Ask the Mortgage Professor: Mortgage Center

A: 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, the FHA settled into the principal role it has today: 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.

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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