Federal Housing Administration (FHA)

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FEDERAL HOUSING ADMINISTRATION (FHA)

Created by the Federal Housing Act of 1934, the Federal Housing Administration (FHA) was the core of the early New Deal's strategy to revive the construction industry and expand home ownership. The agency did not build homes or loan money but provided federal insurance for private mortgages to protect creditors against default and thereby encouraged banks to loan more money for housing construction and home improvements. Federal mortgage insurance also enabled private lenders to charge lower interest rates and extend mortgage repayment periods, which helped to reduce the national rate of mortgage foreclosure from 250,000 non-farm units in 1932 to 18,000 in 1951. It also brought about lower down payment requirements (average FHA-backed mortgages were for 93 percent of home value compared with 58 percent for savings and loan association mortgages in the 1920s). Furthermore, the FHA's real assessment regulations did much to establish minimum standards for housing construction throughout the building industry. From 1935 to 1939, the agency insured 400,000 housing units, representing 23.4 percent of the total number of units financed through the mortgage market during this period. Over the next five-year period its mortgage insurance was substantially extended to cover 806,000 units, 45.4 percent of total units that received mortgage finance. Between 1934 and 1972 the FHA helped nearly eleven million families to own their homes and another twenty-two million to improve their properties. Thanks in part to its insurance program, middle-income and lower-middle-income families gained access to home ownership and the number of families living in owner-occupied units rose from 44 percent to 63 percent over this period.

Reflecting the rationale for its creation, the FHA was more concerned to revive home construction than to help cities. In the words of its first administrator, oil executive James Moffett, it also acted like a "conservative business operation" intent on encouraging sound loans by lending agencies, with the agency itself delivering a small profit on its operations for the federal government. As a result, the FHA was reluctant to insure rental housing, the predominant form of accommodation for low-income inner-city residents, because it viewed such property as a relatively nonliquid asset, capable of delivering only long-term profits, and subject to profit constraints like rent control, maintenance costs, and tenant problems. Between 1934 and 1937 it insured only twenty-one rental projects, none of which was intended to provide low-income accommodation. There was a brief policy change in 1938 when the agency insured a low-cost prefabricated municipal project constructed by Works Progress Administration labor in Fort Wayne, Indiana, that was planned to become a model for other municipal ventures until the American Federation of Labor's opposition to the use of relief labor killed off the scheme.

The FHA also favored suburban over inner-city development as a sounder actuarial risk. Its ideal home was a bungalow or a colonial set on an ample lot with a driveway and garage. Consequently its insurance of single-family units exceeded that of multi-family units by a ratio in excess of four to one between 1940 and 1950. The agency also evaluated the suitability of neighborhoods for mortgage risk through adoption of the conservative appraisal methods of the Home Owners Loan Corporation. It trained underwriters to measure the quality of an area based primarily on its social and economic stability and its protection from so-called adverse influences. Consequently the FHA refused to insure in neighborhoods that suffered blight or were deemed likely to do so. As late as 1966, for example, it did not insure a single mortgage in Camden, New Jersey, a declining industrial city. Its banker-like approach to what constituted sound property investment also made it prejudicial against heterogeneous and racially mixed neighborhoods, as well as districts where African Americans were deemed likely to settle. FHA redlining excluded half of Detroit's neighborhoods and one-third of Chicago's from its insurance program in 1940. The agency also promoted racial segregation through its active encouragement of restrictive covenants, even after these were ruled unenforceable by the U.S. Supreme Court's Shelley v. Kraemer judgment in 1948.

The FHA worked in favor of white suburbanization and against the interests of the increasingly nonwhite inner cities. It helped to transform the American suburb from a rich person's preserve into a middle-class enclave. The consequences for the other America became evident when urban disorder focused attention on the nation's ghettos in the 1960s. In 1968 former Senator Paul Douglas of Illinois reported for the National Commission on Urban Problems: "The poor and those on the fringes of poverty have been almost completely excluded. These and the lower middle class, together constituting the 40 percent of the population whose housing needs are greatest, [have] received only 11 percent of the FHA mortgages."

See Also: CITIES AND SUBURBS; HOME OWNERS LOAN CORPORATION (HOLC); HOUSING; NATIONAL HOUSING ACT OF 1934.

BIBLIOGRAPHY

Gelfand, Mark I. A Nation of Cities: The Federal Government and Urban America, 1933–1965. 1975.

Jackson, Kenneth T. "Race, Ethnicity and Real Estate Appraisal: The Home Owners Loan Corporation and the Federal Housing Administration." Journal of Urban History 6 (1980): 419–452.

Morgan, Iwan. "The Fort Wayne Plan: The FHA and Prefabricated Municipal Housing in the 1930s." The Historian 47, no. 4 (1985): 538–559.

Iwan Morgan