National Housing Act Defined
President Franklin D. Roosevelt signed the National Housing Act on June 27, 1934, as a part of his New Deal program. It is also known as the Capehart Act and it established the Federal Housing Administration and the Federal Savings and Loan Insurance Corporation in the United States.
The objective of the New Deal program was to push the economic growth in the U.S. countering the effects of the Great Depression. The National Housing Act was passed to, “encourage improvement in housing standards and conditions, to provide a system of mutual mortgage insurance, and for other purposes.”
A Little More on the National Housing Act
Under the New Deal program, the Franklin Roosevelt Administration and the Congress enacted a number of new laws to alleviate the effects of the Great Depression. The laws were passed to expand the power of the federal government for managing and stabilizing the economy of the United States.
The housing bubble burst of 1920 was one of the major contributing factors toward the onset of the Great Depression. According to reports, by “the summer of 1932, as many as one thousand mortgage defaults were being recorded every day…and by early 1933 about half of the nation’s home mortgages were in default…” Thousands of Americans lost their homes and many more were threatened to face the same consequence.
The Federal Housing Administration was created to establish the federally-guaranteed mortgage insurance program. In return for a minimum fee, the program insured the mortgage lenders against the threat of default.
During this time, it became extremely difficult for the Americans to secure a mortgage finance. The loan terms for mortgage became troublesome for most of the Americans. The lending institutions were demanding 50% down payment and repayment of the whole amount within 5 years. After the creation of the Federal Housing Administration, the lending institutions supported by the federal insurance started to offer more generous terms for the mortgage loans as they were insured against the threat of default. They offered 20% mortgage loans with 20% down payment and 20 to thirty years repayment time.
The Federal Housing Administration was successful in its mission and it made the mortgage loans affordable for the Americans. It successfully alleviated the housing market crisis by implementing the policy of insurance.
After the effect of the Great Depression was effectively dissipated, many New Deal Programs were withdrawn by the Congress. However, the Federal Housing Administration stayed as the lawmakers believed it still had a purpose for the growth of the U.S. economy. In 1965, the Federal Housing Administration was incorporated into the Department of Housing and Urban Development.
Till date, the FHA remains an important part of the U.S housing finance system. The Federal Housing Administration has insured over 35 million home mortgages and 47, 205 multifamily project mortgages since its inception. At present, it has 4.8 million insured single-family mortgages and 13,000 insured multifamily mortgages.
The FHA was criticized for endorsing the practice of redlining in their efforts. The redlining left a large section of African American people without having the access to the mortgage loan. The Underwriting Handbook used by the FHA marked African-American neighborhoods as ineligible for FHA mortgages. The FHA denied insurance for the mortgage loans provided to the colored people neighborhood. As a result, the lending institutions refused to provide mortgage loan to these neighborhoods. This unfair policy of the FHA denied homeownership to millions of Americans. Many believe this is one of the main reasons for the wealth disparities between the races that still exists in America.