Loan Policy Changes Made to Strengthen FHA's Mortgage Insurance Program

RCED-91-61: Published: Mar 1, 1991. Publicly Released: Mar 13, 1991.

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Pursuant to a congressional request, GAO reviewed policy changes to the Federal Housing Administration's (FHA) single-family mortgage insurance program, focusing on the: (1) effect of the changes on the FHA Mutual Mortgage Insurance Fund's cash position; and (2) House-Senate Conference Committee on Housing Legislation's attempts to enact housing legislation.

GAO found that: (1) the Fund's cash position over the next 10 years will depend on the economic conditions that prevail, particularly house appreciation rates; (2) FHA was concerned that the Fund would not perform well if house prices appreciated at only a 2- to 4-percent rate per year; (3) if the Fund does not perform well under those conditions, FHA will probably need the Department of the Treasury's assistance to maintain a positive cash balance; (4) an independent contractor's June 1990 study concluded that the Fund was not actuarially sound, and the Department of Housing and Human Development (HUD) proposed several reforms to its Single-Family Mortgage Insurance Program; (5) Congress considered the HUD proposal as part of the 1990 housing legislation debate aimed at putting the Fund back on an actuarially sound basis; (6) the House-Senate Conference Committee attempted to restore the Fund to an actuarially sound base by incorporating such reforms as setting an annual risk-related premium structure, with higher premiums for new mortgage loans with lower down payments; and (7) the reforms should result in a budgetary savings of about $2.5 million over a 5-year period.

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