The National Housing Act of 1934 created the Federal Housing Administration (FHA) to revive the housing industry by ensuring long-term mortgages and stimulating the construction of new homes. Prior to the 1930s, home mortgages usually required a down payment of 35 percent or more, with the loan lasting only five to 10 years and necessitating a large “balloon” payment at the end. Many working-and lower-class Americans could not meet these stringent requirements to qualify for a home mortgage, and for the middle-class families who had bought homes in the 1920s, the economic collapse of the Great Depression created havoc in their ability to pay their mortgage. Compounding this problem was the fact that new home construction had nearly ground to a halt by 1933 because of the depression’s impact on incomes and the housing industry.
New Deal housing policy developed over the 1930s. In 1933, the first priority was to stop the avalanche of home foreclosures, and the Home Owners Loan Corporation (HOLC) was created in June 1933 to help by providing assistance in refinancing existing mortgages. The Public Works Administration (PWA) also provided money at the local level to build new housing and provide jobs in construction, but the PWA, headed by Harold Ickes, was very cautious in granting money and the agency built little new housing by 1937. In 1937, the United States Housing Authority was created to build urban public housing.
The FHA had two functions: to guarantee home mortgages by providing lenders insurance against default and to provide money for home modernization and construction. FHA initially proved disappointing in stimulating new home construction, but its insurance aspect had an immediate, discernible impact. Together with the HOLC’s refinancing of existing mortgages, the FHA helped to stabilize the foreclosure rate on existing mortgages, which had reached 1,000 per day in early 1933. The FHA had clear rules on what condition homes needed to be in to qualify for an FHA guarantee, and this clarity provided standardization in the inspection of homes across the mortgage industry, including private inspections. The FHA also stimulated the issuance of new mortgages, as the agency was able to convince lenders to reduce the down payment needed to purchase a home and stretch payment terms to a more affordable 20- or 30-year period.
But the policies of the FHA had some unintended and negative consequences, particularly for America’s central CITIES. Following the practices of private banks, FHA “red-lined” high risk areas of cities, refusing to insure homes in declining or blighted urban neighborhoods. Rental properties and home improvement loans were also viewed as high-risk investments. Rental unit construction dropped off markedly in the next several decades, from about 40 percent of all new home construction in 1927 to less than 10 percent in 1956. The FHA chiefly financed single-family home units in the SUBURBS, and this became one of the contributing factors to the acceleration of white, middle-class suburbanization during the post-WoRLD War II period.
See also Federal National Mortgage Association.
Further reading: Mark I. Gelfand, A Nation of Ci-ties: The Federal Government and Urban America, 1933-1965 (New York: Oxford University Press, 1975); Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States (New York: Oxford University Press, 1985).
—Katherine Liapis Segrue
World History
