Impact of FHA Loan Policy Changes on Its Cash Position

T-RCED-90-70: Published: Jun 6, 1990. Publicly Released: Jun 6, 1990.

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GAO discussed the impact of proposed policy changes on the cash position of the Federal Housing Administration's (FHA) Mutual Mortgage Insurance (MMI) Fund, focusing on the effects of: (1) increasing FHA mortgage ceiling limits; (2) reducing down payment requirements; and (3) allowing FHA to insure adjustable rate mortgages (ARM) with higher interest rate caps. GAO noted that the MMI fund: (1) was the largest FHA fund, with $271 billion of insurance-in-force as of September 30, 1989; (2) had a $1.4 billion loss in fiscal year 1988; and (3) provided basic single-family mortgage insurance and was intended to be self-sustaining by charging buyers a 3.8-percent mortgage premium. GAO also noted that: (1) if favorable economic conditions exist, house prices will increase about 7 to 9 percent annually; (2) the fund's cash balance could grow from $6.2 billion at the beginning of 1989 to an estimated $8.8 billion in 1998; (3) increasing the mortgage ceiling to 95 percent of a state's median house price would have the greatest effect on the fund's balance and would also assist in generating the most new business; and (4) if the fund was not actuarially sound, the mortgage ceiling should not be raised to the 95-percent level, which could subject the federal government to enormous costs over the life of the new insurance that would be created.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Legislation designed to make the MMI Fund actuarially sound has been enacted into law, Cranston-Gonzalez Housing Affordability Act of 1990. In line with the legislation, HUD has, among other things, increased premiums charged to, and upfront cash required of, borrowers.

    Matter: If the fund is not actuarially sound, Congress should make any decision to raise the mortgage ceiling in conjunction with a decision on how to resolve the problem of actuarial soundness so that the potential financial risks assumed by the federal government in the long run are adequately considered.


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