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Federal Housing Administration: Capital Requirements and Stress Testing Practices Need Strengthening

GAO-18-92 Published: Nov 09, 2017. Publicly Released: Dec 11, 2017.
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What GAO Found

The Federal Housing Administration's (FHA) budgetary reviews of the Mutual Mortgage Insurance Fund (MMI Fund) assess whether it needs more budget authority to cover expected future costs, and independent actuarial reviews provide complementary information on the fund's finances. FHA uses the actuarial reviews to assess whether the MMI Fund's capital ratio (economic value divided by insurance obligations) meets the 2 percent requirement and how fund components would perform under alternative economic scenarios. While the actuarial assessment does not directly determine the need for additional budget authority, it evaluates the fund's ability to absorb unexpected losses and may prompt changes in FHA policies and insurance premiums.

Capital requirements and stress testing practices—tools for managing financial risks—for the MMI Fund are not consistent with all elements of a framework GAO developed to help assess these tools in the context of FHA's single-family mortgage insurance programs. In accordance with the framework, FHA's capital assessments and stress tests are transparent and incorporate a number of relevant risk factors. However, areas of inconsistency include the following:

  • Scenario-based requirement . The statutory capital requirement is intended to help ensure the fund can absorb unexpected losses but is not based on a specified risk threshold, such as an adverse economic scenario the fund would be expected to withstand without requiring supplemental funds.
  • Accountability mechanisms . The capital requirement also does not include accountability mechanisms, such as a set of steps FHA would have to take if the capital ratio again fell below the 2 percent minimum.
  • Fund-wide stress tests . FHA has conducted separate stress tests—projections of financial condition under adverse scenarios—of its forward (traditional) and reverse mortgage (loans against home equity available to seniors) portfolios, but has not performed tests on a fund-wide basis.
  • Stress test objectives . FHA has not defined specific objectives for its stress tests such as determining the amount of additional capital, if any, that would be needed to withstand conditions similar to the last housing crisis.

Strengthening FHA's capital requirement and stress testing practices could help ensure that the MMI Fund is able to withstand economic downturns and that stress test results are as relevant and useful as possible for risk management.

Including reverse mortgages in the fund's capital assessment has advantages and disadvantages. Unlike for stress tests, FHA jointly assesses forward and reverse mortgages to calculate a combined capital ratio. Subjecting the reverse mortgage portfolio to capital assessment has made its financial condition more transparent. But, the portfolio's sensitivity to changes in economic assumptions makes the combined ratio more unpredictable. Alternative approaches also pose trade-offs. For example, a separate reverse mortgage capital requirement may help ensure the financial transparency of both portfolios, but requiring FHA to hold more capital to account for the volatility of the reverse mortgage portfolio could compel FHA to raise insurance premiums or lower borrowing limits.

Why GAO Did This Study

FHA insures private lenders against losses from defaults on single-family mortgages. According to independent actuarial reviews, in fiscal years 2009–2014, FHA's MMI Fund (which insures $1.2 trillion in single-family traditional and reverse mortgages) did not meet its statutory 2 percent capital requirement. Also, a budgetary review determined that the fund required $1.69 billion in supplemental funds in fiscal year 2013.

GAO was asked to examine issues concerning the MMI Fund's capital requirement and actuarial reviews. This report examines the types of information provided by assessments of the fund's financial condition, FHA's capital requirement and stress testing practices, and trade-offs associated with including reverse mortgages in the fund's capital assessment.

GAO analyzed actuarial and budgetary assessments of the MMI Fund. GAO reviewed financial institution and regulatory capital and stress testing principles to develop an evaluative framework and applied it to FHA. GAO also interviewed federal and mortgage industry officials.


Congress should consider specifying the economic conditions the MMI Fund would be expected to withstand without supplemental funds, and FHA should conduct stress tests on a fund-wide basis and specify the objectives of its stress tests. GAO also continues to maintain that Congress should incorporate accountability mechanisms into FHA's capital requirement (as stated in GAO-13-722). FHA agreed with GAO's recommendations.

Matter for Congressional Consideration

Matter Status Comments
Congress should consider amending the National Housing Act to specify the economic conditions the MMI Fund would be expected to withstand without substantial risk of drawing on permanent and indefinite budget authority, and require FHA to specify and comply with a capital ratio consistent with these conditions. In specifying the economic conditions, Congress should take into account FHA's statutory operational goals and role in supporting the mortgage market during periods of economic stress. (Matter for Consideration 1)
As of March 2024, Congress had not yet acted on this matter for consideration.

Recommendations for Executive Action

Agency Affected Recommendation Status
Federal Housing Administration The Commissioner of FHA should combine stress test results for the forward mortgage and Home Equity Conversion Mortgage portfolios, where possible, and report estimated MMI Fund-wide capital ratios for the stress scenarios examined. (Recommendation 1)
Closed – Implemented
Consistent with our recommendation, FHA reported on fund-wide stress test outcomes in its fiscal year 2017 report to Congress. For example, the report noted that the MMI Fund's capital ratio remained above the statutory 2 percent minimum requirement in 79 of the 100 stress scenarios examined. In addition, the report discussed the sensitivity of the combined capital ratio to changes in interest rates and house prices, noting that the overall fund was more sensitive to these changes than the forward mortgage portfolio alone, but less sensitive than the reverse mortgage portfolio alone.
Federal Housing Administration The Commissioner of FHA should develop specific objectives for stress tests of the MMI Fund and apply stress testing methods and scenarios consistent with those objectives. (Recommendation 2)
Closed – Implemented
Consistent with our recommendation, FHA articulated more specific objectives in its report to Congress on the MMI Fund for fiscal year 2017 and repeated them in the report for fiscal year 2018. The reports state that the purpose of the stress tests is to assess the fund's capacity to absorb risk under varying economic conditions, including scenarios that are more stressful than those reflected in the baseline assumptions. The reports further state that the tests evaluate the fund's capacity to maintain capital at or above two key thresholds--the 2 percent statutory minimum capital requirement and zero, the point at which the fund is at extreme risk of requiring a mandatory appropriation. In line with these objectives, both reports include information on the number of stress scenarios out of the 100 examined that would cause the fund to fall below the two thresholds. FHA's more specific objectives and consistency in reporting will facilitate comparison of stress test results from year to year and help ensure that the stress tests are targeted to FHA's risk management needs.

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