The Importance of the Federal Housing Administration in the Housing Market

Testimony before Subcommittee on Housing and Insurance

A home is listed for sale near downtown Danville, Illinois.

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Julia Gordon, Director of Housing Finance and Policy at the Center for American Progress, testified before the House Committee on Financial Services Subcommittee on Housing and Insurance on February 26, 2015. Below is an executive summary of her statement. 

Good morning Chairman Luetkemeyer, Ranking Member Cleaver, and members of the subcommittee. My name is Julia Gordon, and I direct the housing and consumer finance team at the Center for American Progress, a nonpartisan think tank dedicated to improving the lives of Americans through progressive ideas and action. Thank you so much for convening this hearing on the Federal Housing Administration, or FHA. I greatly appreciate the opportunity to testify today about the FHA and its importance to America’s families, the housing recovery, and the broader economy.

Research and our lived experience confirm the link between housing and opportunity in this country, from the many benefits of homeownership for families and communities to the central role of the housing economy on economic vitality. A healthy housing market, when coupled with appropriate protections to ensure responsible and sustainable lending, offers opportunities for young people to begin building wealth through homeownership, for growing families to access good schools and high-opportunity neighborhoods, and for older people to choose whether to age in place or seek a smaller or more supportive environment.

Yet at present, the nation’s housing recovery is neither strong nor equitably distributed. Not only has the national mortgage market shrunk significantly, but many communities, especially communities of color, lag far behind non-Hispanic white communities, and hard-hit neighborhoods continue to suffer the ongoing effects of multiple foreclosures, negative equity, vacant homes, and blight. We have turned back the clock nearly 20 years on homeownership rates, and rental costs are soaring relative to incomes.

Consequently, the Federal Housing Administration is now more important to the country than ever. Established in 1934 to promote long-term stability in the U.S. housing market after the foreclosure crisis that occurred during the Great Depression, FHA reinvented housing finance by demonstrating that long-term, fixed-rate mortgages could help middle-class families build long-term economic security even through uncertain economic times and that lenders could extend credit to a broad population on fair terms with good economic results. In the 80 years since, FHA has helped more than 40 million creditworthy families realize the benefits of homeownership.

Since that time, FHA’s role has evolved. First, the agency focuses on facilitating homeownership for creditworthy borrowers who would otherwise have difficulty putting together a 20 percent down payment, such as first-time homebuyers and homebuyers of color. To accomplish this goal, FHA doesn’t lend directly to homebuyers. Rather, it insures loans made by private lenders that meet strict size guidelines and underwriting standards. To fund this insurance, the agency charges both upfront and annual fees, the cost of which the borrowers cover themselves.

Second, FHA keeps mortgage credit flowing during business cycle downturns when private investors retreat. This so-called countercyclical role proved to be of critical importance in preventing a much more severe collapse of the housing market after the 2008 financial crisis. While playing this role severely strained the agency’s finances, a combination of strongmanagement, critical policy changes, and overall improvement in the housing market—in part due to FHA lending—has put the agency on track to fully replenish its capital reserve fund within the next two years.

Going forward, FHA should continue to assisting first-time and low-wealth borrowers, provide stability in the mortgage market, and maintain the insurance fund’s financial integrity. While Congress should provide necessary oversight to ensure FHA is pursuing this mission in a responsible fashion, FHA needs the authority and latitude to make certain business judgments within the congressionally mandated framework.

In this testimony, I will discuss the work of today’s FHA, the state of FHA’s finances, and several improvements that FHA can make to further its mission of supporting homeownership while strengthening its financial position.