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GAO-10-827R 1 (2010-09-14)

handle is hein.gao/gaobaanui0001 and id is 1 raw text is: SGA 0 SA o i Itai y ntegity * Reliablity United States Government Accountability Office Washington, DC 20548 On September 20, 2010, the PDF file was changed to revise two sentences. On page 5, the second and fifth sentences of the last paragraph were corrected to clarify the status of certain FHA policy changes. September 14, 2010 The Honorable Christopher J. Dodd Chairman The Honorable Richard C. Shelby Ranking Member Committee on Banking, Housing, and Urban Affairs United States Senate Subject: Mortgage Financing: Opportunities to Enhance Management and Oversight of FHA's Financial Condition The Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) has helped millions of families purchase homes through its single- family mortgage insurance programs. In recent years, FHA has experienced a dramatic increase in its market role due to the contraction of other mortgage market segments. FHA insures almost all of its single-family mortgages under its Mutual Mortgage Insurance Fund (Fund), which is reviewed from both an actuarial and budgetary perspective each year.' On the basis of an independent actuarial review, FHA reported in November 2009 that the Fund was not meeting statutory capital reserve requirements as of the end of fiscal year 2009, as measured by the Fund's estimated capital ratio (i.e., economic value divided by the unamortized insurance-in-force).2 Additionally, although the Fund historically has produced budgetary receipts for the federal government, a weakening in the performance of FHA- insured loans has heightened the possibility that FHA will require additional funds to help cover its costs on insurance issued to date. In light of FHA's changing market role and financial condition, you asked us to examine (1) how estimates of the Fund's capital ratio have changed since 2001, the primary factors contributing to recent changes, and the budgetary implications of changes in the Fund's financial performance; (2) how FHA and its actuarial review contractor evaluate the financial condition of the Fund, including the Fund's performance under different economic scenarios; (3) the steps FHA has taken to improve the financial condition of the Fund, and how it has interpreted statutory requirements pertaining to the Fund; and (4) the performance of FHA's 'In addition, the annual independent audits of FHA's financial statements review the Fund from a financial accounting perspective and provide information used in the actuarial and budgetary reviews of the Fund. 'The economic value of the Fund is the sum of existing capital resources plus the net present value of future cash flows. The unamortized insurance-in-force is generally understood as the initial insured loan balances. However, as we discuss later in this report, a legislative provision defines unamortized insurance-in-force as the remaining obligation on outstanding mortgages, a definition generally understood to mean the amortized insurance-in-force. GAO-10-827R FHA Financial Condition

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