Housing Finance

During the 1980s, a decline in the production of affordable housing and a rise in the number of low-income households meant that more poor families were unable to obtain affordable housing. Although Congress wanted to expand access to capital for the production of affordable housing, it had concerns about risk after the federal government lost more than $2 billion from defaults on multifamily mortgage loans insured through the former coinsurance program run by the Department of Housing and Urban Development (HUD). Accordingly, in 1992, Congress established two new risk-sharing demonstration programs that divide the financial liability for any defaults between the federal government and its risk-sharing partners--state housing finance agencies or other qualified financial institutions. This report (1) reviews these two programs and HUD's administration and (2) identifies any opportunities for improvement. More specifically, GAO looks at how well the programs are meeting their goals, identifies their benefits for participating financial institutions and HUD, and considers ways to improve the programs and their administration.

GAO noted that: (1) the credit enhancement program, together with the reinsurance program, was established under the Housing and Community Development Act of 1992 to facilitate the financing of affordable multifamily housing and to make that financing available in a timely manner; (2) the credit enhancement program is meeting these goals; (3) as of September 1997, 32 participating state and local housing finance agencies had reserved about 84 percent of the risk-sharing units allocated to these agencies through March 1996; (4) most of the insured loans are financing properties that serve more low-income households than required, apparently because the credit enhancement is being used with other subsidies, particularly low-income housing tax credits; (5) while it is still too soon to evaluate the financial performance of the insured loans, the available financial indicators reflect sound underwriting standards; (6) activity in the reinsurance program has been so limited that the program remains largely untested; (7) only one institution--Fannie Mae--has participated extensively in the program, and one lender--Banc One Capital Funding Corporation--has originated over half of the loans that Fannie Mae has reinsured; (8) Banc One's activity has demonstrated that the risk-sharing reinsurance program can expand participation in mortgage lending, including lending for smaller properties in rural areas--an unmet capital need, according to HUD's studies; (9) participation in the demonstration programs has enabled HUD to facilitate the financing of affordable multifamily housing while limiting its loss exposure through risk sharing; (10) participation has also allowed HUD to increase the efficiency and reduce the costs of its operations through delegation, compared with the Federal Housing Administration's (FHA) traditional multifamily program; (11) HUD has retained responsibility for monitoring its risk-sharing partners' performance, but its data system for monitoring the progress of credit enhancement projects is unreliable; (12) HUD is aware of the system's problems and plans to resolve them in the course of overhauling all of its information management systems; (13) HUD has also retained responsibility for overseeing its risk-sharing partners' compliance with the demonstration programs' requirements; however, GAO's review identified one default that was not reported to HUD headquarters for over a year; and (14) HUD recognizes that effective oversight is critical, particularly if one or both of the demonstration programs are made permanent and lenders' activity increases.

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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