The 1970s alsowitnessed therebirth of theprivate mortgageinsuranceindustry, whichprovided directcompetition withthe FHA.
mum quality standards that would have to be verified via inspection before FHA insurancewas written. The agency, rather than the pri- vate sector, was also the creator of mortgage“redlining,” a policy by which the FHA refusedto write insurance on loans located on proper-ties within communities with high concentra-tions of racial and ethnic minorities.
Despite its promise to be the heart of theNew Deal solution to the housing problems of the Great Depression, the FHA maintained a relatively small role in the U.S. mortgage mar-ket, rarely rising beyond 10 percent of totalmortgage debt outstanding during its first de-cade of operation.
Indeed, the agency’s mar-ket share did not break 15 percent until thebeginning of World War II. During the 1950sand 1960s, the FHA’s market share hoveredbetween 15 and 20 percent.
Due to its relatively low activity and highcredit standards, coupled with its higher pric-ing, the FHA posed little financial threat to thetaxpayer during its initial decades. Over its first20 years, the agency maintained an income of almost $500 million in premiums with claimspayments of only half that amount.
Withhousing prices and employment steadily ris-ing throughout the 1940s and 1950s, theagency was able to maintain a position of fi-nancial health and stability, with both defaultsand foreclosures remaining low.The 1960s witnessed a dramatic turn forthe FHA, as the program was among many federal programs that were increasingly seenas not simply a backstop for the market butas a tool of social engineering. President Lyn-don Johnson, in his first State of the Union Address, asked Congress to allow the agency to postpone foreclosure for those homeown-ers who defaulted due to circumstances be-yond their control. The Housing Act of 1964and the Housing and Urban Development Act of 1968 both expanded the reach of theFHA, while adding a mandate to “assist fami-lies with incomes so low that they could nototherwise decently house themselves.” While itwould take some time for these seeds to bearfruit, the FHA entered the 1970s with a man-date to reduce its underwriting standards.The inflation of the 1970s was not kind tothe agency’s traditional fixed-rate mortgageproduct.
The FHA’s market share, by dollar volume, plunged from over 24 percent in 1970to just 6 percent by 1976.
Its market shareremained just above that level for most of the1980s, while its activity increased along withthe rest of the mortgage market as declinesin mortgage rates, due to reduced inflation,led to a massive expansion in mortgage lend-ing. Unfortunately, the FHA was not immunefrom the mortgage market boom and bust of the late 1980s. It required restructuring andreform. In 1989, for the first time, Congressrequired annual audited financial statementsfor the agency and established the MortgageeReview Board, intended to reduce lender fraudand abuse within the agency.The 1970s also witnessed the rebirth of theprivate mortgage insurance industry, whichprovided direct competition with the FHA.While a number of private mortgage insur-ance companies went public in the 1960s—themost prominent of which was the MortgageGuaranty Insurance Corporation—it was notuntil 1972 that the level of private mortgageinsurance issued surpassed that of the FHA.Since that time, private mortgage insurershave maintained a market share comparableto that of the FHA, while presenting no risk tothe taxpayer.During the 1980s the agency underwentseveral program expansions that would even-tually result in significant costs to both theFHA insurance fund and the taxpayer. Fore-most among these costly expansions was thereduction of the required down payment from10 percent to 3 percent. Congress also elimi-nated the agency’s maximum interest ratecap, allowing lenders to charge rates abovethe previous cap. Repeatedly Congress alsoraised the size limit on FHA loans, expand-ing the agency’s market share in higher-costhousing markets. When the housing marketeventually turned south, the FHA insurancefund lost about $6 billion, while its economic value plunged toward zero.
The early 1980swere some of the worst years witnessed by theagency. Loans written in 1981 displayed a life-