"What Does FHA Do?"

FHA insures lenders against loss in the event that borrowers default on their loans. In this way, FHA encourages lenders to make loans that they might otherwise view as too risky.

FHA began operations in the depths of the depression of the 1930s when lenders had stopped making new loans altogether because a sizeable proportion of existing loans were in default. As the country worked its way out of the depression, lenders regained their confidence, a private mortgage insurance industry developed, and the role of FHA changed. It became helping a segment of the low-and-moderate-income population become homeowners who otherwise might not make it because they have shaky credit or can't come up with the cash needed for the down payment.

Even that more limited role shrank during the early years of the new century as the conventional market relaxed its underwriting standards and a new sub-prime market developed to service the riskiest borrowers. But the bubble burst in 2007=2009, lenders retreated from the excesses of the previous years, the sub-prime market disappeared, and FHA again became an important part of the market. See FHA Mortgages: a 2009 Update.