Mortgage Financing

Borrowers with mortgage loans insured by the Federal Housing Administration (FHA) pay insurance premiums, which are deposited into the Department of Housing and Urban Development's Mutual Mortgage Insurance Fund. FHA-insured Fund mortgages were valued at about $305 billion as of September 1994. Although the Fund has traditionally been self-sufficient, it began to suffer substantial losses during the 1980s, mainly because foreclosures on single-family homes supported by the Fund were high in areas experiencing difficult times economically. To help place the Fund on a financially sound basis, legislative reforms, such as requiring FHA borrowers to pay more in premiums, were made in November 1990. This report (1) estimates, under different economic scenarios, the Fund's economic net worth as of the end of fiscal year 1994; (2) assesses the Fund's progress in achieving the legislatively mandated capital reserve ratio that expresses economic net worth as a percentage of insurance-in-force; and (3) compares GAO's estimate of the Fund's economic net worth with the estimate prepared for FHA by Price Waterhouse.

GAO found that: (1) in 1994, the Fund's economic net worth continued to improve; (2) as of September 30, 1994, the Fund had $305 billion in outstanding mortgage loans; (3) using moderate house price appreciation rates and unemployment rates, the Fund had an economic net worth of about $6.1 billion and a resulting capital ratio of 2.02 percent; (4) using low house price appreciation rates and high unemployment rates, the Fund had an economic net worth of $3 billion; (5) using high house price appreciation rates and low unemployment rates, the Fund had an economic net worth of $7.4 billion; (6) during fiscal year 1994, the Fund's capital ratio of 2.02 percent of the amortized insurance-in-force exceeded the November 2000 capital ratio goal of 2 percent; (7) the firm estimated that the Fund had an economic net worth of about $6.68 billion and a resulting capital ratio of 1.99 percent at the end of fiscal year 1994, which was about the same as GAO estimate; and (8) the Fund's future economic net worth will depend on a number of economic factors including the appreciation rates in housing prices and whether FHA is restructured.