buyer is allowed to submit the down payment from a number of sources. The 3.5% can come from relatives, the government, or even an employer. The buyer is also required to pay for mortgage insurance up to 80% of the home’s value, but prices can fluctuate depending on a buyer’s credit status.
About the Author: Phin Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phin on his Phin Upham website