Shining Light from Mortgage Mess: FHA Loans

Mortgages are in increasingly short supply as economic chaos continues, but consumers are getting some vital relief from the FHA. The number of FHA mortgage applications has soared, nearly tripling in 2008, as troubled banks and other mortgage companies reign in their credit.

As the subprime mortgage meltdown accelerates, trillions of dollars worth of mortgage company assets appear to be worthless. That's because lenders made bad loans and then transferred the right to be repaid to investors, including many of the world's most prominent financial institutions. But when that market evaporated, there were no longer buyers for these subprime mortgages, and no one to take them off the hands of banks and other lenders.

Fannie Mae has even discontinued its participation in Alt-A mortgages-a category considered much less risky than subprimes. With all these loans gone, homeowners now have fewer options when submitting mortgage applications. But luckily, the FHA is stepping in to take up much of the slack in the mortgage market vacuum.

History of the FHA

The FHA was created in the wake of the Great Depression.  Economists are now making increasingly frequent comparisons between today's crisis and that of the late 1920s and early 1930s. Unfortunately, those comparisons are starting to ring true. But one comforting historical nugget worth remembering is that the U.S. emerged stronger than ever from the Great Depression, with help from agencies like the FHA.

Congress created the FHA at a time when 2,000,000 construction workers were unemployed, homeowners were having trouble qualifying for mortgages, and many Americans were renting homes because they couldn't afford to buy. If that sounds eerily familiar, it's because today, mortgages are harder to get, mortgage applications are being rejected in record numbers, the rental market is surging as more homes go into foreclosure and their occupants become renters, and home construction is in the doldrums.  It happened also in the 1970s, when high inflation and energy prices wreaked havoc in the nation, just as they're doing today. But emergency FHA financing kept cash-strapped properties afloat, helped stabilize real estate prices, and provided mortgages to many homeowners turned down by lenders.

Benefits of FHA mortgages

The FHA requires as little as 3 percent down, compared with 20 percent down payments for most mortgages. Although banks and mortgage companies that act as FHA lenders may have minimum credit score requirements, the FHA doesn't.  As a result, its loans tend to be more affordable. That's one main reason why FHA mortgage applications have soared, especially now that Fannie Mae and Freddie Mac are curtailing their mortgage activity.

The Department of Housing and Urban Development and the FHA have insured more than 34 million home mortgages and 47,205 multi-family project mortgages since 1934, and the FHA currently holds about five million mortgages.  Worried American homeowners can take comfort in the fact that when it comes to a long history of experience and successful navigation of mortgage and real estate crises, the FHA has solid and indisputable credentials.