Housing Finance:

FHA's Risk-Sharing Programs Offer Alternatives for Financing Affordable Multifamily Housing

RCED-98-117: Published: Apr 23, 1998. Publicly Released: Apr 23, 1998.

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Pursuant to a legislative mandate, GAO reviewed the risk-sharing demonstration programs established under section 542 of the Housing and Community Development Act of 1992, focusing on: (1) how well the programs' goals are being met; (2) the benefits for participating financial institutions and the Department of Housing and Urban Development (HUD); and (3) opportunities for improving the programs and HUD's administration of them.

GAO noted that: (1) the credit enhancement program, together with the reinsurance program, was established under the Housing and Community Development Act of 1992 to facilitate the financing of affordable multifamily housing and to make that financing available in a timely manner; (2) the credit enhancement program is meeting these goals; (3) as of September 1997, 32 participating state and local housing finance agencies had reserved about 84 percent of the risk-sharing units allocated to these agencies through March 1996; (4) most of the insured loans are financing properties that serve more low-income households than required, apparently because the credit enhancement is being used with other subsidies, particularly low-income housing tax credits; (5) while it is still too soon to evaluate the financial performance of the insured loans, the available financial indicators reflect sound underwriting standards; (6) activity in the reinsurance program has been so limited that the program remains largely untested; (7) only one institution--Fannie Mae--has participated extensively in the program, and one lender--Banc One Capital Funding Corporation--has originated over half of the loans that Fannie Mae has reinsured; (8) Banc One's activity has demonstrated that the risk-sharing reinsurance program can expand participation in mortgage lending, including lending for smaller properties in rural areas--an unmet capital need, according to HUD's studies; (9) participation in the demonstration programs has enabled HUD to facilitate the financing of affordable multifamily housing while limiting its loss exposure through risk sharing; (10) participation has also allowed HUD to increase the efficiency and reduce the costs of its operations through delegation, compared with the Federal Housing Administration's (FHA) traditional multifamily program; (11) HUD has retained responsibility for monitoring its risk-sharing partners' performance, but its data system for monitoring the progress of credit enhancement projects is unreliable; (12) HUD is aware of the system's problems and plans to resolve them in the course of overhauling all of its information management systems; (13) HUD has also retained responsibility for overseeing its risk-sharing partners' compliance with the demonstration programs' requirements; however, GAO's review identified one default that was not reported to HUD headquarters for over a year; and (14) HUD recognizes that effective oversight is critical, particularly if one or both of the demonstration programs are made permanent and lenders' activity increases.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HUD has explored the feasibility of amending its current risk-sharing agreement by offering to: (1) allow Freddie Mac to use reinsurance with 18-year balloon mortgages and (2) to modify both Fannie Mae's and Freddie Mac's risk-sharing agreements to authorize the use of reinsurance with loan pools. Freddie Mac has requested authorization of a 10-year balloon mortgage instead of an 18-year mortgage. HUD is reviewing this proposal but has reservations regarding decreasing balloon mortgages for substantially less than 18 years. Since neither GSE is interested in loan pool reinsurance, no risk-sharing agreements have been modified to accommodate this provision.

    Recommendation: The Secretary of Housing and Urban Development should direct the Commissioner, Federal Housing Administration, to explore the feasibility of amending HUD's current risk-sharing agreements, to: (1) allow the use of reinsurance with 18-year balloon mortgages as is currently permitted in an agreement with Fannie Mae; and (2) authorize the use of reinsurance with loan pools.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: Since November 2002, HUD has been collecting data on its multifamily risk-sharing mortgages. For each risk-sharing mortgage, HUD field offices prepare a Closing Memorandum which includes information such as original mortgage amount, number of units, and percent of the risk assumed by FHA. This information is entered into one of HUD's databases (F-47) for tracking FHA insured multifamily loans.

    Recommendation: To ensure that risk-sharing demonstration programs' managers have consistent and reliable data to meet their statutory and regulatory obligations, the Secretary of Housing and Urban Development should take steps to correct current flaws in the information systems supporting the programs.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: HUD has created an interim spreadsheet to better ensure that consistent and reliable data is available for managing the risk-sharing program. This interim step is consistent with the recommendations made in the report. The successful implementation of the new Development Application Processing System should replace this interim measure.

    Recommendation: In correcting the flaws in the data system supporting the credit enhancement program, the Secretary of Housing and Urban Development should direct the system's designers and the program's managers to examine the near-term suitability of using spreadsheets and databases commonly contained in suite software within the context of the long-term data needs of a growing universe of projects, giving careful consideration to the requirements of all users of the system.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: According to the Deputy Director for Multifamily Development, HUD has created a new Quality Assurance and Lender Monitoring Division that is located in several Field Offices throughout the country. The division has begun making field visits to the largest state housing finance agencies participating in the Risk-Sharing program.

    Recommendation: The Secretary of Housing and Urban Development should give priority to implementing a comprehensive monitoring system to ensure that HUD's risk-sharing partners are complying with the demonstration programs' procedures, regulations or risk-sharing agreements, including the requirements for timely reporting on the status of insured loans.

    Agency Affected: Department of Housing and Urban Development


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