National Housing Act

In 1934...yep, during the Great Depression…the National Housing Act was passed, establishing the Federal Housing Administration (the FHA) as part of the New Deal.

The New Deal was all about putting people to work, pulling out all the stops to try to stimulate the economy. After a huge, scary spike in mortgage defaults by homeowners (like...half of mortgages), the National Housing Act came to the rescue with the FHA.

The FHA back then, as it does today, has programs meant to encourage homeownership, a big part of the economy. Because buying a home is probably the biggest purchase you’ll ever make...unless you downsize your house for that new Tesla.

Unlike most New Deal programs, the National Housing Act continues to affect us today, since the FHA is still around. It exists with less stringent mortgage-getting rules than a normal formal mortgage from a bank (the FHA softly guarantees payment from borrowers, in a sense).

The National Housing Act’s main shtick at that time was to create a mortgage insurance program that was federally-backed, encouraging mortgage lenders to keep lending, because the ol’ federal government's got their backs. For all intents and purposes, it worked: lenders were more comfortable lending at more favorable terms, which stopped the downward spiral of the mortgage market, stabilizing it.

Well...it worked for some homeowners. The National Housing Act, while helping get the U.S. economy out of the Great Depression, has its own closet of skeletons. Today, the OG FHA is criticized for discriminating against black neighborhoods, practicing what’s called “redlining,” which economists and historians say contributed to the wealth disparity between whites and blacks that we have today.

See: Private Mortgage Insurance - PMI.