FHA's Role in Helping People Obtain Home Mortgages Gao ID: RCED-96-123 August 13, 1996

Many changes have occurred in the single-family housing finance system since the Federal Housing Administration (FHA) was established in the 1930s to insure housing loans made by private lenders. These changes include the advent of modern private mortgage insurance, the emergence of a secondary mortgage market, and various public- and private-sector initiatives to expand affordable housing for home buyers. Critics of FHA argue that other housing finance entities, such as private mortgage insurers, are filling the role FHA once filled exclusively. Supporters of FHA contend that its single-family program, which has insured about 24 million home mortgages since its inception, remains the only way for some families to become homeowners and should be expanded. This report discusses (1) the terms of the mortgage insurance offered by FHA, private mortgage insurers, and the U.S. Department of Veterans' Affairs; (2) the characteristics of borrowers of insured mortgages and the overlap between FHA-insured mortgages and privately insured mortgages; and (3) other methods used by the federal government to promote affordable homeownership.

GAO found that: (1) FHA and Department of Veterans Affairs (VA) programs allow borrowers to make smaller downpayments and accumulate higher total debt to income ratios than private mortgage insurers (PMI); (2) FHA programs finance closing costs as a part of the mortgage, insure loans up to $155,250, and provide full insurance coverage to lenders; (3) FHA insured 15 percent of the single-family housing market in 1994; (4) FHA insures low-income homebuyers with incomes no greater than 80 percent of the median income of the metropolitan statistical area; (5) FHA insures more home purchase mortgages than PMI or VA; (6) two-thirds of FHA approved loans would not have qualified for PMI; (7) the maximum loan amount for a FHA single-family home mortgage is the lesser of 95 percent of the median house price or 75 percent of the Federal Home Loan Mortgage Corporation's loan limit; (8) the federal government promotes affordable homeownership through several HUD and other Federal programs; (9) these programs require federal funds and assist homebuyers in combining their assistance with FHA mortgage insurance; and (10) FHA programs promote homeownership among home buyers that are typically underserved by other agencies and PMI.

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