Mortgage Financing

Through its Federal Housing Administration (FHA), the Department of Housing and Urban Development insures private lenders against losses on home mortgages financed through its Mutual Mortgage Insurance Fund. These mortgages are now valued at nearly $270 billion. Although the Fund has historically been financially self-sufficient, it began to experience substantial losses during the 1980s, mainly because of high foreclosure rates on single-family homes supported by the fund in economically depressed areas. This report (1) summarizes GAO's assessment of the economic net worth of the Fund at the end of fiscal year 1993 and (3) describes GAO's econometric and cash flow modeling approach for forecasting the economic net worth of the Fund.

GAO found that: (1) the fund's economic value has improved in recent years and the fund is accumulating sufficient capital reserves to be actuarially sound under the law; (2) at the end of fiscal year (FY) 1993, the fund had an estimated economic net worth of $4.9 billion and a capital ratio of 1.83 percent under the baseline GAO scenario; (3) at the end of fiscal year 1992, the fund's estimated net worth was $600 million and its capital ratio was 0.21 percent; (4) although legislative and other changes to the FHA single-family mortgage insurance program helped restore the fund's financial health, favorable economic conditions in 1993 were primarily responsible for the improvement; (5) the fund fell below the mandated capital ratio of 1.25 percent in FY 1992, but exceeded the ratio in FY 1993; (6) econometric and cash flow models of the FHA single-family mortgage program were used to estimate the economic net worth of FHA loans; (7) the econometric model estimated the historical relationships between the probability of loan foreclosures and prepayments and key explanatory factors such as the borrower's equity and interest rates; (8) the cash flow model measured five primary sources and uses of cash for loans originated in fiscal years 1975 through 1993; and (9) the fund's ability to maintain its financial health and to meet and maintain mandated reserve levels depends on many economic and program-related factors.