Mortgage Financing

This testimony discusses the financial health of the Mutual Mortgage Insurance Fund managed by the Federal Housing Administration (FHA). Through this fund, FHA operates a single-family insurance program--financed through insurance premiums at no cost to the American taxpayer--that since 1934 has helped millions of Americans buy homes. FHA's correct commitments total nearly a half a trillion dollars. Following an economic downturn in the 1980s that resulted in severe losses and a negative economic value, the fund's future was in doubt. Legislation in the 1990s required that FHA achieve a capital ratio in the fund of 2 percent by November 2000 and to maintain or exceed that ratio at all times thereafter. The latest actuarial study of the fund puts its capital ratio at 3.66 percent and its economic value appears to have reached its highest level in at least 20 years. This testimony focuses on activities of the program, how fund reserves are estimated and what constitutes an adequate level of reserves, government actions that have or could influence the level of reserves, and the impact that action related to reserve levels could have on the federal budget.

GAO noted that: (1) FHA is a major source of financing for the single-family housing market--overall as well as for specific groups, particularly low-income and other homebuyers who may not have much cash for a down payment but are otherwise able to afford a loan; (2) FHA's home mortgage insurance program has helped people become homeowners through the use of a mutual insurance fund that until the 1990s, returned profits to homebuyers; (3) the reserves that FHA is required to maintain consist of current capital resources--primarily nonmarketable Treasury securities--plus estimates of the net present value of future cash flows from the activity of the Fund; (4) deriving estimates of the value of future cash flows requires professional judgment and, in practice, relies on complex economic models; (5) determining what reserve levels would ensure the financial soundness of the Fund requires additional study; (6) when Congress first established the 2-percent reserve requirement, the Fund was experiencing unusual losses; (7) today, the Fund appears to be enjoying its highest level of reserves in the last 20 years; (8) to help Congress decide on an appropriate level of reserves for the future, GAO is now conducting analyses that will model economic scenarios that the Fund should withstand; (9) for example, losses the FHA experienced in the 1980s following unusually high claims resulting from foreclosures in the oil-producing states may provide an indication of the reserve levels that might be needed for the Fund to remain financially sound; (1) there are a number of actions that Congress and the Secretary of HUD have taken and could take to influence the level of reserve; (11) both the Secretary and Congress have changed insurance premiums; (12) the Secretary has also taken actions to limit losses from the management of foreclosed properties and to enhance FHA's oversight of lenders; (13) Congress has set maximum loan-to-value ratios and required the Secretary to suspend payment of distributive shares; (14) any of these actions may have affected the value of the Fund; (15) Congress and the Secretary could take actions in the future that could reduce the value of the fund, including reducing premiums, changing underwriting standards to reach more homebuyers, or reinstituting the payment of distributive shares; (16) actions taken by the Secretary of HUD or Congress that influence the Fund's reserve level also will affect the federal budget; and (17) any proposal that seeks to use reserves, if not accompanied by a reduction in other spending or an increase in receipts, will result in a decline in the federal budget surplus.