Homeownership

Many changes have occurred in the single-family housing finance system since the Federal Housing Administration (FHA) was established in 1934. These changes include the advent of modern private mortgage insurance, the development of a secondary mortgage market, and the emergence of several public- and private-sector initiatives designed to expand affordable housing opportunities for home buyers. Because of these developments, an ongoing debate has centered on whether FHA's single-family mortgage insurance program is still needed and, if so, what changes, if any, should be made to the program. This testimony discusses (1) the achievements of FHA's home mortgage insurance program, including the extent to which home buyers use FHA insurance, the characteristics of these home buyers (including whether they were first-time home buyers), and how many of them might also qualify for private mortgage insurance; (2) how the insurance terms available through FHA's principal single-family mortgage insurance program compare with private mortgage insurance and guaranties from the Department of Veterans' Affairs; (3) other federal activities that promote affordable homeownership; and (4) the challenges faced by FHA in ensuring the financial health of its Mutual Mortgage Insurance Fund--the insurance fund supporting most FHA-insurance single-family mortgages.

GAO noted that: (1) FHA is a major participant in the single-family housing market; (2) of the approximately 3.8 million home purchase loans made in fiscal year 1996, FHA insured 16 percent; (3) while most of these mortgages were not insured, about 39 percent were; (4) FHA insured 42 percent of all home purchase loans in 1996 and fulfilled a larger role in some specific market segments, particularly low-income home buyers and minorities; (5) most borrowers were able to obtain a home purchase mortgage without insurance by either FHA, the private mortgage insurers, or VA; (6) while a third of the loans FHA insured in 1995 might have qualified for private mortgage insurance, the other two-thirds probably would not have qualified, on the basis of the loan-to-value and qualifying ratios of the loans FHA insured; (7) FHA and VA programs permit borrowers to make smaller down payments and have higher total-debt-to-income ratios than allowed by private mortgage insurers; (8) FHA's program differs from private mortgage insurers' and VA's programs in that it allows closing costs to be financed in the mortgage; (9) in addition to FHA and VA, the federal government promotes affordable homeownership through programs run by the Department of Housing and Urban Development, the Department of Agriculture's Rural Housing Service, the Federal Home Loan Bank System, state housing finance agencies, and Neighborhood Reinvestment Corporation; (10) although these other federal programs share FHA's mission to assist households who may be underserved by the private mortgage market, none reach as many households as FHA; (11) several of these other programs assist home buyers by combining their assistance with FHA mortgage insurance; (12) the federal government promotes homeownership among buyers who might otherwise by underserved through requirements placed upon the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and certain lenders; and (13) although FHA's single-family program is financially self-sufficient, there are challenges facing FHA today, including reducing the losses it incurs on foreclosed properties, maintaining financial self-sufficiency in the face of economic and other factors that could adversely affect future program costs, and resolving year 2000 computing risks.