From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Improving the Federal Housing Administration’s Finances
and Implications for Homebuyers

Description: Audio interview by GAO staff with Mathew Scire, Director,
Financial Markets and Community Investment

Related GAO Work: GAO-13-682 Federal Housing Administration: Analysis of
Options for Modifying Its Products, Market Presence, and Powers
AND
GAO-13-722 FHA Mortgage Insurance: Applicability of Industry
Requirements is Limited, but Certain Features Could Enhance Oversight

Released: October 2013

[ Background Music ]

[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's October
2013. Historically, the Federal Housing Administration has insured
mortgages for homebuyers, particularly first-time, minority, and
lower-income borrowers. Since the housing crisis, many factors have
weakened FHA financially. Two teams led by Mathew Scire, a director in
GAO's Financial Markets and Community Investment team, recently reviewed
ways to improve FHA's financial situation. GAO's Sarah Kaczmarek sat
down with Mathew to talk about what they found.

[ Sarah Kaczmarek: ] So let's start with a question on first-time
homebuyers. How has the housing crisis affected their ability to get FHA
insured loans?

[ Mathew Scire: ] Well, FHA’s been a constant source of mortgage credit
during the housing crisis. FHA insures lenders against losses on loans
that they might make and for FHA, it’s always served a lot of borrowers
who are first-time homebuyers and the same is true during the recent
crisis. In 2012 alone, 78 percent of FHA-insured mortgages went to
first-time homebuyers.

[ Sarah Kaczmarek: ] In your review of options for improving FHA's
financial situation, what do you see as the effect on potential
homebuyers if FHA changes its product terms and conditions?

[ Mathew Scire: ] So, there's three things we look at there. FHA could
increase premiums, for example, or require that borrowers make larger
down payments, or it could tighten underwriting. If it were to do any of
those, that would make it more difficult for a borrower to obtain a home
mortgage. And part of the reason FHA would consider these is the
potential effect it could have on its fund. But there are tradeoffs
here. So you could potentially tighten underwriting too much or raise
premiums too much to the point where FHA may no longer be attracting a
wide spectrum of borrowers. I would also point out that with higher
premiums, borrowers would pay more each month for their mortgage, and
also if they were to make increased down payments, they would need to
bring more cash to the table if they were to purchase a home.

[ Sarah Kaczmarek: ] Now let me ask you—now that the housing market has
started to improve, if FHA limits insurance to smaller loans, how would
that affect potential homebuyers?

[ Mathew Scire: ] So, right now FHA can insure loans up to almost
$730,000, and I think everyone agrees that's a fairly large loan. But,
you have to look at this carefully as well because in certain markets,
house prices are much higher; and so for example, in California, 10
percent of FHA loans were for amounts greater than $450,000. So,
although you may wish to lower the loan limit, you have to be careful
where you set it, and you would likely want to recognize differences in
house prices across locations.

[ Sarah Kaczmarek: ] In a second report, you looked at lessons learned
from regulation of private mortgage insurers. What did you find there?

[ Mathew Scire: ] Well, as you know, private mortgage insurers are
regulated by the states and during the recent crisis many of them had
significant losses and struggled to meet the capital requirements that
the states placed upon them. So we took a look to see what the states do
when that happens, and there's some lessons that could be drawn from
that. For example, we saw that the regulators very often will require
that the insurer develop a plan for restoring their capital position.
And so we think that makes an awful lot of sense, and make
recommendations that the Congress consider requiring that FHA report a
capital restoration plan whenever their capital ratio does not meet the
minimum requirement.

[ Sarah Kaczmarek: ] And finally, for taxpayers and especially
homebuyers, what's the bottom line here?

[ Mathew Scire: ] Well, FHA's current financial condition and its
prominence in the market--because of that, there's been a lot of
proposals to make changes to FHA's operations, the market that it
operates in, and how its financial condition is assessed. And so we
think that there are a number of factors that you should consider in
looking at each of these options. So for example, what impact might that
option have on cost and risk to taxpayers, what impact might they have
on borrowers’ access to credit, and what impact might it have on FHA's
role going forward.

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