The Federal Housing Administration (FHA) is the government agency that provides mortgage insurance on loans made by FHA-approved lenders in the United States.
It was formed in 1934 and is now the largest insurer of mortgages in the world, insuring mortgages on single and multi-family homes as well as manufactured homes and hospitals.
The mortgage insurance protects the lender against losses when homeowners default on their mortgage loans and the homes go into foreclosure.
The FHA pays the lender in the event that the home loan goes into default. With the current foreclosure crisis in the U.S., the FHA is saving the mortgage lenders who provided FHA-insured loans from filing bankruptcy.
Now many are counting on the FHA to correct the housing market, but the agency may not be strong enough on its own to reverse the damage.
The FHA has been the only government agency that does not rely on taxpayers for funding, and operates solely on mortgage insurance premiums paid by homeowners with FHA-approved loans. However, in order to fix the housing market, that may have to change.
According to a report by CNNMoney.com, the FHA currently insures $385 billion in mortgage loans. Proposed rescue efforts from Washington call for the FHA to double the amount of home mortgage loans that it backs by taking up the slack left by the demise of many subprime lenders.
The challenge for the FHA is to become the first choice for borrowers. However, FHA officials are not sure that the agency will not buckle under the enormous pressure. With such uncertainty in the housing market, the risks are tremendous.
The FHA has allowed Americans who may not have been able to buy homes to get affordable mortgages. The agency has traditionally catered to buyers with weak credit and little or no down payments. Through the FHA program, these people have been able to purchase homes with mortgages that they could have never have qualified for without the program.
In order to get FHA loans, home buyers go through private lenders just like everyone else. These private lenders are generally approved by the FHA and therefore the agency offers mortgage insurance. This mortgage insurance is paid in monthly installments by the home buyers along with the mortgage payments.
The insurance protects the lenders from losing out if the home goes into foreclosure. If the mortgage loan goes into default, the lender can file a claim with the FHA to recoup the amount of the borrower's default.
During the housing market boom, mortgages were practically handed out like candy and there was not a lot of need for the FHA. In 2007, FHA loans accounted for only 7 percent of outstanding home mortgage loans. Now that the market has imploded and credit standards have tightened, the FHA is the only option for many borrowers and lenders who want to stay in business.
A new program designed for subprime borrowers who have adjustable-rate mortgage loans was launched in September. The program, called FHASecure, has refinanced approximately 150,000 borrowers in the last six months.
Another recent change at the FHA is the increased loan limit on FHA-insured loans. The limit was raised in March and will allow the FHA to take on more risky loans.
The problem is, if the foreclosure rates continue to increase or even if they hold steady, the FHA is left holding the bag. That means that when the agency runs out of money, the taxpayers will foot the bill. While the FHA has always been able to operate without taxpayer's money so far, times have changed.
As they continue to change, there are new worries about just how much stability the agency can provide and what the breaking point will be. If foreclosures bankrupt the FHA, the burden will then fall on us all to bail out the mortgage mess.
So what are legislators proposing?
Evidently, Councilman Justin Wilson has suggested increasing the taxes levied on certain predatory lenders, including payday lenders and auto title lenders. As the law now stands, the Commonwealth of Virginia requires that all financial services institutions (including hedge funds, stock brokers and payday lenders) pay a 35-cent tax for every $100 of gross revenue brought in.
But Wilson advocates raising that tax to 58 cents per hundred dollars for payday lenders and auto-title lenders. And city officials have evidently noted that the types of predatory lenders targeted in this proposal are predominantly located in lower-income areas, where residents tend to have access to limited educational resources on financial matters.
Supporters have apparently estimated that the Commonwealth would collect about $13,000 annually from the hiked tax. If Wilson's proposal becomes law, that money would go toward education programs for low-income Virginians, in an effort to expose borrowers to the potential costs of and alternatives to payday lending.
According to the Louisville Courier-Journal, similar measures have been proposed in Kentucky. HB 500, which recently passed the state House, would require payday lenders to adhere to similar regulations as the ones in Virginia - limit borrowers' loans to one per business day and compile a database of payday borrowers.
And the Kentucky bill, if it passes the Senate, will also call for greater enforcement of payday lending regulations that are already in place, sources indicate. Apparently, about one-fourth of current payday loans issued in Kentucky are technically illegal because they don't comply with one or more terms of the current legal code.
While lawmakers have allegedly admitted that these are small steps toward eliminating the problems caused by payday lenders, they believe the impact on struggling families will be significant.