FEDERAL HOUSING 

ADMINISTRATION

Risks to the Mutual 

Mortgage Insurance Fund 

and the Agency’s 

Operations 

Statement of Mathew J. Scirè, Director

Financial Markets and Community Investment

Testimony 

Before the Committee on Financial 

Services, House of Representatives

For Release on Delivery 

Expected at 10:00 a.m. EST

Thursday, December 1, 2011

GAO-12-277T

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-277T, a testimony 

before the Committee on Financial Services, 

House of Representatives

December 1, 2011

FEDERAL HOUSING ADMINISTRATION

Risks to the Mutual Mortgage Insurance Fund and 

the Agency’s Operations

Why GAO Did This Study

The Federal Housing Administration 

(FHA) has helped millions purchase 

homes by insuring private lenders 

against losses from defaults on singlefamily mortgages. In recent years, FHA 

has experienced a dramatic increase in 

its market role due, in part, to the 

contraction of other mortgage market 

segments. The increased reliance on 

FHA mortgage insurance highlights the 

need for FHA to ensure that it has the 

proper controls in place to minimize 

financial risks while meeting the 

housing needs of borrowers. 

This statement discusses (1) changes 

in the financial condition of FHA’s fund 

used to insure mortgages—the Mutual 

Mortgage Insurance Fund (Fund)—and 

the budgetary implications of these 

changes; (2) how FHA evaluates the 

financial condition of the Fund; and (3) 

steps FHA has taken to assess and 

manage risks. 

This statement is drawn from a recent 

report on FHA’s oversight capacity 

(GAO-12-15) as well as a report issued 

in September 2010 on the financial 

condition of the Fund (GAO-10-827R). 

GAO also obtained updated 

information on the status of the Fund 

from the recently issued actuarial 

report on the Fund.

What GAO Recommends

GAO previously made 

recommendations on modeling the 

Fund’s financial condition, risk 

assessments, and human capital. FHA 

agreed with these recommendations 

and told GAO they have efforts 

underway to implement them.

What GAO Found

For the third consecutive year, FHA reported that the Fund’s capital ratio (the 

ratio of economic value to insurance-in-force) has not met the 2 percent statutory 

minimum (see below). FHA cites declines in the Fund’s economic value due to 

higher-than-expected defaults, claims, and losses. At the same time, the other 

component of the ratio, FHA’s insurance-in-force, has grown rapidly. The Fund’s 

condition also worsened from a budgetary perspective, with balances in the

Fund’s capital reserve account reaching new lows. If the account were depleted, 

FHA would require more funds to help cover costs on insurance issued to date. 

FHA enhanced methods for assessing the Fund’s financial condition but has not 

yet addressed GAO’s 2010 recommendation for improving the reliability of its 

estimates. It relies on a single economic forecast, which does not fully account 

for variability in future house prices and interest rates. An approach that would 

simulate hundreds of economic paths for house prices and interest rates would 

improve the reliability of its capital ratio estimates. 

FHA has taken or plans a number of steps to better assess and manage risk. It 

created a risk office in 2010 and hired a consultant to recommend best practices. 

FHA plans to charter committees to evaluate risks at enterprise-wide and 

programmatic levels. It began a quality control initiative in the Office of Single 

Family Housing, in which program and field offices assess and report on risks. 

FHA also enhanced lender and appraiser reviews. While FHA’s consultant 

recommended integrating risk assessments, the quality control and risk office 

activities currently remain separate efforts. Also, the Office of Single Family 

Housing has not annually updated assessments since 2009 as required. Without 

integrated and updated risk assessments that identify emerging risks, FHA lacks 

assurance it has identified all its risks. Further, human capital presents 

challenges. FHA has not created a systematic workforce plan to identify critical 

skills and skill gaps. Such a plan will be needed because high percentages of

staff are eligible to retire soon. Without a workforce planning process that 

includes succession planning, FHA’s ability to systematically identify workforce 

needs is limited.

Estimate of the Fund’s Capital Ratio, 2001-2011

View GAO-12-277T. For more information, 

contact Mathew J. Scirè at (202) 512-8678 or 

sciremj@gao.gov. 
 

Page 1 GAO-12-277T

Chairman Bachus, Ranking Member Frank, and Members of the 

Committee:

I am pleased to be here to participate in today’s hearing on the financial 

condition of the Federal Housing Administration’s (FHA) Mutual Mortgage 

Insurance Fund (Fund). As you know, FHA has helped millions of families 

purchase homes through its single-family mortgage insurance programs 

and insures almost all of its single-family mortgages under the Fund.

FHA reported in November 2011 that for the third consecutive year, the 

Fund was not meeting the statutory 2 percent capital reserve requirement, 

as measured by the Fund’s estimated capital ratio—that is, the Fund’s 

economic value divided by the insurance-in-force. 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 could require additional funds to help cover its costs on 

insurance issued to date. The increased reliance on FHA mortgage 

insurance highlights the need for FHA to ensure that it has the proper 

controls in place to minimize financial risks while meeting the housing 

needs of borrowers.

My statement today is based on a September 2010 report about FHA’s 

financial condition and a report issued in November of this year about the 

agency’s risk assessment and human capital management.1 Specifically, 

I will discuss (1) how estimates of the Fund’s capital ratio changed in 

recent years and the budgetary implications of changes in the Fund’s 

financial condition, (2) how FHA and its actuarial review contractor 

evaluate the financial condition of the Fund, and (3) steps FHA has taken 

to manage and assess risks. I also will briefly discuss our report on the 

risks faced by the Government National Mortgage Association (Ginnie 

Mae), which was released today.2

To do this work, we analyzed actuarial reviews of the Fund and federal 

budget documents, and interviewed FHA officials, staff from FHA’s 

 

1

See GAO, Mortgage Financing: Opportunities to Enhance Management and Oversight of 

FHA’s Financial Condition, GAO-10-827R (Washington, D.C.: Sept. 14, 2010) and GAO, 

Federal Housing Administration: Improvements Needed in Risk Assessment and Human 

Capital Management, GAO-12-15 (Washington, D.C.: Nov. 7, 2011). 

2

GAO, Ginnie Mae: Risk Management and Cost Modeling Require Continuing Attention, 

GAO-12-49 (Washington, D.C.: Nov. 14, 2011).

 
 

Page 2 GAO-12-277T

actuarial review contractor, and selected housing market researchers. We 

also analyzed data on FHA’s business volume, market share, workload, 

and staff and contractor resources. We reviewed documentation on the 

proposed structure and functions of FHA’s Office of Risk Management 

and Regulatory Affairs and the Office of Single Family Housing’s internal 

quality control initiative. Finally, we reviewed changes to FHA guidance 

that address risks associated with lenders and appraisers and 

documentation related to workforce and succession planning. Our study 

of Ginnie Mae assessed operational risks and financial exposure. We 

reported on Ginnie Mae volume and market share, reviewed guidance 

and Ginnie Mae’s credit subsidy calculations and estimation model, and 

interviewed agency officials and others. The reports include a detailed 

description of our scope and methodology.

The work on which this statement was based was performed from 

September 2009 to November 2011 in accordance with generally 

accepted government auditing standards. Those standards require that 

we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our 

audit objectives. We believe that the evidence obtained provides a 

reasonable basis for our findings and conclusions based on our audit 

objectives.

Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other 

federal agencies must estimate the net lifetime costs—known as credit 

subsidy costs—of their loan insurance or guarantee programs and include 

the costs to the government in their annual budgets. Credit subsidy costs 

represent the net present value of expected lifetime cash flows, excluding 

administrative costs.3

 

3

For a mortgage insurance program, cash inflows consist primarily of fees and premiums 

charged to insured borrowers and proceeds from sales of foreclosed properties, and cash 

outflows consist mostly of payments to lenders to cover the cost of claims. 

When estimated cash inflows exceed expected 

cash outflows, a program is said to have a negative credit subsidy rate 

and generates offsetting receipts that reduce the federal budget deficit. 

When the opposite is true, the program is said to have a positive credit 

subsidy rate—and therefore requires appropriations. Generally, agencies 

must produce annual updates of their subsidy estimates—reestimates—

on the basis of information about actual performance and estimated 

changes in future loan performance. FCRA recognized the difficulty of 

Background 
 

Page 3 GAO-12-277T

making credit subsidy estimates that mirrored actual loan performance 

and provides permanent and indefinite budget authority for reestimates 

that reflect increased program costs. Upward reestimates increase the 

federal budget deficit unless accompanied by reductions in other 

government spending or an increase in receipts.

The Omnibus Budget Reconciliation Act of 1990 required the Secretary of 

the Department of Housing and Urban Development (HUD) to take steps 

to ensure that the Fund attained a capital ratio of at least 2 percent by 

November 2000 and maintained at least a 2 percent ratio at all times 

thereafter.4

Federal agencies face a number of risks. In the case of agencies with 

loan guarantee or insurance programs, they can face credit risks that 

include borrower default risk, which arises as borrowers become unable 

to make payments on insured mortgages. Agencies with these programs 

also face counterparty risk. That is, an agency may suffer losses due to 

weaknesses or uncertainties in the work of its counterparties—in this 

example, lenders and appraisers. And all agencies face operational risks, 

the risk of loss resulting from inadequate or failed internal processes or 

people (in terms of staff numbers, training, and skills), or external events. 

For this statement, we focus on operational risks related to FHA’s staffing 

and contractor capacity to process increasing workloads.

It also required an annual independent actuarial review of the 

economic net worth and soundness of the Fund. The annual actuarial 

review is now a requirement in the Housing and Economic Recovery Act 

of 2008, which also requires that the Secretary of HUD annually report to 

Congress on the results of the review.

The Fund’s capital ratio dropped sharply in 2008 and fell below the 

statutory minimum in 2009, when economic and market developments 

created conditions that simultaneously reduced the Fund’s economic 

value (the numerator of the ratio) and increased the insurance-in-force 

(the denominator of the ratio).5

 

4

Pub. L. No. 101-508.

According to annual actuarial reviews of 

the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 

2008 and 0.5 percent in 2009 (see fig. 1). For 2010 and 2011, the ratios 

were 0.5 and 0.24 percent, respectively.

5

Unless otherwise stated, the years shown in this testimony are fiscal years.

The Fund’s Financial 

Condition Continues 

to Worsen, Increasing 

the Possibility That 

FHA Will Require 

Additional Funds
 

Page 4 GAO-12-277T

Figure 1: Estimates of the Fund’s Capital Ratio, 2001–2011

In its recent report to Congress, HUD cited several reasons for the 

declines from 2010 to 2011. These included

• Continuing declines in home prices. Forecasts for the 2010 actuarial 

study predicted house price declines of 2.8 percent before bottoming 

in the middle of 2011. This year’s forecasts—dated July 2011—

predicted negative growth of 5.6 percent for FHA’s single-family 

portfolio in 2011. Higher-than-expected declines in house values 

contributed to both higher defaults and claims and higher loss-onclaim than anticipated last year.

• More loans, particularly from the housing bubble years of 2006-2008 

were in serious delinquency, and a significant percentage had been 

there for more than one year. Claims become the most likely outcome 

for extended delinquency loans, many of which are in foreclosure.

• For the first time, the actuarial calculations built in factors recognizing 

the elevated re-default potential from the increased number of active 

loans with a previous serious delinquency (3 months or more).
 

Page 5 GAO-12-277T

• The independent actuaries also made a decision to treat foreclosure 

actions likely affected by so called robosigning problems as expected 

claims in 2012.6

In reviewing the components of the capital ratio, the combination of a 

relatively stable economic value (numerator of the ratio) and a declining 

insurance-in-force (denominator) over much of the decade increased the 

capital ratio. However, since 2008, the economic value has fallen as the 

insurance-in-force has risen, dramatically lowering the capital ratio 

(see fig. 2).

Figure 2: Estimates of the Fund’s Economic Value and Insurance-in-force, 2001–

2011

At the same time, the Fund’s condition has worsened from a budgetary 

perspective. Historically, FHA has estimated that its loan insurance 

program was a negative subsidy program (that is, estimated cash inflows 

exceeded expected cash outflows). On the basis of these estimates, FHA 

accumulated substantial balances in a budgetary account known as the 

capital reserve account, which holds reserves in excess of those needed 

for estimated credit subsidy costs and helps cover unanticipated 

 

6

Robosigning refers to mortgage servicers’ practice of having a small number of 

employees sign a large number of affidavits and other legal documents that mortgage 

companies subsequently submitted to courts and other public authorities to execute 

foreclosures. For more information, see GAO, Mortgage Foreclosures: Documentation 

Problems Reveal Need for Ongoing Regulatory Oversight, GAO-11-433 (Washington, 

D.C.: May 2, 2011).
 

Page 6 GAO-12-277T

increases in those costs such as higher-than-expected claims. Reserves 

needed to cover estimated subsidy costs are held in the Fund’s financing 

account.7

However, in recent years the capital reserve account has covered large 

upward reestimates of FHA’s credit subsidy costs through transfers to the 

financing account. As a result, balances in the capital reserve account fell 

dramatically—from $22 billion at the end of 2007 to $4.4 billion by the end 

of 2010 (see fig. 3). If the reserve account were to be depleted, FHA 

would need to draw on permanent and indefinite budget authority to cover 

additional increases in estimated credit subsidy costs. FHA’s latest 

annual report to Congress raises the possibility that if house prices 

decline in 2012, the expected future losses on the current, outstanding 

portfolio could exceed current capital resources. These would be offset by

the expected net receipts from the new 2012 cohort of loans. But, 

according to HUD, if house prices were to decline in 2012 by an amount 

rivaling that of 2011, these new loans would not be expected to generate 

sufficient net receipts to offset any potential decline in value of the current 

outstanding portfolio, which could necessitate assistance from the 

Department of the Treasury (Treasury). Under one stress scenario in 

which house prices decline by 13.7 percent in 2011, rather than the 5.6 

percent assumed in the baseline scenario, and house prices decline 

another 1.3 percent in 2012, HUD estimates that it may require $13 billion 

in assistance from Treasury to ensure the financing account had sufficient 

loss reserves.

 

7

The financing account records lifetime cash flows for loans insured in 1992 and 

thereafter. It appears in the budget for informational and analytical purposes but is not 

included in the budget totals or budget authority or outlays. 
 

Page 7 GAO-12-277T

Figure 3: End-of-Year Balances in the Fund’s Capital Reserve Account, 2002–2010

As we reported in September 2010, FHA and its actuarial review 

contractor enhanced their methods for assessing the Fund’s financial 

condition but still were addressing other methodological issues that could 

affect the reliability of estimates of the capital ratio. Annual actuarial 

reviews of the Fund use statistical models to estimate the probability that 

loans will prepay or result in insurance claims on the basis of certain loan 

and borrower characteristics (such as loan-to-value ratios and borrower 

credit scores) and key economic variables (such as house prices and 

interest rates).8

 

8

The loan-to-value ratio is the ratio of the amount of the mortgage loan to the value of the 

home.

FHA and its contractor have enhanced these models in 

recent years, by incorporating additional variables related to loan 

performance and developed an additional model to predict loss rates on 

insurance claims. Also, consistent with recommendations we made in a 

prior report, in 2003 the actuarial reviews began to analyze the impact of 

FHA’s Current 

Methodology for 

Assessing the Fund’s 

Condition Does Not 

Fully Account for 

Future Economic 

Volatility
 

Page 8 GAO-12-277T

more pessimistic economic scenarios—for example, nationwide declines 

in home prices—than they did previously.9

However, the current methodology is significantly limited by its reliance on 

a single economic forecast to produce the estimate of the capital ratio that 

is used to determine if the Fund is meeting the 2 percent capital reserve 

requirement. This approach does not fully account for the variability in 

future house prices and interest rates that the Fund may face. As a result, 

baseline estimates of the capital ratio may tend to underestimate 

insurance claims and mortgage prepayments and therefore may tend to 

overestimate the Fund’s economic value. In a November 2003 report, the 

Congressional Budget Office concluded that FHA could project the Fund’s 

cash flows more accurately by using an approach (stochastic modeling) 

that involves running simulations of hundreds of different economic paths 

to produce a distribution of capital ratio estimates.10

Given the uncertainty that always surrounds estimates of future economic 

activity, the report we issued last year recommended that HUD require 

the actuarial review contractor to use stochastic simulation of future 

economic conditions, including house prices and interest rates, to 

estimate the Fund’s capital ratio and include the results of this analysis in 

FHA’s annual report to Congress on the financial status of the Fund. 

However, the most recent annual report does not include an estimate of 

the Fund’s capital ratio using this technique. In response to our 2010 

report, FHA officials told us that they were planning to require the 

actuarial review contractor to use a stochastic simulation model for the 

2011 actuarial review. But, these officials said that the model would be 

used to examine the implications of extreme economic scenarios on the 

Fund and decisions about using the model to estimate the Fund’s capital 

ratio had not been made.

 

9

GAO, Mortgage Financing: FHA’s Fund Has Grown, but Options for Drawing on the Fund 

Have Uncertain Outcomes, GAO-01-460 (Washington, D.C.: Feb. 28, 2001).

10Congressional Budget Office, Subsidy Estimates for FHA Mortgage Guarantees, a CBO 

paper (Washington, D.C.: November 2003). 
 

Page 9 GAO-12-277T

FHA faces risks resulting from its operations. FHA’s loan volume grew 

significantly from 2006 to 2010. In 2006, FHA insured almost half a million 

loans, totaling $70 billion in mortgage insurance. By 2010, it insured 1.7 

million loans, or about $319 billion in mortgage insurance. During the 

same time period, FHA’s single-family staff increased 8 percent, from 932 

employees in 2006 to 1,011 employees in 2010, while increases in key 

workload areas often surpassed 100 percent:

• Staff in the homeownership centers’ Processing and Underwriting 

Division grew at a slower rate (22 percent) than key workload items, 

particularly volume-driven loan reviews (which increased by more 

than 100 percent).

• Increases in contractor staff and workload related to management of 

foreclosed or real estate-owned properties were substantial, but 

noncontractor staff levels increased at more modest levels.

• Loss mitigation actions more than doubled from 2006 to 2010, while 

loss mitigation staff levels remained relatively constant.11

Although FHA has taken steps to assess credit and operational risks 

facing its single-family insurance programs, its current risk-assessment 

strategy is not comprehensive because it is not integrated across the 

agency and lacks annual assessments and mechanisms to anticipate 

changing conditions. To address credit risk and help improve the financial 

condition of the Fund (which is supported by borrower premiums), FHA 

raised premiums and made or proposed policy or underwriting changes. 

For example, in April 2011 FHA increased its annual insurance premiums 

from 0.85 percent to 1.10 percent for borrowers with 30-year loans with 

initial loan-to-value ratios of 95 percent or less and from 0.90 percent to 

1.15 percent for borrowers with 30-year loans with initial loan-to-value 

ratios greater than 95 percent. Additionally, FHA increased downpayment requirements for borrowers with lower credit scores. FHA also 

has proposed reducing allowable seller contributions at closing, thereby 

helping to ensure that buyers put more of their own funds into the home 

purchase. In addition, FHA is in the process of revising its mortgage 

scorecard algorithm, to recognize the effect of various risk elements not 

 

11Loss mitigation actions seek to minimize losses from potential foreclosures by finding 

alternatives to foreclosure and helping homeowners retain their homes, if possible.

FHA Has Taken Steps 

to Address Risks, but 

Has Yet to Implement 

a Comprehensive 

Risk-Assessment 

Strategy 

Although FHA Worked to 

Address Credit and 

Operational Risk, It Has 

Not Yet Put a 

Comprehensive Strategy 

in Place
 

Page 10 GAO-12-277T

currently discerned by the scorecard and determine what cases warrant 

manual underwriting.12

To address operational risks and improve its risk-assessment strategy, in 

2010 FHA received congressional approval to establish the Office of Risk 

Management and Regulatory Affairs and create the position of Deputy 

Assistant Secretary for Risk Management and Regulatory Affairs, which 

reports directly to the Assistant Secretary for Housing-FHA 

Commissioner. To provide assistance to the Office of Risk Management 

(one of the offices within the Office of Risk Management and Regulatory 

Affairs) in developing a risk-management strategy and organizational 

structure and establishing risk-management policies and processes, FHA 

hired a consultant to produce a comprehensive report and recommend 

best practices for its operation.

According to FHA, these revisions are in the early 

stages, and no completion date has been set.

13

However, FHA’s risk-assessment strategy raises several issues. First, 

FHA’s current risk-assessment strategy is not comprehensive because it 

is not integrated throughout the organization. While the consultant 

recommended that FHA integrate risk assessment and reporting 

throughout the organization, currently Single Family Housing’s quality 

control activities and the Office of Risk Management’s activities remain 

separate efforts. FHA officials noted that until the Office of Risk 

Management set up a governance process, the integration suggested by 

According to FHA officials, FHA plans to 

adopt the consultant’s recommendation to establish an enterprise risk 

committee to address overall risk to the organization and a second tier of 

committees to address program and operational risks. In addition, in 2009 

the Office of Single Family Housing implemented an internal quality 

control initiative at headquarters and the four homeownership centers. 

For the areas identified as high-risk, headquarters and the 

homeownership center divisions developed plans to document control 

objectives and established a monitoring strategy in which each 

homeownership center submits quarterly reports to headquarters on the 

effectiveness of the controls, including the status of any mitigation efforts.

 

12The purpose of the algorithm is to objectively measure the borrower’s risk of default 

quickly and efficiently by examining the data the borrower provides on the loan application 

and the borrower’s credit score.

13McKinsey & Company, Building the ORM Organization, Close-out Materials, a report 

prepared at the request of the Department of Housing and Urban Development, 

December 2010.
 

Page 11 GAO-12-277T

the consultant would not be possible. In the meantime, they stated that 

every effort was being made to help ensure that the Office of Risk 

Management’s activities complemented program office activities. Second, 

contrary to HUD guidance, Single Family Housing has not conducted an 

annual, systematic review of risks to its program and administrative 

functions. According to an official in the Office of Single Family Housing, 

although management intended to conduct an annual assessment, the 

dates slipped because of changes in senior leadership in Single Family 

Housing and few staff were available to perform assessments (because 

of attrition and increased workload). Finally, Single Family Housing’s 

current risk-assessment efforts do not include procedures for anticipating 

potential risks presented by changing conditions. The consultant’s report 

proposes a reporting process and templates for identifying emerging risks 

and provides specific examples. Office of Risk Management officials told 

us that once they are operational the risk committees eventually would 

determine the exact design and content of the reports and templates.

Moreover, implementation and integration of the new risk-assessment 

strategy and planned tools has been slow because of delays in defining 

the Office of Risk Management’s authority, difficulty filling new staff 

positions in the Office of Risk Management, and changes in FHA 

leadership.

All these factors limit FHA’s effectiveness in identifying, planning for, and 

addressing risk. More specifically, without an integrated risk-assessment 

strategy, certain risks may not be fully addressed at the operational level 

in a way that minimizes risk to the insurance programs; without annual 

reassessments of its risks, Single Family Housing lacks assurance that its 

quality control efforts address all its risks; and without ongoing 

mechanisms in place to anticipate and address new or emerging risks, 

FHA lacks a systematic approach to help the agency identify, analyze, 

and formulate timely plans to respond most effectively to changed 

conditions and risks. Therefore, we recommended that FHA (1) integrate 

the internal quality control initiative of the Office of Single Family Housing 

into the operational risk processes of the Office of Risk Management, (2) 

conduct an annual risk assessment, and (3) establish ongoing 

mechanisms—such as use of the report templates from the 2010 

consultant’s report—to anticipate and address risks that might be caused 

by changing conditions. FHA agreed with the recommendations and 

stated that it either was working toward achieving the recommendations 

or had plans to do so in the very near future. For example, FHA said it 

would leverage or integrate existing risk management efforts as soon as 

the Office of Risk Management’s final governance structure and risk 
 

Page 12 GAO-12-277T

management strategies were in place. The agency also stated that the 

Office of Risk Management would conduct an annual risk assessment as 

a component of its overall risk management strategy. It stressed that 

ongoing mechanisms to anticipate and address risks related to changing 

conditions would be part of the office’s strategy.

With growth in loan volume, the number of lenders and appraisers (or 

counterparties) participating in FHA’s single-family programs also has 

grown. The total number of FHA-approved lenders increased 24 percent, 

from 10,370 in 2006 to 12,844 in 2010. The number of FHA-approved 

appraisers increased approximately 67 percent from 33,553 in 2006 to

56,192 in 2010.

However, FHA has made recent changes to address risks posed by its 

lenders and appraisers. For example, on May 20, 2010, FHA stopped 

approving new loan correspondents.14 As of January 1, 2011, existing 

loan correspondents could no longer participate in FHA programs. Former 

loan correspondents now can participate only as third-party originators 

through sponsorship by FHA-approved lenders. As a result, as of 

September 2011, FHA had almost 3,700 approved lenders. Furthermore, 

the agency has increased the net worth requirement for approved 

lenders. On May 20, 2011, FHA increased the requirement for existing 

lenders to $1 million, except for lenders classified as small under the 

Small Business Administration’s size standards (their requirement 

increased to $500,000). As of May 20, 2013, FHA will require a net worth 

of $1 million for all lenders, plus 1 percent of the total loan volume in 

excess of $25 million, to a maximum required net worth of $2.5 million.15

 

14Loan correspondents were lenders that originated FHA-insured loans—meaning that 

they could accept mortgage applications, obtain employment verifications and credit 

histories on applicants, order appraisals, and perform other tasks that precede the loan 

underwriting process—but did not have direct endorsement authority. Direct endorsement 

authority is the authority to underwrite loans and determine their eligibility for FHA 

mortgage insurance without HUD’s prior review.

To help ensure that lenders and appraisers follow its policies and 

procedures, FHA also has enhanced the criteria used to select loans for 

technical reviews. Specifically, since May 3, 2010, the agency has 

considered high-risk loan or borrower characteristics, such as certain 

15Loan volume is defined as FHA single-family insured mortgages originated, 

underwritten, purchased, or serviced during the prior fiscal year.

FHA Has Taken Steps to 

Address Counterparty 

Risks, but Continues to 

Face Human Capital 

Challenges
 

Page 13 GAO-12-277T

types of refinanced loans and loans to borrowers with low credit scores. 

Additionally, FHA increased the number of risk factors used to target 

lenders for review. FHA also has revised its approach for overseeing 

appraisers.

FHA has addressed staffing and training needs and succession planning 

to some extent, but it lacks plans that strategically address future 

workforce needs, including replacing retiring staff. Although workforce 

planning practices used by leading organizations include defining critical 

skills and skill gaps, FHA’s current approach does not have mechanisms 

for doing so. FHA previously had a multiyear workforce plan that identified 

the critical competencies; analyzed skills and competencies, including 

gaps; and proposed comprehensive strategies to address these gaps, but 

has not created another such plan.16 Instead, FHA has relied on 

occasional Resource Estimation and Allocation Process studies and 

annual managerial assessments of staffing and training needs.17

FHA also currently does not have a succession plan, although a HUD 

plan for 2006–2009 identified mission-critical positions, analyzed existing 

staff competencies, assessed the number of retirement-eligible 

employees, and determined the probability of near-term retirements.18

While FHA has taken some steps to address succession planning, they 

have been limited. FHA implemented two initiatives focused on 

succession planning. The first, begun in 2010, was intended to help 

ensure that, at any given time, at least two additional supervisors, 

managers, or executives could perform the work of each supervisor, 

manager, or executive. However, this does not apply to staff positions 

Succession planning is particularly important because almost 50 percent 

of Single Family Housing headquarters staff are eligible to retire in the 

next 3 years. The percentage of staff eligible to retire at the 

homeownership centers is even higher—63 percent.

 

16Department of Housing and Urban Development, Strategic Workforce Plan, FY04 to 

FY08, Office of Housing, (Washington, D.C.: July 2004).

17Resource Estimation and Allocation Process studies establish a staffing baseline for 

budget formulation and execution, strategic planning, organizational and management 

analyses, and ongoing management of staff resources.

18Department of Housing and Urban Development, Succession Management Plan, Fiscal 

Year 2006-2009, (Washington, D.C.: September 2006).
 

Page 14 GAO-12-277T

beyond management. The second initiative also began in 2010. Its goal is 

to train and develop staff. Neither initiative assesses the number of 

retirement-eligible employees in critical positions as required by HUD 

guidance. According to FHA officials, as resources have dwindled, they 

have considered all their positions to be critical.

According to FHA officials, plans to update their workforce and 

succession plans were suspended. In 2007–2009, FHA had a workforce 

planning process designed to identify critical skill gaps and a strategy for 

addressing these gaps. According to the officials, HUD told FHA to stop 

this initiative in 2009 because HUD was going to implement a workforce 

planning process for the entire department. However, the effort never 

came to fruition because of funding shortages. Without a more 

comprehensive workforce planning process that includes succession 

planning, FHA’s ability to systematically identify the workforce needed for 

the future and plan for upcoming retirements is limited. Therefore, we 

recommended that FHA develop workforce and succession plans for the 

Office of Single Family Housing. FHA agreed, stating that it would 

develop a formal workforce plan and had efforts underway to develop a 

succession plan.

We released a report today about Ginnie Mae, which has experienced a 

substantial increase in the volume of its business since 2007 as the 

volume of federally insured or guaranteed mortgages increased. Ginnie 

Mae is a wholly owned government corporation in HUD, which 

guarantees the timely payment of principal and interest on mortgagebacked securities (MBS) backed by pools of federally insured or 

guaranteed mortgage loans, such as FHA loans. As of 2010, Ginnie Mae 

guaranteed more than $1 trillion in outstanding MBS composed primarily 

of FHA-insured mortgages. The growth in outstanding Ginnie Maeguaranteed MBS resulted in an increased financial exposure for the 

federal government. Nonetheless, Ginnie Mae’s revenues exceeded its 

costs, and it has accumulated a capital reserve of about $14.6 billion.

Ginnie Mae has taken steps to better manage operational and 

counterparty risks and has several initiatives planned or underway. The 

operational risks the agency may face include limited staff, substantial 

reliance on contractors, and the need for modernized information 

systems. Ginnie Mae plans to increase its staff levels, complete a 

reorganization, and implement recommendations related to contracting. 

For Ginnie Mae, counterparty risk is the risk that issuers of Ginnie Mae 

MBS fail to provide investors with monthly principal and interest 

Ginnie Mae’s Risk 

Management and Cost 

Modeling Require 

Continuing Attention
 

Page 15 GAO-12-277T

payments. To manage its counterparty risk, Ginnie Mae has processes in 

place to oversee MBS issuers that include approval, monitoring, and 

enforcement and has revised its approval and monitoring procedures. For 

example, in 2010 Ginnie Mae increased the minimum net worth

requirement for issuers of Ginnie Mae-guaranteed MBS to $2.5 million. 

But, planned initiatives to enhance its risk-management processes for 

issuers, including its tracking and reporting systems, have not been fully 

implemented. It will be important for Ginnie Mae to complete its initiatives 

related to operational and counterparty risk as soon as practicable.

In developing inputs and procedures for the model used to forecast costs 

and revenues, Ginnie Mae did not consider certain practices identified in 

Federal Accounting Standards Advisory Board (FASAB) guidance for 

preparing cost estimates of federal credit programs. Ginnie Mae has not 

developed estimates based on the best available data, performed 

sensitivity analyses to determine which assumptions have the greatest 

impact on the model, or documented why it used management 

assumptions rather than available data. By not fully implementing 

practices in FASAB guidance that GAO believes represent sound internal 

controls for models, Ginnie Mae’s model may not use critical data that 

could affect the agency’s ability to provide well-informed budgetary cost 

estimates and financial statements. This may limit Ginnie Mae’s ability to 

accurately report to Congress the extent to which its programs represent 

a financial exposure to the government.

We recommended that the Secretary of Housing and Urban Development 

direct Ginnie Mae to take steps to ensure its model more closely follows 

certain practices identified in Federal Accounting Standards Advisory 

Board guidance for estimating subsidy costs of credit programs. More 

specifically, Ginnie Mae should (1) assess and document that it is using 

the best available data in its model and most appropriate modeling 

approach, (2) conduct and document sensitivity analyses to determine 

which cash flow assumptions have the greatest impact on the model, 

(3) document how management assumptions are determined, such as 

those for issuer defaults and mortgage buyout rates, and (4) assess the 

extent to which management assumptions, such as those for issuer 

defaults and mortgage buyout rates, can be replaced with quantitative 

estimates. The President of Ginnie Mae wrote that Ginnie Mae is working 

towards implementing our recommendation for conducting sensitivity 

analyses relating to issuer risk and behavior, but neither agreed nor 

disagreed with our other specific recommendations. In addition, Ginnie 

Mae agreed with our observation about the importance of completing 
 

Page 16 GAO-12-277T

ongoing and planned initiatives for enhancing its risk-management 

processes, as soon as practicable, to improve operations.

Mr. Chairman, Ranking Member Frank, and Members of the Committee, 

this concludes my prepared statement. I would be happy to respond to 

any questions that you may have at this time.

For further information about this testimony, please contact Mathew J. 

Scirè, Director, at 202-512-8678 or sciremj@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this statement. Individuals making key contributions to 

this testimony include Paige Smith (Assistant Director), Andy Pauline 

(Assistant Director), Steve Westley (Assistant Director), Dan Alspaugh, 

Nadine Garrick Raidbard, John McGrail, Marc Molino, José R. Peña, 

Beth Reed Fritts, Paul G. Revesz, and Barbara Roesmann.

GAO Contact and 

Staff 

Acknowledgments 

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