Impact of FHA Loan Policy Changes on Its Cash Position

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: John M. Ols Jr Team: General Accounting Office: Resources, Community, and Economic Development Division Phone: (202) 512-7631