GAO-13-400R

United States Government Accountability Office

Washington, DC 20548

March 7, 2013

The Honorable Jeb Hensarling

Chairman

Committee on Financial Services

House of Representatives

The Honorable Randy Neugebauer

Chairman

Subcommittee on Housing and Insurance

Committee on Financial Services

House of Representatives

Subject: Overview of GAO’s Past Work on FHA’s Single-Family Mortgage Insurance 

Programs

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, which insure private lenders against 

losses on mortgages that finance purchases of properties or refinance existing FHA 

mortgages. In recent years, FHA has experienced a dramatic increase in its market 

role, partly because other mortgage market segments contracted during the recent 

financial crisis. At the same time, it has faced fiscal challenges. Since 2009, FHA 

has not met its statutory capital reserve requirements—essentially, a floor below 

which reserves should not fall.1 Additionally, although FHA’s single-family insurance 

programs historically produced budgetary receipts for the federal government, a

weakening in the performance of FHA-insured loans could increase the possibility 

that FHA will require funds to help cover its costs on insurance issued to date.

The increased reliance on FHA mortgage insurance highlights the need for FHA to 

better ensure that it has the proper controls in place to minimize financial risks while 

meeting the housing needs of borrowers. We previously had identified “modernizing 

the U.S. financial regulatory system” as a high-risk area and included a discussion of 

concerns about the resolution of Fannie Mae and Freddie Mac. Because of 

continuing uncertainty over the resolution of Fannie Mae and Freddie Mac, the 

potential impact of their resolution on FHA, and concerns about FHA’s financial 

condition, in February 2013 we included FHA in this high-risk area, now called 

“modernizing the U.S. financial regulatory system and the federal role in housing 

 

1

Unless otherwise stated, references to years are fiscal years. 

On May 30, 2013, we revised the figure on p. 8 by removing a dotted line 

designated as the minimum capital ratio and more clearly reflecting the 

negative economic value in 2012.
Page 2 GAO-13-400R

finance.”2 To ensure that Congress has a complete picture of FHA and the role it 

plays in the mortgage market, you asked us to summarize our prior work on this 

agency.

Scope and Methodology 

This report summarizes our prior work in the following areas: (1) FHA’s market 

share, (2) FHA’s financial condition, (3) FHA’s loan requirements (such as down 

payments), (4) FHA’s oversight of lenders and appraisers, (5) FHA’s management of 

delinquent loans and foreclosed properties, (6) FHA’s risk-assessment efforts, (7) 

challenges related to FHA’s human capital and information systems, and (8) FHA’s 

reverse mortgages. See enclosure I. 

To complete this work, we generally relied on two of our reports—a November 2011 

report on FHA’s risk assessment and human capital management and a September 

2010 report on FHA’s financial condition.3 We included excerpts from other of our

reports, where relevant. For a complete list of these reports, see enclosure II. Each 

of these reports includes a detailed scope and methodology. We also relied on 

information in HUD’s 2012 annual report to Congress on the financial status of the 

Mutual Mortgage Insurance Fund and the 2012 actuarial review of the Mutual 

Mortgage Insurance Fund. 4 We obtained other FHA and HUD documents to update 

some of our analysis, update the status of our prior recommendations, and provide 

current information on FHA’s single-family mortgage insurance programs. 

We performed the work on which this report was based 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 the 

evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives.

Background

FHA was established in 1934 under the National Housing Act to broaden 

homeownership, shore up and protect lending institutions, and stimulate 

employment in the building industry. The agency has played a particularly large role 

among first-time and minority homebuyers. FHA also generally is thought to promote 

stability in the market by helping ensure the availability of mortgage credit in areas 

 

2

Every 2 years, we provide Congress with an update on our High-Risk Program, which highlights major areas 

that are at high risk for fraud, waste, abuse, or mismanagement, or need broad reform. See GAO, High-Risk 

Series: An Update, GAO-13-283 (Washington, D.C.: Feb. 14, 2013).

3

See GAO, Federal Housing Administration: Improvements Needed in Risk Assessment and Human Capital 

Management, GAO-12-15 (Washington, D.C.: Nov. 7, 2011); and Mortgage Financing: Opportunities to Enhance 

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

4

See Department of Housing and Urban Development, Annual Report to Congress Regarding the Financial 

Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year 2012 (Washington, D.C.: Nov. 16, 2012); and 

Integrated Financial Engineering, Inc., Actuarial Review of the Federal Housing Administration Mutual Mortgage 

Insurance Fund Forward Loans for Fiscal Year 2012, report prepared for the Department of Housing and Urban 

Development (Rockville, Md: Nov. 5, 2012). 
Page 3 GAO-13-400R

that may be underserved by the private sector or that are experiencing economic 

downturns.

FHA’s single-family mortgage insurance programs insure private lenders against 

losses on home mortgages. FHA insures a variety of mortgages for initial home 

purchases and refinancing. It also insures reverse mortgages, which permit persons 

62 years and older to borrow against their home equity. FHA provides most of its 

single-family mortgage insurance through programs supported by the Mutual 

Mortgage Insurance Fund (insurance fund). 

FHA’s single-family insurance programs are administered by the Deputy Assistant 

Secretary for Single Family Housing, who reports to the Assistant Secretary for 

Housing-Federal Housing Commissioner. Within the Office of Single Family 

Housing, headquarters offices develop policy and manage oversight functions. 

FHA’s four homeownership centers—in Atlanta, Georgia; Denver, Colorado; 

Philadelphia, Pennsylvania; and Santa Ana, California—undertake many of the dayto-day functions associated with loan endorsement, processing, and lender 

oversight.

Summary 

Among other things, our past work discusses FHA’s financial condition and steps the 

agency has taken to improve its financial condition. As housing prices began to 

decline at the end of 2006 and conventional mortgage lenders tightened their 

underwriting standards, more homebuyers began taking advantage of FHA-insured 

loans, which tend to have less strict underwriting standards and require lower down 

payments, as compared with conventional loans. As a result, FHA’s share of the 

market increased. In 2006, FHA insured approximately 4.5 percent of purchase 

mortgages.

5 At its peak in 2009, it insured 32.6 percent of purchase mortgages. In 

2011, its share of purchase mortgages fell to 26.5 percent.

As FHA’s market share grew, the economic value of FHA’s insurance fund declined 

dramatically. Specifically, it declined from about $21 billion at the end of 2007 to less 

than $4 billion by the end of 2009. At the end of 2012, the fund’s economic value 

was negative. As a consequence, the insurance fund’s capital ratio fell to negative 

1.44 percent in 2012, far below the statutory minimum of 2.0 percent. As the capital 

ratio declined, the insurance fund’s condition also worsened from the federal 

budgetary perspective. This has heightened the possibility that FHA may require 

additional funds from the Department of the Treasury (Treasury) to have sufficient 

reserves for all future insurance claims on its existing portfolio.

In recent years, FHA has taken several actions intended to shore up its financial 

position and minimize defaults, such as increasing down-payment requirements for 

certain loans in 2010 and raising premiums on insured mortgages multiple times. 

(FHA proposed its most recent premium increase in January 2013.) However, such 

changes, which could make it more difficult to obtain mortgage insurance, can affect 

the types of borrowers FHA serves and the role it plays in the mortgage market, 

 

5

In the 5 years prior to 2006, FHA’s share of purchase mortgages had reached a high of 14.2 percent.
Page 4 GAO-13-400R

which traditionally has been to support underserved populations. As we have 

previously reported and highlighted in our 2013 high-risk report, further actions could 

be taken to help restore FHA’s financial soundness and clarify its future role in the 

market, such as defining the economic conditions the insurance fund should be 

expected to withstand without funding from the Treasury.

6 We also have 

recommended that FHA improve it risk-assessment efforts and human capital 

management.7

 The agency has taken multiple actions to address these 

recommendations, but some are yet to be completed. 

Agency Comments

We provided a draft of this report to HUD for its information and to seek confirmation 

of any new information not previously reported. The agency provided technical 

comments, which we incorporated where appropriate. 

- - - - - 

If you or your staff have any questions or wish to discuss the material in this report 

further, please contact me 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 report. GAO staff members who made major contributions to this report 

include A. Paige Smith, Assistant Director; Cory Marzullo; John McGrail; Josephine 

Perez; Barbara Roesmann; and Jena Sinkfield.

Mathew J. Scirè

Director, Financial Markets and

 Community Investment

Enclosures–2 

 

6

See GAO-13-283 and 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).

 

7

GAO-12-15.
Page 5 GAO-13-400R

Enclosure I

FHA Loan Volume 

FHA’s loan volume grew considerably from 2006 to 2010 and has since 

remained high. FHA insured almost half a million loans, totaling $70 billion 

in mortgage insurance, in 2006. (This was low compared to prior years; 

from 2000 to 2005, FHA’s loan volume ranged from about 521,000 to 

about 1.2 million loans.) For 2009, the agency insured about 1.9 million 

loans, totaling more than $361 billion in mortgage insurance. The number 

of loans dropped in 2012 to about 1.2 million, or about $227 billion in 

mortgage insurance (see fig.). 

FHA Loan Volume, 2006-2012

FHA Market Share

Looking at all mortgages (both insured and uninsured), FHA’s overall 

market share, in terms of number of loans, increased from 3.3 percent in 

2006 to a high of 21.1 percent in 2009 and decreased in 2011 to 14

percent. (These data do not include reverse mortgages; as we discuss 

later, FHA currently insures nearly 100 percent of reverse mortgages.) 

Similarly, FHA’s market share of all purchase mortgages increased from 

4.5 percent in 2006 to a high of 32.6 percent in 2009. (In the 5 years prior 

to 2006, FHA’s share of purchase mortgages was as high as 14.2 

percent.) In 2011, FHA’s market share of purchase mortgages was 26.5

percent (see next fig.). In recent years, the contraction of other segments

Background

Mortgage insurance protects 

lenders against losses in the event 

of default. Not all loans require 

mortgage insurance; lenders 

usually require insurance when a 

homebuyer has a down payment of 

less than 20 percent of the value of 

the home. FHA, the Department of 

Veterans Affairs (VA), the U.S. 

Department of Agriculture’s Rural 

Housing Service (RHS), and 

private mortgage insurers provide 

mortgage insurance.

FHA insures a variety of mortgages 

for initial home purchases

(purchase mortgages) and 

refinancing. It also insures reverse 

mortgages, which are loans against 

a borrower’s home available to 

persons 62 years or older. Many 

FHA-insured loans are to lowincome, minority, and first-time 

homebuyers.

FHA Single-Family Mortgage Insurance

FHA Loan Volume and Market Share 
Page 6 GAO-13-400R

of the mortgage market and legislated increases in the loan amounts eligible for FHA insurance resulted in 

higher demand for FHA-insured mortgages.

FHA Market Share, 2006-2011

When focusing just on the insured market, FHA’s presence is even more significant. According to U.S. Housing 

Market Conditions, FHA insured approximately 54 percent of insured mortgages in calendar year 2011. (The 

data do not include mortgages insured by RHS.) Specifically, FHA insured 757,025 home purchase loans in 

2011. That same year, VA guaranteed 379,885 loans, and private mortgage insurers issued 266,690 certificates

of insurance. 

FHA’s Customers

The agency has played a particularly large role among first-time and minority homebuyers. Over the last 4 years, 

FHA has insured more than 3.5 million home purchase loans, 2.8 million of which were for first-time 

homebuyers. In 2012, about 78 percent of these loans went to first-time homebuyers, about 32 percent of whom 

were minorities. According to HUD analysis of 2011 Home Mortgage Disclosure Act data, FHA has continued to 

lead the market in support of minority homeownership. While FHA insurance was used for approximately 27 

percent of all home purchase loans in 2011, FHA-insured loans accounted for 50 percent of loans to AfricanAmerican borrowers and 49 percent of loans to Hispanic borrowers. 
Page 7 GAO-13-400R

Enclosure I

Capital Ratio

The insurance 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 insurance fund’s 

economic value (the numerator of the capital ratio) and increased the 

insurance-in-force, or insurance obligations (the denominator of the capital 

ratio). According to annual actuarial reviews of the insurance fund, the 

capital ratio fell from about 7 percent in 2006, to 3 percent in 2008, and 

below 2 percent in 2009. In 2012, the capital ratio fell below zero to 

negative 1.44 percent (see next fig.).

Estimates of the Insurance Fund’s Capital Ratio, 2001-2012

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

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

insurance-in-force (the denominator of the ratio) over much of the past 

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. Economic value represents the insurance fund’s existing 

capital resources (total assets less total liabilities) plus the net present 

value of its existing portfolio of insured mortgages. 

An independent actuary hired by HUD produces the estimates of future 

cash flows. The estimates are based on econometric models that use 

historical experience to model the relationship between loan performance 

and various factors, most importantly expectations for future house prices 

and interest rates. For 2012, the actuarial review estimated that future 

cash flows for every loan that FHA currently insured would be negative

Background

The Omnibus Budget 

Reconciliation Act of 1990 required 

the HUD Secretary to ensure that 

FHA’s Mutual Mortgage Insurance 

Fund attained a capital ratio (the 

ratio of the insurance fund’s 

economic value to insurance 

obligations) of at least 2 percent by 

November 2000 and maintained at 

least that ratio at all times 

thereafter. The Omnibus Budget 

Reconciliation Act and later, the 

Housing and Economic Recovery 

Act of 2008, required HUD to 

annually obtain an independent 

actuarial review of the economic 

net worth and soundness of the 

insurance fund.

Under the Federal Credit Reform 

Act of 1990, FHA must estimate 

the net lifetime costs (credit 

subsidy costs) of its loan insurance 

program and include the costs to 

the government in its annual 

budget. Credit subsidy costs 

represent the net present value of 

expected lifetime cash flows, 

excluding administrative costs. For 

a mortgage insurance program, 

cash inflows include fees and 

premiums charged to insured 

borrowers and proceeds from sales 

of foreclosed properties, and cash 

outflows include 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.

FHA Single-Family Mortgage Insurance

Measures of Financial Condition and Factors Affecting It 
Page 8 GAO-13-400R

$46.6 billion. Because FHA’s existing capital resources were only $30.4 billion, the resulting economic value 

was negative $16.3 billion (see next fig.).

 

Estimates of the Insurance Fund’s Economic Value and Insurance-in-force, 2001-2012 

The 2012 actuarial analysis projects that the capital ratio will be positive by 2014 and will go above 2.0 percent 

in 2017 (see table). The forecast was based on assumptions such as the level of future lending activity and 

house prices for multiple years, which are difficult to predict. The forecast also assumed no changes in policy or 

other actions by FHA that might accelerate “recovery” time. (As discussed later, FHA plans policy changes that 

may accelerate increases to the ratio.)

Actuarial Projections of Present and Future Capital Ratios 

Year Insurance-in-force (billions) Economic net worth (billions) Capital ratio

2012 $1,131 -$16.3 -1.4% 

2013 1,230 -5.3 -0.4

2014 1,291 2.0 0.2 

2015 1,314 9.7 0.7

2016 1,352 19.7 1.5

2017 1,401 30.7 2.2 

2018 1,441 42.0 2.9

2019 1,467 53.9 3.7

Source: HUD/FHA.
Page 9 GAO-13-400R

While the Omnibus Budget and Reconciliation Act requires that FHA maintain the minimum ratio at all times, it 

does not specify the time frames for re-attaining the 2 percent level should FHA fall below it. In a 2010 report, 

we recommended that Congress consider establishing such a time frame, taking into account FHA’s statutory 

operational goals and role in supporting the mortgage market during periods of economic stress (see GAO-10-

827R). In 2001, we evaluated the adequacy of the 2-percent requirement for the capital ratio (see GAO-01-460). 

We identified several scenarios under which the 2-percent ratio would not be adequate, including a scenario in 

which the nation experienced a downturn or a scenario in which FHA experienced higher-than-normal 

foreclosure rates. We recommended that Congress or HUD consider defining the types of economic conditions 

under which the insurance fund would be expected to meet its commitments without borrowing from the 

Treasury (drawing on permanent and indefinite budget authority). Recent events suggest that the 2-percent 

capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. 

Implementing this recommendation would be an important step not only in addressing FHA’s long-term financial 

viability, but also in clarifying FHA’s role.

Some Factors Affecting Recent Estimates and Future Financial Condition 

In the 2012 annual report to Congress on the insurance fund, HUD cited three factors that drove changes to the 

most recent estimate of FHA’s financial position: 

• First, the estimates of house price appreciation for the 2012 actuarial study were significantly lower than 

those used for 2011. The difference accounted for an estimated $10.5 billion reduction in the value of the 

insurance fund (compared with the actuary’s 2011 projection of what the fund’s economic value would be at 

the end of 2012). 

• Second, the continued decline in interest rates causes a substantial loss of revenue. Premium revenues 

from an existing portfolio go down when more borrowers pay off their mortgages to refinance into lower 

rates. The capital ratio calculation does not include those borrowers who refinance into new FHA-insured 

loans. In addition, actuarial projections include higher claim expenses when interest rates stay low because 

borrowers with higher mortgage rates who are unable to refinance become more willing to default. The 

effects of continued low interest rates resulted in a reduction of $8 billion in the estimated economic value of 

the insurance fund (versus the previous year’s projections).

• Third, FHA directed the actuary to adjust the way losses from defaulted loans and reverse mortgages were 

reflected in the economic value of the insurance fund. This resulted in an estimated $10 billion reduction to 

the economic value, compared with the 2011 projections. 

In addition to explaining the factors that led to changes in estimates from 2011 to 2012, the actuarial analysis 

also highlighted factors that will have longer-term effects on the financial condition of the insurance fund. 

• Single-family books of business insured before 2010. According to the annual report, loans insured 

before 2010 continue to be the prime source of stress on the insurance fund, with $70 billion in future claim 

payments attributable to the 2007-2009 books of business. Losses per-dollar of insured loans peaked for the 

2007 book, the year that also experienced the greatest total decline in home values. When that book is 

finally closed, its total costs (including losses) are expected to exceed 11.3 percent of the initial dollar 

volume of loans insured. While the 2008 book has a lower loss-per-dollar (7.7 percent), that book was three 

times as large as 2007. Therefore, the 2008 book has expected dollar losses that are more than twice those 

of the 2007 book ($13.2 billion versus $6.4 billion). 

• Seller-funded down-payment assistance. The annual report noted that Congress prohibited the use of 

seller-funded down-payment assistance starting in January 2009. Borrowers who make small or no down 

payments are more likely to default on mortgage obligations. The report further noted that the effect of loans 

with seller-funded down-payment assistance remains measureable on the insurance fund. They are 

expected to cost the insurance fund more than $15 billion. The actuary estimated that if FHA had not 

participated in seller-funded down payment loans, the economic value of the insurance fund would be 

positive $1.77 billion. Problems associated with these loans were well-documented. A March 2005 HUD 

contractor study found that property sellers who provided down payment assistance through nonprofits often 

raised sale prices of the homes involved to recover the required payments that went to the organizations. 
Page 10 GAO-13-400R

We too reported on the risks associated with FHA-insured loans with such assistance (see GAO-06-24). We 

found that loans with this type of assistance had inflated prices and defaulted more often than loans without 

such assistance. In October 2007, FHA published a rule that prohibited seller-funded down-payment 

assistance. Subsequently, the rule was struck down by the courts on procedural grounds. As noted 

previously, Congress ultimately prohibited the use of this assistance. 

Capital Reserves

As the capital ratio declined, the insurance fund’s condition also worsened from the federal budgetary 

perspective. FHA annually estimates the subsidy costs of its loan insurance program (and also reestimates, or 

annually updates, prior analyses). Historically, FHA 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 capital reserve account, which holds reserves in excess 

of those needed for estimated credit subsidy costs and helps cover unanticipated increases to those costs (such 

as higher-than-expected claims). Funds needed to cover estimated subsidy costs are accounted for in the 

insurance fund’s financing account. (Balances in the capital reserve and financing accounts may not be equal to 

the insurance fund’s economic value, as defined in the actuarial review, in part because the Federal Credit 

Reform Act requires the Office of Management and Budget to use certain economic assumptions for the budget. 

The independent actuarial review may not use the same assumptions.)

However, in recent years, FHA covered large upward reestimates (which reflect higher subsidy costs and lower 

revenues) with transfers from the capital reserve account to the financing account. As a result, balances in the 

capital reserve account fell dramatically, from $19.3 billion at the end of 2008 to an estimated $3.3 billion at the 

end of 2012 (see next fig.). At the end of 2012, the financing account held approximately $35.1 billion, 

approximately three times more than it held at the end of 2008. 

End-of-year Balances in the Insurance Fund’s Capital Reserve Account, 2008-2012 

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. The President’s budget for 2013 

contained a $9.3 billion upward reestimate in FHA’s credit subsidy costs for the insurance fund. The budget 

indicated that the reestimate would deplete FHA’s capital reserve account in 2012, potentially causing FHA to 

draw on $688 million in permanent and indefinite budget authority. However, according to FHA, the agency 

ultimately did not need to draw on this authority because of premium increases and higher-than-anticipated loan 

volumes. In its 2012 report to Congress, HUD noted that information (the insurance fund valuation) in the 

forthcoming President’s budget for 2014 will determine the adequacy of the capital balance in the insurance fund 

and the need to draw on permanent and indefinite budget authority in the current fiscal year. The President’s 

budget is expected to be released in the spring of 2013. 
Page 11 GAO-13-400R

Enclosure I

Underwriting and Down Payments

In underwriting FHA-insured loans, lenders evaluate potential borrowers’ 

credit history, available assets to close the mortgage loan, and their

likelihood of default, among other things.

In recent years, FHA took steps to tighten its underwriting standards, 

including raising down-payment requirements. Specifically:

• In September 2009, FHA announced changes to its streamline 

refinance loans that, according to FHA, have reduced early payment 

defaults. 

• In October 2010, FHA increased down-payment requirements for 

borrowers with lower credit scores. Borrowers with credit scores of 

500-579 must make a down payment of at least 10 percent. 

Furthermore, anyone with a credit score below 500 is ineligible for an 

FHA-insured loan.

• In February 2012, FHA published a rule proposing to reduce allowable 

seller contributions at closing, thereby helping to ensure that buyers 

put more of their own funds into the home purchase. (As noted 

previously, Congress eliminated seller-funded down payments in 

2009.) 

• In January 2013, FHA

o Announced that it would raise its minimum down-payment 

requirement from 3.5 to 5.0 percent for loans of $625,500 or more. 

FHA also increased the annual premium for these loans to the 

statutory maximum (see Insurance Premiums below).

o Announced that it will require manual underwriting on loans for 

borrowers with credit scores below 620 and debt-to-income ratios 

above 43 percent.

Down-payment requirements and credit scores are important tools to help 

offset the risk of borrower default. For example, down-payment 

requirements affect the loan-to-value (LTV) ratio—the mortgage amount 

divided by the value of the home. LTV ratios are important because of the 

direct relationship that exists between the amount of equity borrowers 

have in their homes and the likelihood of default. In 2005, we found that 

mortgages with higher LTV ratios (those with smaller down payments, or 

little equity) and lower credit scores generally were riskier than mortgages 

with lower LTV ratios and higher credit scores (see GAO-05-194). 

Insurance Premiums

In recent years, FHA has increased insurance premiums to help improve 

the financial condition of the insurance fund. Most recently (in January 

2013), FHA announced two changes to the premium structure:

Background

When making FHA-insured loans, 

lenders must comply with FHA’s 

underwriting criteria. (Underwriting 

refers to a risk analysis that uses 

information collected during the 

origination process to decide 

whether to approve a loan.) In 

general, FHA borrowers 

purchasing a home currently must 

make a cash investment (down 

payment) of at least 3.5 percent of 

the purchase price of the home. 

This investment may come from 

the borrowers’ funds or from 

certain third-party sources. 

FHA’s insurance fund is supported 

by borrowers’ insurance premiums. 

FHA has the authority to establish 

and collect a single up-front 

premium and annual premiums on 

the remaining insured principal 

balance of the loan. Annual 

premiums vary based on the 

amount of the down payment, the 

size of the loan, and the length of 

the mortgage term. Borrowers are 

permitted to finance their up-front 

mortgage insurance premiums (as 

well as some of their closing 

costs). 

FHA Single-Family Mortgage Insurance

FHA Underwriting Requirements, Premium Rates, and

Insurance Coverage 
Page 12 GAO-13-400R

1. Effective April 1, 2013, FHA will increase the annual insurance premiums most borrowers pay between 0.05 

and 0.10 percentage points. Current annual premiums range from 0 to 1.5 percent. The annual premium for 

loans of $625,500 or more will be set at the statutory maximum (see next table). FHA also will raise annual 

premiums on smaller loans, but these premiums will remain below the maximum. FHA expects that the 

premium increases—$13 per month for the average insured borrower—will add significant revenue to the 

insurance fund and help limit FHA’s market share, while at the same time being modest enough so that they 

will not affect borrower access to credit or threaten the housing recovery. 

Increases to FHA Annual Premiums Effective as of April 1, 2013

Term greater than 15 years

Base loan amount Loan-to-value Previous mortgage 

insurance premium

New mortgage 

insurance premium

Statutory maximum 

Less than or equal to 

$625,500

Less than or equal to 

95%

1.20% 1.30% 1.50%

Less than or equal to 

$625,500

Greater than 95% 1.25 1.35 1.55

Greater than $625,500 Less than or equal to 

95%

1.45 1.50 1.50

Greater than $625,500 Greater than 95% 1.50 1.55 1.55

Term less than or equal to 15 years

Less than or equal to 

$625,500

78.01 to 90% 0.35% 0.45% 1.50%

Less than or equal to 

$625,500

Greater than 90% to less 

than or equal to 95%

0.60 0.70 1.50

Less than or equal to 

$625,500

Greater than 95% 0.60 0.70 1.55

Greater than $625,500 78.01 to 90% 0.60 0.70 1.50

Greater than $625,500 Greater than 90% to less 

than or equal to 95%

0.85 0.95 1.50

Greater than $625,500 Greater than 95% 0.85 0.95 1.55

Any amount Less than or equal to 

78%

0 0.45 1.50

Source: FHA.

2. Effective June 3, 2013 on new loans, FHA will require that borrowers continue to pay annual premiums, 

regardless of loan value. Previously, premiums could be eliminated after loans (principal amounts) declined 

to 78 percent of their original value. 

 

FHA can continue to raise up-front and annual premiums to the statutory maximums (generally 3 percent of the 

original insured principal mortgage amount for up-front premiums and between 1.5 and 1.55 percent of the 

remaining insured principal amount for annual premiums). However, as we reported in June 2007, raising 

premiums could cause lower-risk borrowers to choose more competitive (lower priced) loans from other sources, 

leaving FHA to insure relatively more higher-risk borrowers (see GAO-07-708). 

Insurance Coverage

FHA is obligated to pay private lenders for almost all losses resulting from foreclosures on single-family homes 

insured under the insurance fund (12 U.S.C. Sec. 1710). Therefore, loan requirements such as underwriting 

standards and down-payment requirements are critical components to limiting risk exposure. In comparison, VA 
Page 13 GAO-13-400R

guarantees losses from 25 to 50 percent of a loan. In 1997, we analyzed the implications of reducing FHA’s 

insurance guarantee to VA’s coverage levels and found that FHA would be insuring better-quality loans with less 

loss exposure. As a result, FHA’s capital reserve ratio likely would increase, enhancing the insurance fund’s 

ability to maintain financial self-sufficiency. However, we also found that private lenders likely would raise 

interest rates and make fewer higher-risk, FHA-insured loans because they could incur greater losses. Lenders 

likely would serve fewer low-income, first-time, and minority homebuyers—the types of homebuyers for which 

FHA historically has been the primary lender (see GAO/RCED-97-93). Reducing FHA’s insurance coverage 

would require congressional action.
Page 14 GAO-13-400R

Enclosure I

Recent Enhancements 

FHA relies on private lenders to underwrite the loans it insures and on 

private appraisers to appraise the value of the homes being financed. In 

November 2011 (GAO-12-15), we reported that FHA had made changes 

to several processes intended to help ensure that these lenders and 

appraisers followed its policies and procedures.

• FHA enhanced the criteria it uses to select loans for post-endorsement 

technical reviews of underwriting quality. Since May 2010, the agency 

has considered high-risk borrower or loan characteristics. For 

example, loans to borrowers with low credit scores and certain types of 

refinanced loans could merit review. 

• FHA began using a more risk-based approach to select lenders and 

appraisers for review. For example, FHA increased the number of risk 

factors used to target lenders for review. The risk factors included loan 

volume, product type, process (direct endorsement or lender 

insurance), performance, and peer group performance. In addition, 

since March 2010 FHA has considered factors such as the appraiser’s 

volume and past sanctions, as well as the type of property being 

appraised, when targeting appraisers for review. 

Post-endorsement reviews can result in indemnification agreements—

requiring the lender to repay FHA for any losses that it incurs after a loan 

defaults and the property has been sold. In November 2011, we reported 

that FHA issued 645 indemnification agreements in 2010.

Appraiser reviews may result in a variety of actions, ranging from notices 

of deficiency for minor processing errors to required education to removal 

from FHA programs. In November 2011, we reported that in 2010 FHA 

had issued 1,044 notices of deficiency, required 477 appraisers to take 

education, and removed 89 appraisers from FHA programs. 

Proposed Actions

In its 2012 annual report to Congress, FHA proposed new authorities 

(requiring congressional action) that it stated would enhance FHA’s ability 

to hold lenders accountable for noncompliance with FHA policy and 

provide greater flexibility for FHA to change policies and procedures as 

emerging needs and trends were identified.

• Indemnification authority for direct endorsement lenders. This 

change would allow FHA to seek indemnification from direct 

endorsement lenders, which represent 70 percent of all FHA approved 

lenders. Currently, FHA only has authority to require indemnification 

for lenders approved to participate in the Lender Insurance program. 

According to FHA, with this authority, the agency will be able to require 

indemnification from all of its approved lenders for loans that do not 

comply with its guidelines. FHA has been seeking this authority since 

2010.

Background

As of September 2011, almost 

3,700 lending institutions were 

approved to participate in FHA’s 

mortgage insurance programs for 

single-family homes. Virtually all of 

these lending institutions had direct 

endorsement authority, meaning 

that they could underwrite loans 

and determine their eligibility for 

FHA mortgage insurance without 

FHA’s prior review. However, direct 

endorsement lenders are still 

subject to review of loan paperwork 

before endorsement and reviews of 

the loan after endorsement. They 

can apply to participate in the 

Lender Insurance program, which 

enables high-performing lenders to 

approve mortgages for FHA 

insurance without a preendorsement review. As of 

September 2011, about 20 percent 

of direct endorsement lenders 

participated in the Lender 

Insurance program. 

FHA maintains and manages a 

roster of real estate appraisers 

authorized to conduct appraisals 

for FHA-insured mortgages. As of 

the end of 2012, 52,002 appraisers 

were listed on the roster.

FHA Single-Family Mortgage Insurance

FHA Oversight of Lenders and Appraisers 
Page 15 GAO-13-400R

• Revised standard for indemnification for fraudulent activity. This change would eliminate the “knew or 

should have known” standard relating to fraud or misrepresentation. While Fannie Mae and Freddie Mac 

require lenders to retain all fraud-related risk, FHA only holds lenders accountable for fraudulent activity if 

they “knew or should have known” it occurred. According to FHA, providing proof to meet this standard limits 

FHA’s ability to hold lenders accountable for fraud. Removal of the standard would greatly improve FHA’s 

ability to avoid unnecessary losses from fraudulent activity.

• Authority to terminate origination and underwriting approval. FHA would enhance its ability to review 

lender performance. If a lender was found to have an excessive rate of early defaults or claims, FHA would 

have greater flexibility in terminating the approval of the lender to originate or underwrite single-family 

mortgages for FHA insurance. FHA has been seeking this authority since 2010.

• Revised compare ratio requirement. FHA has sought greater flexibility in establishing the metric by which 

it compares lender performance so that it can more effectively assess lender performance during all market 

conditions. Specifically, FHA would be able to compare a lender’s rate of early defaults and claims (for 

insured single-family mortgage loans) with the rates of other lenders on any basis determined appropriate. 

Examples of metrics include geographic area, varying underwriting standards, or populations served. 
Page 16 GAO-13-400R

Enclosure I

Loss Mitigation

In our June 2012 report, we found that several agencies, including FHA, 

were not conducting analyses to determine the effectiveness of their lossmitigation actions. The experiences of Treasury, Fannie Mae, and Freddie 

Mac and our econometric analysis strongly suggested that such analyses 

can improve outcomes and cut program costs. Therefore, we 

recommended that FHA periodically analyze the effectiveness and the 

long-term costs and benefits of its loss-mitigation strategies and actions to 

more fully understand their strengths and risks and protect taxpayers from 

absorbing avoidable losses to the maximum extent possible. (See GAO12-296.) Consistent with this recommendation, FHA conducted analysis of 

its loss-mitigation options and announced revisions in November 2012 that 

were designed to reduce the number of full claims against the insurance 

fund. FHA’s new loss-mitigation strategies are outlined below. 

Before taking formal loss-mitigation actions, FHA requires loan servicers 

to address delinquencies through an early intervention process. Servicers 

may come to an informal or formal forbearance arrangement with 

borrowers to reinstate loans through repayment plans. (Forbearance 

refers to refraining from exercising a legal right.) Informal forbearance 

plans are oral agreements covering 3 months or less. Formal forbearance 

plans are written agreements covering more than 3 but less than 6 

months. If borrowers are not able to reinstate their loans through a 

forbearance plan, servicers must consider the borrowers for a lossmitigation action. These actions can take the following form: 

• Special forbearance. A written agreement that combines a 

suspension or reduction in monthly mortgage payments for a minimum 

of 12 months with a repayment period. Available to unemployed 

borrowers who are at least three mortgage payments delinquent.

• Loan modifications. A permanent change to one or more of the terms 

of the loan: change in interest rate, capitalization of past due amounts, 

extension of mortgage term, or reamortization of balance due. If 

resetting the interest rate at the market rate and amortizing the new 

loan over 30 years can reduce the borrower’s monthly payment by the 

greater of 10 percent or $100, servicers are to offer a loan modification 

with those terms. This option is available to currently employed 

borrowers who had loss of income or had living expenses increase but 

have sufficient surplus income. Generally, a trial period of 3 months 

applies. 

• Home Affordable Modification Program (FHA-HAMP). Borrowers 

for whom a standard modification is not sufficient may qualify for a 

HAMP-style modification under authority provided to HUD in 2009. 

FHA-HAMP modifications bring borrowers’ monthly payments down to 

80 percent of the current monthly payment but to no less than 25 

percent of income by reducing interest rates to the market rate,

Background

Common measures of loan 

performance are delinquency, 

default, and foreclosure rates. A 

loan becomes delinquent when a 

borrower does not make one or 

more scheduled monthly 

payments. Loans in default 

generally are delinquent by 90 or 

more days—the point at which 

foreclosure proceedings become a 

strong possibility.

When home buyers fall behind on 

their mortgage obligations, FHA 

instructs mortgage servicers 

(typically large financial institutions) 

to assist the home buyers in 

bringing their mortgage payments 

current, because foreclosure 

proceedings can impose high costs 

on financial institutions and 

homeowners. These efforts are 

referred to as “loss mitigation.”

If an FHA-insured mortgage goes 

into foreclosure, FHA pays the 

lender for virtually all the losses 

associated with the loan. FHA 

polices and processes for 

managing properties in foreclosure 

are called asset management.

FHA Single-Family Mortgage Insurance

FHA’s Management of Delinquent Loans and Foreclosed 

Properties
Page 17 GAO-13-400R

extending the loan term to 30 years, and, if necessary, deferring principal. Rather than capitalizing past due 

amounts, servicers can advance funds on behalf of the borrower to reinstate the loan (called a partial claim). 

Under FHA-HAMP, if the borrower’s current interest rate is at or below the market rate and the current 

mortgage payment is at or below the target monthly payment, servicers may advance funds—up to 30 

percent of the loan balance without modifying the loan—on behalf of a borrower to cover past due amounts.

• Preforeclosure sales and deeds-in-lieu of foreclosure. Under a preforeclosure sale agreement (also 

called a short sale), FHA accepts the proceeds of the sale as satisfying the mortgage debt, as long as the 

net proceeds (sales price minus certain costs) are at least 84 percent of the appraised value. A deed-in-lieu 

of foreclosure is a voluntary transfer of a property from the borrower to FHA for a release of all obligations 

under the mortgage.

According to FHA, the agency has expanded its Distressed Asset Stabilization Program, another loss-mitigation 

strategy. FHA-insured loans are sold competitively at a price generally below the outstanding principal balance. 

FHA requires the loan purchaser to delay foreclosure for at least 6 additional months, during which time the new 

servicer can work with the borrower to find an affordable solution to avoid foreclosure. 

 

Foreclosures 

FHA relies on management and marketing contractors to manage its foreclosed properties. These contractors 

conduct property inspections, perform ongoing maintenance, and market properties. We reported in November 

2011 (GAO-12-15) that FHA’s inventory of active properties had increased 85 percent, from 27,747 at the end of 

2006 to 51,292 at the end of 2010. According to a recent Monthly Report to the FHA Commissioner on Business 

Activity, FHA had 37,977 foreclosed properties as of the end of December 2012. Because of the number of 

foreclosed properties they manage, proper oversight of management and marketing contractors is important. 

In April 2002, we reported on procedures for beginning foreclosure, conducting foreclosures, and selling 

foreclosed properties of several agencies, including FHA. (See GAO-02-305.) However, for FHA specifically, the 

procedures could delay the start of critical steps necessary to preserve the value of foreclosed properties and 

sell them quickly. That is, while Fannie Mae, Freddie Mac, VA, and RHS made one entity responsible for the 

custody, maintenance, and sale of foreclosed properties, FHA divided these responsibilities between its 

mortgage servicers and management and marketing contractors, which largely operated independently of one 

another. As a result, we made a number of recommendations to help FHA streamline its procedures, ensure 

prompt property maintenance and marketing strategies, and minimize foreclosure losses. For example, we 

recommended that HUD establish unified property custody as a priority for FHA.

Proposed FHA Actions Related to Loss Mitigation and Foreclosures

In its November 2012 annual report to Congress on the insurance fund, FHA proposed revisions to its lossmitigation and foreclosure processes.

• Streamlining the short-sale process. FHA plans to revise its policy and remove certain barriers for 

borrowers in obtaining a short sale on their FHA-insured mortgages.

• Expanding the claim without conveyance pilot program. Consistent with our April 2002 

recommendations, FHA piloted a program for lenders to sell foreclosure properties secured by 

nonperforming FHA-insured loans to third-parties (at a reserve price slightly below the property value) 

without being conveyed to FHA. Because FHA’s analysis has shown that this method of disposing of 

properties yielded lower losses for the insurance fund than selling them through FHA’s normal disposition 

process, FHA plans to expand the program. 

• Strategies to further improve recoveries. FHA proposed several steps to increase use of loss-mitigation 

options and reduce unnecessary asset-disposition losses. For example, the agency planned to promote 

modification and short-sale strategies for delinquent borrowers through a marketing campaign. 

• Authority to transfer servicing. To help make loss mitigation more effective, FHA sought authority to 

require any of the following actions when a servicer underutilized FHA’s loss-mitigation tools, or when the 
Page 18 GAO-13-400R

agency deemed the action necessary to protect the interests of the insurance fund: (1) transfer servicing 

from the current servicer to a specialty servicer designated by FHA; (2) require a servicer to enter into a 

subservicing arrangement with an entity identified by FHA; or (3) require a servicer to engage a third-party 

contractor to assist in some aspect of loss mitigation such as borrower outreach. According to FHA, such 

authority would permit the agency to better avoid losses from poor servicing of FHA-insured loans, yielding 

better results for borrowers and FHA.
Page 19 GAO-13-400R

Enclosure I

Our Prior Work

In November 2011 (GAO-12-15), we reported on several weaknesses in 

FHA’s risk-assessment efforts.

1. FHA’s risk-assessment strategy was not integrated throughout the 

organization. While the consultant had recommended that FHA 

integrate risk assessment and reporting throughout the organization, 

the Office of Single Family Housing’s quality control activities and the 

Office of Risk Management’s activities remained separate efforts. FHA 

officials noted that until the Office of Risk Management set up a 

governance process, the integration suggested by the consultant 

would not be possible. In the meantime, FHA officials stated they were 

making every effort to help ensure that the Office of Risk 

Management’s activities complemented program office activities.

2. Contrary to HUD guidance, the Office of Single Family Housing had 

not conducted an annual, systematic review of risks to its program and 

administrative functions since 2009. According to an official in this 

office, management intended to conduct an annual assessment but 

changes in senior leadership in the office and the few staff available to 

perform assessments (because of attrition and increased workload)

hampered these efforts. 

3. The Office of Single Family Housing’s risk-assessment efforts did not 

include procedures for anticipating potential risks presented by 

changing conditions. The consultant’s report proposed a reporting 

process and templates for identifying emerging risks. Office of Risk 

Management officials told us that once they were operational, risk 

committees would determine the exact design and content of these 

reports and templates.

We concluded that all these factors limited FHA’s effectiveness in 

identifying, planning for, and addressing risk. Therefore, we recommended 

that FHA (1) integrate the internal quality control initiative of the Office of 

Single Family Housing into the processes of the Office of Risk 

Management, (2) conduct an annual risk assessment, and (3) establish 

ongoing mechanisms—such as using report templates from the 

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

by changing conditions.

FHA’s Recent Actions

FHA has begun addressing recommendations made by the contractor 

hired to identify best practices for the Office of Risk Management. For 

instance, in June 2012 it finalized the delegations of authority needed for 

the Office of Risk Management and Regulatory Affairs to establish and 

maintain risk-management policies, activities, and controls for FHA. It also 

has formed a Single Family Credit Risk Committee and an Operational 

Risk Committee. Credit risk is risk related to borrower default or lender 

default. Operational risk is risk related to people, processes, technology,

Background

To improve its risk-assessment 

strategy, in 2010 FHA established 

the Office of Risk Management and 

Regulatory Affairs headed by a

Deputy Assistant Secretary who 

reports directly to the Assistant 

Secretary for Housing-FHA 

Commissioner. FHA also hired a 

consultant to assist a unit—the 

Office of Risk Management—within 

the larger office, and produce a 

comprehensive report and 

recommend best practices for its 

structure and operations. 

In 2009, FHA’s Office of Single 

Family Housing had implemented a 

new system of management 

control for risk assessment, the 

internal quality control initiative. For 

the areas identified as high-risk, 

staff developed plans to document 

control objectives and established 

a monitoring strategy that involved 

submitting quarterly reports on the 

effectiveness of the controls, 

including the status of any 

mitigation efforts.

FHA Single-Family Mortgage Insurance

FHA’s Risk Assessment
Page 20 GAO-13-400R

external events, and reputation. In addition, FHA has purchased a performance evaluation tool that is used to 

generate monthly reports that include modeling, surveillance, and analytics of the FHA portfolio.

FHA also has begun addressing our November 2011 recommendations. Specifically, consistent with our 

recommendations, FHA has taken the following actions: 

 

• Integrating risk-assessment efforts. FHA has begun integrating its quality control initiatives into the 

processes of the Office of Risk Management. For example, according to its charter, the Operational Risk 

Committee will develop a process to integrate these efforts. In addition, the Office of Risk Management and 

Regulatory Affairs is reviewing the results of quality control activities as it prepares baseline operational risk 

assessments. 

• Conducting an annual risk assessment. FHA has developed a plan for conducting an inaugural risk 

assessment for the Office of Single Family Housing. It includes preparing baseline operational risk 

assessments and visiting the homeownership centers (field offices that perform many day-to-day functions 

associated with loan endorsement, processing, and lender oversight) and headquarters offices to update 

them. FHA plans to complete the inaugural risk assessment by September 2013. 

• Establishing ongoing mechanisms to anticipate risks. As noted above, FHA has created committees to 

address credit and operational risks. The charters for both committees indicate that they are to discuss and 

address emerging risks. And, as part of the annual risk-assessment process mentioned above, FHA plans to 

identify emerging risks.

However, some of the initiatives taken in response to our recommendations have not been completed or put 

fully in place. They are critical to FHA’s efforts to assess and manage risk.
Page 21 GAO-13-400R

Enclosure I

Human Capital

In November 2011 (GAO-12-15), we reported that single-family loan 

volume had grown significantly from 2006 to 2010, but staffing levels for 

the Office of Single Family Housing had remained relatively constant. 

FHA’s single-family staff increased 8 percent from 2006 to 2010 (see next 

table). Staff at homeownership centers (in the field)—which accounted for 

almost 80 percent of the single-family workforce—increased about 4 

percent. 

Single Family Housing Staff Levels, 2006-2010 

2006 2007 2008 2009 2010 Percentage 

change from 

2006 to 2010

Headquarters 163 162 145 157 212 30

Homeownership centers 769 734 797 780 799 4 

Single Family Housing 

total 

932 896 942 937 1,011 8

Source: FHA.

Note: According to HUD’s 2013 budget justification, in 2011, single-family staff increased to 

1,075—294 at headquarters and 781 at the homeownership centers.

We also identified weaknesses in FHA’s human capital management. 

While FHA had addressed staffing and training needs and succession 

planning to some extent, it lacked plans that strategically addressed future 

workforce needs, including replacing retiring staff.

• Leading organizations use workforce planning practices that include 

defining critical skills and skill gaps, but FHA’s approach did not have 

mechanisms for doing so. Although FHA previously had a workforce 

plan that identified critical competencies, analyzed gaps, and proposed 

comprehensive strategies to address these gaps, it had not created 

another such plan. Instead, FHA relied on occasional studies and 

annual managerial assessments of staffing and training needs. 

• FHA also did not have a current succession plan. (A plan for 2006-

2009 had identified mission-critical positions, analyzed existing staff 

competencies, assessed the number of retirement-eligible employees, 

and determined the probability of near-term retirements.) We noted 

that succession planning was particularly important because, as of 

July 2011, almost 50 percent of Single Family Housing staff at 

headquarters were eligible to retire in the next 3 years. The 

percentage of staff eligible to retire at the homeownership centers was 

even higher—63 percent (see next table).

Background

FHA’s Office of Single Family 

Housing has staff at headquarters 

and four homeownership centers— 

Atlanta, Georgia; Denver, 

Colorado; Philadelphia, 

Pennsylvania; and Santa Ana, 

California. Headquarters staff 

develop policy and manage 

oversight functions, while 

homeownership center staff 

undertake many of the day-to-day 

functions associated with loan 

endorsement, processing, and 

lender oversight.

 

More than 40 information 

technology (IT) systems support 

FHA’s single-family insurance 

programs. Their uses include 

processing loans and financial and 

performance reporting. However, 

FHA has reported that these 

systems are outdated, unable to 

sustain the increasing volume of 

insurance applications, and costly 

to maintain.

FHA Single-Family Mortgage Insurance

Challenges Related to Human Capital and Information 

Systems
Page 22 GAO-13-400R

Percentage of FHA Staff Eligible to Retire within the Next 1, 2, and 3 Years, as of July 2011

Entity Eligible to retire within 1 year Eligible to retire within 2 

years

Eligible to retire within 3 

years

Single-family headquarters staff 39 45 47

Homeownership centers 54 58 63

Source: GAO analysis of FHA data.

We concluded that without a more comprehensive workforce planning process that included succession 

planning, FHA’s ability to systematically identify future workforce needs and plan for upcoming retirements was 

limited. We recommended that FHA develop workforce and succession plans for the Office of Single Family 

Housing.

Since our November 2011 report, FHA has developed a workforce analysis and succession plan that identifies 

gaps in mission-critical competencies and additional steps that need to be taken, although the timing of many of 

these steps is not specified. Completing these steps is critical to ensuring that the agency has adequate staff to 

effectively oversee its mortgage insurance programs.

 

Information Systems

In our November 2011 report, we summarized FHA’s efforts to improve its IT systems. Recent increases in 

FHA’s business volume had exacerbated its IT constraints. A consultant FHA hired to examine technology 

constraints and identify risks related to processing workloads (for single-family programs) reported in 2009 that 

critical elements of IT infrastructure were at capacity, causing work slowdowns and poor customer service. For 

example, network overloads slowed systems in the afternoon, when work hours overlapped at the 

homeownership centers (which are in different time zones). To partially address these issues, HUD upgraded 

the mainframe’s system capacity and made changes to certain applications to improve response time. 

Nevertheless, during a period in which transaction levels continued to increase, FHA had reached the limit of 

hardware and software capacity on IT systems. 

To address system constraints, in August 2009 FHA identified five critical initiatives for its single-family 

insurance programs. These included: (1) implementing a standard automated underwriting system to evaluate 

loan applications and associated data to determine eligibility for insurance and (2) replacing the Computerized 

Home Underwriting Management System (CHUMS)—FHA’s major underwriting system—with an off-the-shelf 

system that would enable the agency to decrease processing times, increase data accuracy, and provide better 

service to its customers.

In January 2010, FHA began working on key aspects of the five initiatives as part of its “FHA Transformation” 

efforts, which HUD initially estimated would cost $281 million over the next 5 years. For example, the agency 

began replacing CHUMS. At that time, we noted that FHA had major components to complete. To meet its goal 

of replacing CHUMS with a new platform, FHA also would have to migrate functions and applications associated 

with loan origination and underwriting, lender approval and monitoring, and loan servicing and administration. In 

addition to these CHUMS components, several other IT systems would have to be moved to the new platform. 

Moreover, the audit of FHA’s 2012 and 2011 financial statements identified a significant deficiency related to IT 

systems, and stated that FHA management and the HUD Office of the Chief Information Officer should mitigate 

persistent IT control deficiencies. A significant deficiency is one or a combination of deficiencies in internal 

control that is less severe than a material weakness, yet important enough to merit attention by those charged 

with governance. The audit report noted that expensive and manual compensating controls, including monthly 

reconciliations of data among the interfaced systems, were needed to manage the numerous systems and that 

security and access controls had weaknesses. (We noted in November 2011 that the large number of systems 

resulted in hundreds of interfaces, which meant that changing one system required extensive effort to maintain 

the interfaces across systems. The multiple systems and interfaces also presented challenges for maintaining 

appropriate accessibility levels, security controls, and privacy standards.) 
Page 23 GAO-13-400R

Enclosure I

Our Prior Work

In July 2009 (GAO-09-836), we found that the higher loan limit enacted by 

HERA might increase the potential for losses. To calculate the amount of 

funds available to a borrower, lenders start with a limiting factor of home 

value or the HECM loan limit, whichever is lower. The increase in the 

HECM loan limit meant that relatively more borrowers would have their 

HECM capped by the home’s value, rather than the loan limit. The 

potential for losses is higher with such a loan because the projected loan 

balance is more likely to exceed the projected home value. When this 

effect is combined with declining home prices, the potential for losses 

increases. Combined with borrowers opting to receive more of their equity 

upfront, HECM loan performance declined dramatically in recent years. 

The independent actuary projected the economic value of the HECM 

portfolio to be negative $2.8 billion at the end of 2012. 

Challenges and Proposed FHA Actions

In its November 2012 annual report to Congress on the insurance fund, 

FHA identified a number of challenges facing HECMs. 

• More borrowers maximizing upfront draw. The vast majority of 

recent borrowers take out 80 percent or more of the maximum amount 

possible in one initial cash draw. Research performed by the 

independent actuaries indicates that HECM loans with such high upfront draws are twice as likely to have a tax-and-insurance default 

(discussed below) than loans with initial draws of 60 percent, and four 

times as likely as loans with initial draws of 40 percent.

• Tax and insurance defaults. For many homeowners, taking all 

eligible cash up front results in insufficient cash flow in later years for 

property upkeep, taxes, and insurance. This affects program 

performance by increasing defaults resulting from borrowers being 

unable or unwilling to make tax and insurance payments. The 

incidence of tax and insurance defaults has increased in recent years.

• Increased property conveyance rates. The conveyance rate upon 

termination increased sharply during this past year. Research 

indicates that this was directly tied to falling home prices. Owners and 

estate executors faced with mortgage balances greater than property 

value at the time of borrower exit from the home are less willing to 

market and sell the property than those with positive equity in the 

home. In such cases, there is no financial benefit from managing the 

property sale and so those responsible for the home are more likely to 

convey the property to HUD for sale. Property management and 

marketing costs associated with the disposition of homes conveyed to 

HUD typically cost approximately 12 percent of property value and 

thus increase the severity of loss for FHA. 

Background

FHA currently insures nearly all 

reverse mortgages. A reverse 

mortgage permits persons 62 

years and older to borrow against 

their homes’ equity. In 2012, FHA 

insured 54,591 reverse 

mortgages under its Home Equity 

Conversion Mortgage (HECM) 

program. Beginning in 2009, 

HECM loans were insured under 

FHA’s Mutual Mortgage 

Insurance Fund. In 2012, HECMs 

totaled $78 billion. In comparison, 

FHA’s portfolio of forward 

mortgages exceeded $1 trillion. 

The Housing and Economic 

Recovery Act of 2008 (HERA) 

made several modifications to the 

HECM program, including 

changing how origination fees are 

calculated and increasing the loan 

limit.

FHA Single-Family Mortgage Insurance

Home Equity Conversion Mortgage Program (Reverse 

Mortgages)
Page 24 GAO-13-400R

• Longevity risk. Borrower mortality and loan termination speeds are now estimated to be slower than 

previous predictions, increasing the likelihood that loan balances will exceed property values at time of loan 

termination. Using these updated longevity predictions results in a lower economic value for the HECM 

portfolio in the actuarial calculations. 

FHA has made or proposed changes to the HECM program designed to address some of these challenges. In 

January 2013, FHA issued guidance stating that it was eliminating the standard, fixed-rate HECM, thereby 

reducing the maximum amount of funds available to a HECM borrower. Further, FHA’s annual report to 

Congress proposed additional revisions to the program, including reducing the amount borrowers can draw at 

the time the HECM loan is originated and issuing new incentives for estate executors of HECM borrowers to 

dispose of properties themselves rather than conveying them to HUD. 
Enclosure II

Related GAO Products

Page 25 GAO-13-400R

High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013.

Foreclosure Mitigation: Agencies Could Improve Effectiveness of Federal Efforts with 

Additional Data Collection and Analysis. GAO-12-296. Washington, D.C.: June 28, 2012.

Mortgage Financing: FHA and Ginnie Mae Face Risk-Management Challenges. GAO-12-

578T. Washington, D.C.: March 29, 2012.

Federal Housing Administration: Improvements Needed in Risk Assessment and Human 

Capital Management. GAO-12-15. Washington, D.C.: November 7, 2011.

Mortgage Financing: Opportunities to Enhance Management and Oversight of FHA’s 

Financial Condition. GAO-10-827R. Washington, D.C.: September 14, 2010.

Reverse Mortgages: Policy Changes Have Had Mostly Positive Effects on Lenders and 

Borrowers, but These Changes and Market Developments Have Increased HUD’s Risk. 

GAO-09-836. Washington, D.C.: July 30, 2009. 

Federal Housing Administration: Modernization Proposals Would Have Program and Budget 

Implications and Require Continued Improvements in Risk Management. GAO-07-708. 

Washington, D.C.: June 29, 2007.

Federal Housing Administration: Decline in the Agency’s Market Share Was Associated with 

Product and Process Developments of Other Mortgage Market Participants. GAO-07-645. 

Washington, D.C.: June 29, 2007.

Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with 

Down Payment Assistance. GAO-06-24. Washington, D.C.: November 9, 2005.

Mortgage Financing: Actions Needed to Help FHA Manage Risks from New Mortgage Loan 

Products. GAO-05-194. Washington, D.C.: February 11, 2005. 

Single-Family Housing: Opportunities to Improve Federal Foreclosure and Property Sale 

Processes. GAO-02-305. Washington, D.C.: April 17, 2002.

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

Uncertain Outcomes. GAO-01-460. Washington, D.C.: February 28, 2001.

Homeownership: Potential Effects of Reducing FHA's Insurance Coverage for Home 

Mortgages. GAO/RCED-97-93. Washington, D.C.: May 1, 1997
Page 26 GAO-13-400R

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