HUD Management

FHA's Multifamily Loan Loss Reserves and Default Prevention Efforts Gao ID: RCED/AIMD-95-100 June 5, 1995

In recent years, the number of defaults on Federal Housing Administration (FHA)-insured loans for multifamily housing has soared. In 1994, FHA established loan loss reserves of $103 billion for its multifamily portfolio. This represents the amount that HUD expects to lose from future defaults on FHA-insured loans. This report evaluates (1) the methodology that FHA used to set loan loss reserves for its fiscal year 1993 multifamily portfolio; (2) the relative benefit of creating a new, actuarially sound insurance fund for all new multifamily housing insurance commitments; and (3) HUD's current initiatives for preventing future defaults on FHA's multifamily housing loans.

GAO found that: (1) FHA used an improved methodology to estimate its FY 1993 loan loss reserves of $10.3 billion; (2) the reliability of the FHA estimate is limited by weaknesses in FHA data, FHA use of several default factors, and assumptions about the probability of default; (3) creating an actuarially sound insurance fund for all new multifamily housing commitments would eliminate the need for appropriations to cover anticipated losses on new FHA loans, but it might entail reducing the amount of mortgage insurance available for high-risk loans; (4) FHA could have difficulty complying with a requirement for actuarial soundness, since defaults on insured multifamily loans are hard to predict; (5) HUD is undertaking initiatives to strengthen its management abilities and prevent future defaults, such as using contractors to compile information about the physical and financial condition of insured multifamily properties; and (6) HUD has yet to make specific plans to develop data systems that can take full advantage of the new information it hopes to gain through its initiatives.

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.

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