The report excerpted here on the FHA loan programs of the Department of Housing and Urban Development was issued by the Joint Center for Housing Studies at Harvard University.

The future of FHA lies in its potential to complement and extend the reach of public and private housing finance organizations to meet the housing capital requirements of undeserved communities. To understand how to accomplish this modern mission, Federal Housing Commissioner Nicolas P. Retsinas hosted eight public forums across the country to gather testimony from current and potential FHA partners.

In describing the evolution of the modern national housing finance system, forum participants acknowledged the important role FHA played in innovating new mortgage products and encouraging the growth of private, nonprofit, and other government-chartered housing finance institutions.

Over its 60-year history, FHA has been a leader in the remarkably successful federal effort to create a robust private mortgage market. As an integral component of a national finance system that includes Ginnie Mac, Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Federal Reserve Banks, and the Federal Deposit Insurance Corp., FHA has helped make mortgage credit widely available to large segments of the American population.

Although FHA continues to fulfill its mission to address the nation's unmet homeownership and affordable housing needs, the revolution in housing finance over the last 20 years has dramatically changed the environment in which FHA operates. Today, many diverse institutions - for-profit lenders and mortgage insurance companies, community development finance institutions, and state and local housing finance agencies, to name a few - have overtaken FHA as an innovator and now set the pace of change in national capital markets.

The FHA mortgage insurance program revolutionized housing finance in the United States. In its 60 years of operation, FHA has made homeownership possible for more than 23 million Americans, and has insured more than 4.2 million units of multifamily housing. It has set the underwriting standards for the private mortgage industry and contributed to the quality of housing in America by promoting national minimum building code requirements.

Created in 1934 to help revive a slumping national economy, FHA pioneered the development of the national housing finance system. In the 1930s, only 44% of U.S. households owned their homes - and the Depression threatened to drive the homeownership rate lower still. Those who could qualify for home loans typically faced sizable down payments (up to 50% of the house value), short mortgage terms (often 10 years or less), and large balloon payments.

Rather than originating mortgages itself, FHA worked in partnership with other public and private financial organizations to develop new, more accessible mortgage products. With the introduction of FHA-backed mortgage insurance, conventional lenders - and later state and local housing agencies - were able to manage the risk associated with low down payment (20%-25%), long-term (25- to 30-year) amortizing loans.

Following FHA's lead, the entire housing finance industry soon shifted to the new type of mortgage, dramatically expanding access to mortgage capital for millions of middle-income Americans. Backed by the full faith and credit of the federal government, FHA and the national mortgage market grew rapidly after World War II, boosting the number of homeowners from 15 million to 33 million by l960. At the same time, the homeownership rate rose from 44% to 62%.

As these loans gained widespread acceptance in the marketplace, FHA further expanded access to homeownership by insuring loans with down payments as low as 3%. FHA also insured loans to borrowers with higher debt and housing cost ratios, gifts as source of down payment and closing costs, and other characteristics not commonly accepted by the private sector.

Forum participants described the many changes that are radically altering the housing finance market. Over the past two decades, the variety of housing finance organizations has expanded, technology has become more sophisticated, and new financial instruments have been developed. Most importantly, the growth of Fannie Mae and Freddie Mac - and the secondary market they helped to establish - has dramatically improved the liquidity of the home mortgage finance system.

Development of the private mortgage insurance industry has further enhanced the liquidity of residential mortgage loans. Following FHA's lead, private mortgage insurers (PMIs) have grown in number and size, and today insure a significant portion of residential mortgages. As PMIs have extended their reach, FHA has increasingly focused on insuring more risky mortgage loans that benefit the low end of the homeowner and apartment markets.

In addition, deregulation of the banking industry and the dismantling of interstate banking regulations continues to blur distinctions among different types of lending institutions. As a result, a variety of conventional lenders - including commercial banks and mortgage bankers - have joined savings and loans and thrifts as major residential mortgage lenders.

Newly established nonprofit and quasi-public housing finance institutions add to the diversity of the nation's housing finance system. Partly in response to federal cutbacks in housing production programs, the number of community development finance institutions rose sharply in the l980s. These community loan funds, credit unions, national nonprofit financial intermediaries, and micro-loan programs have also become important suppliers of mortgage credit to low- and moderate-income households. And though a relatively new force in providing capital and in developing affordable housing, these organizations are rapidly evolving into sophisticated institutions that combine legitimate community representation with advanced technical expertise.

Despite these market changes, FHA remains an important source of mortgage insurance - especially for first-time homebuyers. In 1994, FHA insured more than 1.2 million loans, including 686,000 loans to purchase homes and another 531,000 refinancings. Of FHA-insured home purchase loans, 459,000 went to first-time buyers. In fact, FHA serves a far larger share of first-time buyers than the private sector. In 1993, for example, 66% of FHA-insured home purchase mortgages went to first-time buyers, compared with only 30% handled by Fannie Mae and Freddie Mac.

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