Better Housing: FHA Property Improvement Loans

Abstract

The National Housing Act of 1934 is most well-known for creating the Federal Housing Administration (FHA) to insure home mortgages; however, the first section of the Act also covers insurance of financial institutions against losses on loans and advances of credit “for the purpose of financing alterations, repairs, and improvements upon real property.” Title I was at the heart of a New Deal initiative to modernize housing as both a means to improve the welfare of American households as well as employ surplus labor in home construction and repair. It also introduced commercial banks to consumer instalment lending, which revolutionized household finance. FHA endorsed more property improvement loans per year than home mortgages for its first 35 years. And the cumulative number of loans insured under Title I was greater than the more famous Section 203B program until the financial crisis of 2008. Yet the importance of Title I is often overlooked. “Historical scholars have argued that FHA programs were self-validating: by encouraging the neglect of older homes and neighborhoods, they made filtering inevitable, and with it the decline of older neighborhoods in central cities. There is some truth to this assessment of federal policy. However, and although the fact has been widely ignored, from the beginning the FHA also sought to improve existing homes and neighborhoods” (Harris 2009, p. 392). In part, this may be because the Title I program has not kept pace with changes in the financial industry, causing disbursements to tumble and the program to drift into obscurity. This paper briefly describes FHA’s Title I property improvement program, including its history and underwriting requirements. Using administrative data, the paper examines variation in interest rates across loan and borrower characteristics. In particular, I estimate the rate premium associated with unsecured lending during the Great Recession. I further estimate the likelihood of default and insurance claim amount given default. The results could be used to automate credit underwriting and facilitate modernization of property improvement financing.