How the Federal Housing Administration Affects Homeownership

In this paper, I attempt to determine how the Federal Housing Administration (FHA) affects homeownership. The FHA insures the full value of selected loans made by private lenders. I use changes in FHA underwriting criteria over time and the differential effects of these criteria across metropolitan areas to study the effects of the FHA on homeownership. To do this, I simulate the difference in the fraction of homes in his metropolitan area that a prospective homeowner could afford with FHA and conventional criteria, and see how the difference in affordability affects homeownership. I find that more generous FHA underwriting criteria increase homeownership. In the period from 1970 to 1990, FHA increased homeownership by an average of about 0.6 percentage points, and increased homeownership by 1.57 percentage points for those at the 90th percentile of effects of FHA on house purchase affordability. FHA also had greater effects on the homeownership of certain groups, especially Blacks and married couples with children…