Mortgage Financing:

Financial Health of the Federal Housing Administration's Mutual Mortgage Insurance Fund

T-RCED-00-287: Published: Sep 12, 2000. Publicly Released: Sep 12, 2000.

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Stanley J. Czerwinski
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Pursuant to a congressional request, GAO discussed the financial health of the Mutual Mortgage Insurance Fund, focusing on: (1) the activities of the Federal Housing Administration's (FHA) home mortgage insurance program; (2) how the reserves of the Fund are estimated; (3) GAO's views on determining an adequate level of reserves; (4) actions that Congress and the Secretary of the Department of Housing and Urban Development (HUD) have taken or could take to influence the level of reserves; and (5) the impact that actions affecting the level of reserves could have on the federal budget.

GAO noted that: (1) FHA is a major source of financing for the single-family housing market--overall as well as for specific groups, particularly low-income and other homebuyers who may not have much cash for a down payment but are otherwise able to afford a loan; (2) FHA's home mortgage insurance program has helped people become homeowners through the use of a mutual insurance fund that until the 1990s, returned profits to homebuyers; (3) the reserves that FHA is required to maintain consist of current capital resources--primarily nonmarketable Treasury securities--plus estimates of the net present value of future cash flows from the activity of the Fund; (4) deriving estimates of the value of future cash flows requires professional judgment and, in practice, relies on complex economic models; (5) determining what reserve levels would ensure the financial soundness of the Fund requires additional study; (6) when Congress first established the 2-percent reserve requirement, the Fund was experiencing unusual losses; (7) today, the Fund appears to be enjoying its highest level of reserves in the last 20 years; (8) to help Congress decide on an appropriate level of reserves for the future, GAO is now conducting analyses that will model economic scenarios that the Fund should withstand; (9) for example, losses the FHA experienced in the 1980s following unusually high claims resulting from foreclosures in the oil-producing states may provide an indication of the reserve levels that might be needed for the Fund to remain financially sound; (1) there are a number of actions that Congress and the Secretary of HUD have taken and could take to influence the level of reserve; (11) both the Secretary and Congress have changed insurance premiums; (12) the Secretary has also taken actions to limit losses from the management of foreclosed properties and to enhance FHA's oversight of lenders; (13) Congress has set maximum loan-to-value ratios and required the Secretary to suspend payment of distributive shares; (14) any of these actions may have affected the value of the Fund; (15) Congress and the Secretary could take actions in the future that could reduce the value of the fund, including reducing premiums, changing underwriting standards to reach more homebuyers, or reinstituting the payment of distributive shares; (16) actions taken by the Secretary of HUD or Congress that influence the Fund's reserve level also will affect the federal budget; and (17) any proposal that seeks to use reserves, if not accompanied by a reduction in other spending or an increase in receipts, will result in a decline in the federal budget surplus.

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