FHA MORTGAGE 

INSURANCE

Applicability of 

Industry Requirements 

Is Limited, but Certain 

Features Could 

Enhance Oversight

Report to Congressional Requesters

September 2013

GAO-13-722

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-722, a report to 

congressional requesters

September 2013

FHA MORTGAGE INSURANCE

Applicability of Industry Requirements Is Limited, 

but Certain Features Could Enhance Oversight 

Why GAO Did This Study

FHA insures private lenders against 

losses from defaults on single-family 

mortgages that meet FHA criteria. 

FHA’s insured portfolio was more than 

$1 trillion at the end of fiscal year 2012. 

The mortgage insurance market also 

includes PMIs regulated by the states. 

Since 2009, FHA’s Fund (under which 

FHA insures almost all its single-family 

mortgages) has not met its statutory 2

percent capital requirement. GAO was

asked to examine the financial 

condition requirements that apply to 

FHA and PMIs. This report examines 

(1) how reserving practices and capital 

requirements for FHA’s Fund compare

with those for PMIs, and (2) how 

applicable PMI practices and 

requirements could enhance Fund 

oversight. 

To address these objectives, GAO 

reviewed accounting standards, federal 

and state laws, regulations, and 

policies; analyzed FHA data; and 

interviewed federal officials and PMI 

industry officials and analysts. 

What GAO Recommends

Congress should consider requiring

FHA to submit a capital restoration

plan and regular updates on 

implementation whenever the Fund’s 

capital ratio does not meet required 

levels. Also, FHA should disclose 

estimates of specific cash flows 

(premiums, claims, and recoveries) 

over time to provide additional 

perspective on the Fund’s financial 

status. FHA generally agreed with 

GAO’s recommendation.

What GAO Found

Reserving practices and capital requirements for the Mutual Mortgage Insurance 

Fund (Fund) of the Federal Housing Administration (FHA) differ in key respects 

from those for private mortgage insurers (PMI). These differences stem from the 

distinct environments in which FHA and PMIs operate, including the particular 

accounting principles and statutory provisions that they must follow. For example, 

statutory accounting principles (developed to meet the needs of insurance 

regulators in assessing financial condition) require PMIs to establish several 

reserve components, including a reserve for estimated losses expected in the 

near term on loans that are delinquent (loss reserve). In contrast, generally 

accepted accounting principles for federal entities (developed to align financial 

statement reporting with federal budget requirements) require FHA to reserve for 

the present value of estimated losses for all outstanding loans net of anticipated 

revenues (liability for loan guarantees). For both FHA and PMIs, capital 

requirements are expressed as comparisons of risk to capital, but the

calculations measure risk and capital differently. Like FHA, PMIs have struggled 

to meet their capital requirements in recent years. 

The PMI regulatory framework has limited applicability to FHA’s Fund, but it has 

certain features that could enhance Fund oversight. Some of the purposes and 

concepts underlying PMI reserving practices and capital requirements are not 

pertinent to FHA. For example, two of the PMI reserve components (the 

unearned premium reserve and the contingency reserve) are intended, in part, to 

prevent PMIs from reducing capital through payment of excessive dividends to 

stockholders. However, the concept of separately disclosing reserve components 

as PMIs do could be applied to the Fund. The PMI loss reserve and unearned 

premium reserve focus on the timing of specific cash flows—the loss reserve on 

near-term insurance claims for delinquent loans and the unearned premium 

reserve on insurance premiums as they are earned over time. In contrast, FHA’s

liability for loan guarantees combines 30-year estimates of future claims, 

premiums, and recoveries into a single number, as required, and does not

disclose the timing of each type of cash flow. Disclosing the timing of specific 

cash flows would help illustrate the extent to which estimates of claims 

payments, premiums, and recoveries in the liability for loan guarantees are 

concentrated in the near term or longer term and therefore more or less certain. 

Such disclosure could enhance congressional oversight of FHA and would be 

consistent with reporting practices of other federal programs and federal internal 

control guidance for communicating externally about an agency’s risks. 

Accountability features of the PMI regulatory framework also could be applied to 

FHA. Unlike FHA, PMIs must take certain actions for noncompliance with their 

capital requirements. These actions may include remediation plans to restore 

capital to required levels and additional reporting. In 2012, FHA provided 

Congress with a set of planned actions to address its capital shortfall, but had not 

done so in prior years. Producing a capital restoration plan when the capital ratio 

fell below the required level could help ensure prompt action by FHA. This type of 

requirement is contained in legislative proposals currently before Congress and 

would be consistent with requirements Congress has enacted for the Federal 

Deposit Insurance Corporation and certain financial institutions.

View GAO-13-722. For more information, 

contact Mathew Scirè at 202-512-8678 or 

sciremj@gao.gov
Page i GAO-13-722 FHA Mortgage Insurance

Letter 1 

Background 4

FHA and Private Insurers Follow Distinct Reserving Practices and 

Capital Requirements 12

Features of the Regulatory Framework for Private Insurers Could 

Enhance Oversight of FHA 22

Conclusions 27

Matter for Congressional Consideration 28

Recommendation for Executive Action 29

Agency Comments and Our Evaluation 29

Appendix I Objectives, Scope, and Methodology 31

Appendix II Comments from the Department of Housing and Urban 

Development 34

Appendix III GAO Contact and Staff Acknowledgments 36

Tables

Table 1: Calculations for FHA and PMI Reserves for Financial 

Accounting Purposes 14

Table 2: Capital Requirements for FHA and PMIs 16

Figures

Figure 1: Budget Accounting for FHA’s Mutual Mortgage Insurance 

Fund 6

Figure 2: FHA’s Share of Loan Originations, 2001-2012 12

Figure 3: FHA Capital Ratio, Fiscal Years 2001-2012 18

Figure 4: Risk-to-Capital Ratios of Selected PMIs, 2001-2012 19

Contents 
Page ii GAO-13-722 FHA Mortgage Insurance

Abbreviations

FASAB Federal Accounting Standards Advisory Board

FCRA Federal Credit Reform Act of 1990

FHA Federal Housing Administration

GAAP generally accepted accounting principles

HERA Housing and Economic Recovery Act of 2008

HUD Department of Housing and Urban Development

MPP minimum policyholders position

PMI private mortgage insurers

PV present value

RHS Rural Housing Service

VA Department of Veterans Affairs

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Page 1 GAO-13-722 FHA Mortgage Insurance

441 G St. N.W.

Washington, DC 20548

September 9, 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

The Federal Housing Administration (FHA), within the Department of 

Housing and Urban Development (HUD), administers single-family 

mortgage insurance programs, which insure private lenders against 

losses on mortgages that finance purchases of properties or that 

refinance existing mortgages. FHA’s insured portfolio was more than $1 

trillion at the end of fiscal year 2012. The insured mortgage market also 

includes private mortgage insurers (PMI), which typically insure loans that 

are sold to either of two housing-related enterprises, Fannie Mae and 

Freddie Mac (the enterprises).1 In recent years, FHA has faced fiscal 

challenges, as has the rest of the mortgage insurance industry. Since 

2009, the Mutual Mortgage Insurance Fund (Fund)—under which FHA 

insures almost all of its single-family mortgages—has not met minimum 

statutory capital requirements. Also, declining balances in the Fund’s 

capital reserve account and higher-than-expected claims on loans insured 

before 2010 have increased the possibility that FHA will require additional 

 

1

The enterprises bundle the mortgages into securities and guarantee the timely payment 

of principal and interest to investors in the securities. On September 6, 2008, the 

enterprises were placed under federal conservatorship because of concern that their 

deteriorating financial condition threatened the stability of financial markets.

 
 

Page 2 GAO-13-722 FHA Mortgage Insurance

funds to have sufficient resources for all future insurance claims on its 

existing portfolio.2

You asked us to examine the financial condition requirements that apply 

to FHA and PMIs. This report discusses (1) how the reserving practices 

and capital requirements of FHA’s Fund compare with those for the PMI 

industry and (2) how, if at all, applicable PMI reserving practices and 

capital requirements could enhance oversight of FHA’s Fund. In a 

companion report, we discuss options for improving FHA’s long-term 

viability and their implications.3

To compare FHA’s reserving practices and capital requirements with 

those of the PMI industry, we identified and reviewed accounting 

standards and federal statutes that apply to FHA’s Fund, limiting our 

scope to forward mortgages.4 We identified and reviewed accounting 

standards, Fannie Mae and Freddie Mac policies, and state statutes and 

regulations that apply to PMIs. We also reviewed information on the 

capital positions of FHA and PMIs from 2001 through 2012, as well as 

PMI financial statements and regulatory reports. In addition, we 

interviewed mortgage market participants and stakeholders, including 

federal officials, state regulators, and major PMIs, to confirm our 

understanding of the practices and requirements. To assess how 

applicable industry practices and requirements could enhance oversight 

 

2

Considering FHA’s financial difficulties, as well as continuing uncertainty over the 

resolution of Fannie Mae and Freddie Mac and the potential impact of their resolution on 

FHA, in February 2013 we included FHA in a high-risk area called “modernizing the U.S. 

financial regulatory system and the federal role in housing finance.” 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. 

We previously had identified “modernizing the U.S. financial regulatory system” as a highrisk area and included a discussion of concerns about the resolution of Fannie Mae and 

Freddie Mac. See GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: 

Feb. 14, 2013).

3

GAO, Federal Housing Administration: Analysis of Options for Modifying Its Products, 

Market Presence, and Powers, GAO-13-682 (Washington, D.C.: Sept. 9, 2013).

4

With forward mortgages, the borrower’s monthly loan payments to the lender add to the 

borrower’s home equity and decrease the loan balance. FHA also insures reverse 

mortgages that permit persons 62 years and older to convert their home equity into cash 

advances. With reverse mortgages, the borrower receives payments from the lender. The 

lender adds the principal and interest to the loan balance, reducing the homeowner’s 

equity. This report focuses on forward mortgages because PMIs do not insure reverse 

mortgages. 
 

Page 3 GAO-13-722 FHA Mortgage Insurance

of FHA’s Fund, we determined the extent to which they would provide 

information to enhance Fund oversight, considering factors such as the 

compatibility of concepts and calculations with FHA operations. We 

interviewed insurance regulators in three states—North Carolina, 

Pennsylvania, and Wisconsin—to identify the information PMIs report that 

regulators use in assessing financial condition. We selected these states

based on criteria including market share of PMIs domiciled in the states 

and diversity of regulatory requirements.5 We also interviewed FHA 

officials, regulators, major PMIs, and other industry analysts to obtain 

perspectives on applying PMI practices and requirements to FHA’s Fund 

and the implications for increased transparency and understanding of the 

Fund’s financial condition. Furthermore, we reviewed annual actuarial 

reviews of the Fund, HUD appendixes to the President’s budget, and 

FHA’s audited financial statements to provide additional perspectives on 

the Fund’s financial condition. To assess the reliability of unaudited data 

we obtained from FHA, we conducted reasonableness checks on data 

elements and discussed the sources and interpretation of the data with 

FHA officials. We determined that this information was sufficiently reliable 

for purposes of characterizing the financial condition of the Fund. See 

appendix I for additional information on our scope and methodology.

We conducted this performance audit from February 2013 to September 

2013 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.

 

5

These states were the domiciliary states and primary regulators for PMIs that, according 

to industry data, accounted for 90 percent of the mortgages insured by PMIs in 2012.
 

Page 4 GAO-13-722 FHA Mortgage Insurance

Established in 1934 under the National Housing Act, FHA operates the 

largest federal mortgage insurance program, which is backed by the full 

faith and credit of the federal government.6 FHA primarily insures forward 

mortgages for initial home purchases and refinancing. Generally, lenders 

require borrowers to purchase mortgage insurance when the initial loanto-value ratio (the amount of the mortgage loan divided by the value of 

the home) exceeds 80 percent. In fiscal year 2012, FHA reported that it 

insured almost 1.2 million forward mortgages representing approximately 

$213 billion in mortgage insurance-in-force. Its reported total amortized 

insurance-in-force on forward loans at the end of fiscal year 2012 was 

$1.07 trillion.7

Three different reviews of the financial condition of the Fund are 

conducted annually. First, the Omnibus Budget Reconciliation Act of 1990 

required an annual independent actuarial study of the economic net worth 

and soundness of FHA’s Fund.8 As part of this review, an independent 

actuary estimates the economic value of the Fund, which FHA uses to 

calculate the Fund’s capital ratio.9 The actuary’s analysis considers the 

net current resources available to the Fund; historical performance of 

existing loans; projected claim, loss, and prepayment rates; and projected 

future economic conditions. The actuarial study is now a requirement in 

the Housing and Economic Recovery Act of 2008 (HERA), which also 

requires that the Secretary of HUD submit an annual report to Congress 

 

6

The Department of Veterans Affairs (VA) and the Department of Agriculture’s Rural 

Housing Service (RHS) administer the other two federal programs that guarantee singlefamily mortgages. RHS operates the government’s smallest mortgage guarantee program.

7

Amortized insurance-in-force is the remaining principal balance on all insured loans 

outstanding. This represents FHA’s potential risk because FHA’s insurance covers 100 

percent of the loan balance.

8

Pub. L. No. 101-508, § 2105.

9

As we will discuss later in this report, the Fund’s economic value is defined as its existing 

net capital resources plus the estimated present value of future net cash flows of existing 

insured loans. The Fund’s capital ratio is the economic value of the Fund divided by the 

amortized insurance-in-force.

Background 

Federal Housing 

Administration 
 

Page 5 GAO-13-722 FHA Mortgage Insurance

on the results of the actuarial study, as well as quarterly status reports on 

the Fund.10

Second, estimates that FHA prepares for the federal budget provide 

another review of the financial condition of the Fund. Specifically, 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.11 Agencies annually 

estimate credit subsidy costs by cohort—the loans agencies commit to 

insure or guarantee in a given fiscal year. The initial credit subsidy cost in 

the year the loans are insured is equal to the net present value of 

estimated lifetime cash flows, excluding administrative costs.12 For a 

mortgage insurance program, cash inflows consist primarily of premiums 

charged to insured borrowers and recoveries from sales of foreclosed 

properties, and cash outflows consist mostly of claim payments to 

lenders. A balance equal to the amount needed to cover estimated net 

future costs is held in the Fund’s financing account. Estimated lifetime 

revenues in excess of this amount are recorded in the Fund’s capital 

reserve account. Historically, FHA has estimated that its loan insurance 

program is a negative subsidy program—that is, the present value of 

estimated cash inflows exceeds the present value of estimated cash 

outflows. On the basis of these negative subsidy estimates, FHA built up 

substantial balances over the years in the capital reserve account. 

Generally, agencies must produce annual updates of their subsidy 

estimates—known as reestimates—for each cohort on the basis of 

updated information on actual performance and new estimates of future 

loan performance. Upward reestimates reflect increases in credit subsidy 

costs (or lower lifetime net revenues) and downward reestimates 

represent decreases in credit subsidy costs (or higher lifetime net 

revenues). Balances in the capital reserve account are transferred to the 

 

10Pub. L. No. 110-289, § 2118.

11Pub. L. No. 101-508. 

12Present value expresses the worth of a future stream of cash inflows and outflows in 

terms of an equivalent lump sum received (or paid) today. Net present value is the present 

value of estimated future cash inflows minus the present value of estimated future cash 

outflows. Because the cash flows occur in the future, they must be discounted to 

determine their net present values. To do this, Office of Management and Budget 

guidance requires FHA to use discount rates that are based on interest rates for U.S. 

Treasury securities. 
 

Page 6 GAO-13-722 FHA Mortgage Insurance

financing account to cover upward reestimates (see fig. 1).13 However, 

since 2009 higher-than-expected claims have depleted funds in FHA’s 

capital reserve account to just over $3 billion at the end of fiscal year 

2012. If the capital reserve account were to be depleted and FHA 

required additional funds in the financing account to meet budget 

reestimate requirements, HUD would need to draw on permanent and 

indefinite budget authority, as authorized by FCRA. The President’s fiscal 

year 2014 budget contained a $22 billion upward credit subsidy 

reestimate for the Fund and indicated that the reestimate would deplete 

FHA’s capital reserve account in 2013, potentially causing FHA to draw 

on $943 million in permanent and indefinite budget authority.

Figure 1: Budget Accounting for FHA’s Mutual Mortgage Insurance Fund

a

The financing account appears in the budget for informational and analytical purposes, but is not 

included in the budget totals for budget authority or outlays. It is required to record lifetime cash flows 

for loans insured in 1992 and thereafter.

Third, FHA’s audited financial statements also include a review of the 

Fund. FHA’s financial statements are prepared according to generally 

accepted accounting principles in the United States applicable to federal 

agencies (federal GAAP) as promulgated by the Federal Accounting 

 

13The Fund also has a program account, which receives appropriations for the 

administrative and subsidy costs of a credit program and records the budget authority and 

outlays for these costs. The program account is used to pay the associated subsidy cost 

to the financing account when a guaranteed loan is disbursed. 
 

Page 7 GAO-13-722 FHA Mortgage Insurance

Standards Advisory Board (FASAB).14 Federal GAAP requires that FHA 

calculate its liability for loan guarantees for its loan insurance 

commitments on a present value basis.15 The liability for loan guarantees 

represents net losses FHA expects on its outstanding insurance 

portfolio.16 The use of the present value accounting method is consistent 

with budgeting requirements under FCRA. Under federal GAAP, FHA 

recognizes potential lifetime losses and revenues at the point it insures a 

loan.

The private mortgage insurance industry dates to the 1880s. According to 

an industry consultant report, the industry went bankrupt during the 

housing collapse of the early 1930s but reemerged in the mid-1950s after 

drawing on lessons learned from its prior failure.17 These lessons included 

the need for laws and regulations to help ensure that PMIs were prepared 

for economic shocks. Most residential mortgages insured by PMIs are 

sold to the enterprises. The enterprises have a statutory requirement to 

obtain credit enhancement on single-family residential mortgages 

purchased with loan-to-value ratios of over 80 percent, and private 

mortgage insurance is the major credit enhancement they use. In 2012, 

the PMI industry, which consisted of six active PMIs and their affiliates, 

reported that PMIs insured about 416,000 mortgages representing 

approximately $175 billion in mortgage insurance.

PMIs are regulated by the states in which they do business, with the state 

of domicile (that is, the state in which a PMI is chartered) providing 

primary regulatory oversight. Each state conducts financial oversight of 

the companies operating in its jurisdiction to help ensure that 

policyholders receive the insurance benefits they are entitled to receive. 

 

14The term “generally accepted accounting principles” has a specific meaning for 

accountants and auditors. The American Institute of Certified Public Accountants Council 

has designated FASAB as the independent body that establishes generally accepted 

accounting principles for federal entities.

15The VA and RHS single-family mortgage guarantee programs also follow federal GAAP.

16The liability for loan guarantees applies to insurance commitments made on or after 

October 1, 1991.

17Promontory Financial Group, LLC, The Role of Private Mortgage Insurance in the U.S. 

Housing Finance System, a report prepared at the request of Genworth Financial, Inc., 

January 2011. 

Private Mortgage 

Insurance Industry
 

Page 8 GAO-13-722 FHA Mortgage Insurance

State laws and regulations limit the risk PMIs can assume through means 

such as reserve and capital requirements, investment and risk 

concentration restrictions, and restrictions on activities other than 

mortgage-related insurance. The PMIs also must comply with the 

enterprises’ requirements in order for the mortgages they insure to be 

eligible for sale to the enterprises.

PMIs file audited financial statements, which are prepared in accordance 

with statutory accounting principles, with insurance regulators. Statutory 

accounting principles historically have been those practices or procedures 

prescribed or permitted by an insurer’s domiciliary state through statutes, 

regulations, and practices. The National Association of Insurance 

Commissioners has standardized and incorporated these principles in its 

Accounting Practices and Procedures manuals (which provide a 

comprehensive guide of statutory principles) and other publications.18

Statutory accounting principles were developed to meet the needs of 

insurance regulators, who are focused on insurers’ solvency and ability to 

satisfy their obligations to policyholders and creditors—in particular, to 

pay future claims. Under statutory accounting principles, PMIs recognize 

potential losses once loans become delinquent and recognize premium 

revenues over the period the insurance is outstanding.

In addition to reporting based on statutory accounting principles, many of 

the parent companies of PMIs also publicly report their financial results 

using private-sector GAAP in quarterly and annual filings with the 

Securities and Exchange Commission. The objectives of GAAP reporting 

differ from the objectives of statutory accounting principles reporting. 

GAAP is designed to meet the varying needs of different users of financial 

statements, while statutory accounting principles are designed to address 

concerns of regulators, as previously noted. Although statutory 

accounting principles incorporate private-sector GAAP guidance for 

certain principles, the two sets of accounting principles have differences. 

Statutory accounting principles are more conservative than private-sector 

 

18The National Association of Insurance Commissioners is the voluntary association of the 

heads of insurance departments from the 50 states, the District of Columbia, and five U.S. 

territories. While it does not regulate insurers, according to association officials, it does 

provide services designed to make certain interactions between insurers and regulators 

more efficient. According to the association, these services include providing detailed 

insurance data to help regulators analyze insurance sales and practices; maintaining a 

range of databases useful to regulators; and coordinating regulatory efforts by providing 

guidance, model laws and regulations, and information-sharing tools. 
 

Page 9 GAO-13-722 FHA Mortgage Insurance

GAAP—for example, they do not recognize certain assets recognized 

under private-sector GAAP.19

Although FHA and PMIs both provide mortgage insurance to first-time 

home buyers and others seeking low down-payment mortgages, their 

mortgage insurance programs differ in several respects. Some of these 

differences include:

• Coverage. FHA insurance covers 100 percent of the principal balance 

of each loan, whereas PMIs generally cover from 20 to 30 percent of 

the loan balance, usually based on what the enterprises require.20

• Premiums. FHA collects both an up-front premium (paid at loan 

origination) and annual premiums (paid in monthly installments) from 

all borrowers. PMIs generally charge either premiums paid in monthly 

installments or a single premium (one payment at loan origination that 

fully pays for the insurance policy).21

• Minimum down payment. To meet the requirements of the 

enterprises, PMI-insured loans generally have higher down payments 

than those insured by FHA. One PMI representative told us that a 

small portion of PMIs’ insured loans have a down payment of less 

than 5 percent. In contrast, more than 70 percent of the loans FHA 

insured in 2012 had a down payment of less than 5 percent.22

 

19We previously described some of the differences between private GAAP and statutory 

accounting principles in the context of risk retention groups. See appendix III in GAO, Risk 

Retention Groups: Common Regulatory Standards and Greater Member Protections Are 

Needed, GAO-05-536 (Washington, D.C.: Aug. 15, 2005).

20FHA may recover a portion of each claim amount through disposition methods including 

sales of foreclosed properties. FHA estimates that its claim payout net of recoveries is 

generally between 50 and 75 percent of the balance of a guaranteed loan. PMI coverage 

limits are generally imposed by state law.

21According to a representative of the Mortgage Insurance Companies of America, a PMI 

trade association, about 25 percent of insured borrowers pay for mortgage insurance with 

a single premium.

22Borrowers purchasing a home with an FHA-insured mortgage are required by statute to 

make a cash investment of at least 3.5 percent of the current purchase price. This 

investment may come from the borrowers’ own funds or from certain third-party sources.

Differences between FHA 

and Private Insurer 

Programs and Market 

Roles
 

Page 10 GAO-13-722 FHA Mortgage Insurance

• Borrower qualifications. PMIs generally require their borrowers to 

have higher credit scores and lower debt service-to-income ratios 

than does FHA.23

• Recoveries. FHA generally receives significant recoveries on the sale 

of foreclosed properties. According to officials from one PMI, it is 

generally not in a PMI’s best interest to take possession of foreclosed 

properties. Instead, PMIs usually pay their coverage percentage 

multiplied by the sum of the unpaid loan balance and allowable 

foreclosure related expenses.

FHA and PMIs also have different operational goals and market roles. 

Most PMIs are publicly traded companies or subsidiaries of such 

companies, which have a responsibility to provide a return on investment 

to their shareholders. FHA’s statutory operational goals are to minimize 

the default risk to the Fund and homeowners and provide mortgage 

insurance to traditionally underserved borrowers, which FHA defines as 

including first-time homebuyers, minorities, low-income families, and 

residents of underserved communities.24 FHA traditionally has played a 

particularly large role among such borrowers. FHA generally is thought to 

promote stability in the market by ensuring the availability of mortgage 

credit in areas that may be underserved by the private sector or 

experiencing economic downturns. By expanding its presence when the 

private market contracts, FHA plays a countercyclical role in the mortgage 

market. FHA typically does not restrict its business or change the terms 

under which it provides mortgage insurance in economically distressed 

geographic locations. FHA must ensure that any changes to the terms 

and conditions for mortgage insurance comply with fair lending laws and 

its obligation to affirmatively further fair housing. However, PMIs may 

change the conditions under which they will provide new insurance in a 

geographic area to reflect the increased risk of losses in an area 

experiencing economic hardship. For example, in previous work we found 

that by tightening the terms of the insurance they would provide, PMIs 

may have decreased their share of the market in economically stressed 

 

23The debt service-to-income ratio represents the percentage of a borrower’s income that 

goes toward all recurring debt payments, including mortgage payments.

2412 U.S.C. § 1708(a)(7).
 

Page 11 GAO-13-722 FHA Mortgage Insurance

regions of the country during regional economic downturns in the late 

1980s.25

Consistent with its countercyclical role, FHA’s market share expanded 

during the recent mortgage crisis. According to HUD’s U.S. Housing 

Market Conditions, FHA’s share of the market for home purchase 

mortgages (in terms of loan originations) grew sharply, rising from 

approximately 4.5 percent in 2006 to approximately 26.1 percent in 2012. 

In addition, FHA’s share of the entire mortgage market (including 

refinance activity) rose dramatically after 2007, and stood at 14.6 percent 

in 2012 (see fig. 2). According to data from Inside Mortgage Finance, 

FHA’s share of the insured mortgage market as of the end of 2012 was 

45 percent as measured by annual dollar volume, down from 71 percent 

in 2009.26

 

25GAO, Homeownership: FHA’s Role in Helping People Obtain Mortgages, 

GAO/RCED-96-123 (Washington, D.C.: Aug. 13, 1996).

26These data may somewhat overstate FHA’s share of the insured market because they 

do not include loans guaranteed by RHS. Data from HUD’s U.S. Housing Market 

Conditions, which capture the number of loans insured annually, also show a sharp 

decline in FHA’s market share over that period (from 72 percent in 2009 to 57 percent in 

2012) but also may overstate FHA’s market share because they do not include loans 

guaranteed by RHS or mortgages insured by all PMIs. 
 

Page 12 GAO-13-722 FHA Mortgage Insurance

Figure 2: FHA’s Share of Loan Originations, 2001-2012

Reserving practices and capital requirements for FHA’s Fund differ in key 

respects from those for PMIs. These differences stem from the distinct 

environments in which FHA and PMIs operate, including the particular 

accounting principles and statutory provisions that they must follow. For 

both FHA and PMIs, capital requirements are expressed as ratios that 

compare risk and capital, but these terms have different meanings in the 

PMI and FHA contexts.

From an accounting perspective, certain reserves are recorded as 

liabilities on an entity’s balance sheet to account for net future obligations 

and unearned revenue. Under their respective accounting principles, FHA 

and PMIs follow different reserving practices to prepare their audited 

financial statements. Under federal GAAP, FHA effectively has one 

reserve, the liability for loan guarantees. It is calculated by estimating the 

net present value of expected future cash flows for all outstanding loans 

(anticipated losses less anticipated future revenue).

FHA and Private 

Insurers Follow 

Distinct Reserving 

Practices and Capital 

Requirements 

FHA and Private Mortgage 

Insurers Establish 

Different Types of 

Reserves under Their 

Respective Accounting 

Principles
 

Page 13 GAO-13-722 FHA Mortgage Insurance

In contrast, under statutory accounting principles, PMIs establish up to 

four separate reserve components, as follows:27

• Unearned premium reserve. This reserve represents the amount of 

insurance premiums that have been collected but not yet earned. 

Premiums paid in advance (single premiums) generally would be 

earned over time based on a schedule specified by a PMI’s 

domiciliary state. 

• Contingency reserve. This reserve represents half of the insurance 

premiums earned each year for the previous 10 years in order to build 

up a countercyclical capital buffer.28 This reserve also prevents a PMI 

from paying out excessive dividends to shareholders during profitable 

times to preserve its ability to pay claims during economic downturns. 

A PMI may release funds, with regulatory approval, if necessary, from 

this reserve to increase its statutory surplus when losses incurred in a 

year exceed 35 percent of premiums earned that year.29

• Loss reserve. This reserve represents expected losses on loans that 

become delinquent. Because the reserve is for loans that are already 

delinquent, it represents an estimate of losses that are likely to occur 

in the near term.

• Premium deficiency reserve. This reserve is intended to cover the 

difference between future losses and existing reserves plus future 

premiums, if future losses are greater. More specifically, it represents 

the amount by which the present value of estimated future losses 

(less future uncollected premium revenues on all loans outstanding) 

 

27We focus on PMI requirements under statutory accounting principles rather than privatesector GAAP because they are the requirements used by regulators to assess solvency.

28According to PMI representatives and state insurance regulators, the countercyclical 

purpose of the contingency reserve is to build up capital during periods when losses are 

minimal to protect policyholders against losses during periods of extreme economic 

contraction. 

29Statutory surplus consists of capital stock, gross paid-in and contributed surplus, and 

unassigned funds (surplus), among other items. Components of unassigned funds 

(surplus) include net income or retained earnings (which increase it) and dividends to 

stockholders (which reduce it). Changes to the contingency reserve are recorded against 

unassigned funds (surplus)—for example, funds released from the contingency reserve 

increase it. However, the contingency reserve is considered capital in determining a PMI’s 

risk-to-capital ratio, as discussed later in this report.
 

Page 14 GAO-13-722 FHA Mortgage Insurance

exceeds the sum of the contingency reserve, loss reserve, and 

unearned premium reserve.

The differences between FHA and PMI reserving practices stem from the 

different accounting principles these entities are required to follow and the 

different purposes these principles serve. Table 1 shows how FHA and 

PMI reserves are calculated. FHA’s practice of reserving for anticipated 

net losses follows federal GAAP, which emphasizes the consistent 

calculation of long-term costs to the government of the subsidies 

associated with insurance, direct loans, and loan guarantees and 

supports budgeting under FCRA. As previously noted, federal GAAP 

accounts for estimated lifetime losses and revenues on insurance, direct 

loans, and guarantee activities on a present value basis in the fiscal year 

in which the commitment to insure, originate, or guarantee a loan occurs. 

In contrast, PMIs follow statutory accounting principles under which 

potential losses are recognized in the loss reserve component when 

loans become delinquent and revenues are recognized as they are 

earned over the coverage period.

Table 1: Calculations for FHA and PMI Reserves for Financial Accounting Purposes

Entity Reserve Calculation

FHA Liability for loan guarantees (Present value (PV) of future losses) minus (PV of future revenues) on all outstanding 

loans.

PMI 

Unearned premium reserve (Premiums paid in advance) minus (portion of premiums earned).

Contingency reserve One-half of premiums earned during the previous 10 years, unless incurred losses 

exceed 35 percent of earned premiums.

Loss reserve (Insured portion of the loan balance for delinquent loans) multiplied by (estimated 

percentage that will result in claims) multiplied by (estimated loss severity). This is 

calculated on a nominal basis (not discounted).

Premium deficiency reserve (PV of future losses) minus (PV of future revenues) on all outstanding loans minus 

(contingency reserve) minus (loss reserve) minus (unearned premium reserve), if result 

is positive. If revenues are greater than losses, no amount is recorded.

Source: GAO.

Despite these differences, a present value calculation of future cash flows 

is used in both the PMI premium deficiency reserve and the FHA liability 

for loan guarantees.30 Specifically, FHA’s liability for loan guarantees is 

 

30Although the type of calculation is similar, FHA and PMIs may use different economic 

assumptions to perform the calculations.
 

Page 15 GAO-13-722 FHA Mortgage Insurance

equal to the net present value of expected future cash flows for all 

outstanding loans (anticipated losses less anticipated future revenue). 

PMIs also calculate the net present value of expected future cash flows, 

but rather than establishing reserves equal to this amount, PMIs compare 

it with the sum of their existing loss reserves, contingency reserves, and 

unearned premium reserves. If the net present value of expected future 

losses exceed the combination of these three reserve components, PMIs 

establish a premium deficiency reserve to make their total reserves equal 

to their anticipated net losses (if not, there is no liability for a premium 

deficiency).31 PMIs generally have not had to establish premium 

deficiency reserves because the sum of their existing reserves has been 

greater than the net present value of expected future losses. This reflects 

the conservative nature of reserving practices under statutory accounting 

principles.

FHA and PMIs both calculate ratios for capital relative to risk outstanding, 

but the calculations measure capital and risk differently (see table 2). As 

noted earlier, the capital position of FHA’s Fund is assessed annually by 

an independent actuary. By statute, the Fund’s economic value—existing 

net capital resources plus the present value of future net cash flows of all 

currently insured loans—must be at least 2 percent of the remaining 

principal balance on all insured loans in the Fund (amortized insurancein-force).32 In contrast, PMIs are subject to two capital requirements—a 

risk-to-capital ratio not to exceed 25 to 1 and a minimum policyholders 

position (MPP) that varies based on the loan-to-value ratio and coverage 

percentage of the mortgages insured.33 The risk-to-capital ratio, which is 

required by 12 states, compares statutory surplus and contingency 

 

31In circumstances when a premium deficiency reserve is necessary, a PMI’s total 

reserves would be conceptually equivalent to a liability for loan guarantees. In 

circumstances when a premium deficiency reserve is not necessary, a PMI’s total 

reserves conceptually would exceed a liability for loan guarantees. However, as noted 

earlier, FHA and PMIs may use different economic assumptions to perform the 

calculations.

32As noted earlier, the remaining principal balance on all insured loans in the Fund 

represents FHA’s potential risk because FHA’s insurance covers 100 percent of the loan 

balance.

33Thirty-four states do not have specific capital requirements for PMIs. Because PMIs 

operate nationally, they are all effectively subject to both the risk-to-capital ratio and MPP 

requirements. 

FHA’s Statutory Capital 

Requirement Differs from 

Private Insurers’ 

Requirements
 

Page 16 GAO-13-722 FHA Mortgage Insurance

reserves with the insured portion of the remaining balance on performing 

loans (risk-in-force).34 The MPP, which is required by four states, 

establishes the amount of funds a PMI must have currently available to 

pay claims using a percentage of the initial balances of insured loans. 

PMIs may use a combination of statutory surplus, contingency reserves, 

and unearned premium reserves to meet the MPP requirement. PMIs’ 

statutory surplus includes premium revenues earned to date. Consistent 

with how revenues are recognized under their respective accounting 

principles, capital in the PMI context does not include estimated future

revenues for existing insurance, while capital in the FHA context does. In 

addition, for the PMI risk-to-capital ratio, risk is assessed based on 

performing loans (because the risk for nonperforming loans has been 

reserved for), while for the FHA capital ratio, risk is assessed based on all 

loans.

Table 2: Capital Requirements for FHA and PMIs

FHA PMIs 

Measure Capital ratio Risk-to-capital ratio Minimum policyholders position

Source of requirement Federal statute Statutes or regulations of 12 

states

Statutes or regulations of 4 states

Basic calculation = Capital

Risk = RiskCapital = Risk × specified percentagea

Elements of capital Total assets minus total liabilities 

plus PV of future cash flows on 

insured loansb

Statutory surplus plus 

contingency reserves

Statutory surplus plus

contingency reserves plus

unearned premium reserves

Elements of risk Remaining balance on all insured 

loans in the Fund

Insured portion of the remaining 

balance on performing loans

Initial balances of insured loans

Required level Greater than or equal to 2 

percent

Less than or equal to 25:1c Varies by loan-to-value ratio and 

coverage amount

Who calculates Independent actuary PMI

Frequency of calculation Annually Quarterly

Source: GAO.

a

These percentages are specified in various states’ statutes or regulations.

b

PV equals present value.

c

A risk-to-capital ratio that is less than or equal to 25:1 is mathematically equivalent to a capital to risk 

ratio that is greater than or equal to 4 percent.

 

34Risk-in-force on performing loans is equal to total risk-in-force minus risk-in-force on 

delinquent loans minus risk-in-force on ceded reinsurance contracts. Reinsurance is the 

practice of ceding a portion of a PMI’s risk (with corresponding premiums) to another 

insurance company as a means of risk management.
 

Page 17 GAO-13-722 FHA Mortgage Insurance

FHA has not met its capital requirement for the last 4 years (see fig. 3).35

FHA met the 2 percent capital ratio from fiscal years 2001 through 2008, 

with a high of 6.82 percent for forward mortgages in the Fund. However, 

the ratio 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 amortized insurance-in-force (the denominator of the 

capital ratio). By the end of fiscal year 2012, the ratio had fallen to a 

negative 1.28 percent for single family forward loans (and a negative 1.44 

percent for forward and reverse loans combined). The 2012 actuarial 

report shows that the negative economic value for forward loans is 

composed of capital assets of $25.6 billion and estimated future cash 

flows of negative $39.1 billion. Forward loans guaranteed prior to fiscal 

year 2011 have estimated negative future cash flows and loans 

guaranteed in fiscal years 2011 and later have estimated positive future 

cash flows. According to the baseline estimate in the 2012 actuarial 

report, the Fund’s capital ratio is not estimated to rise above the statutory 

2 percent level until fiscal year 2017.36 In 2001, we found that setting a 

minimum or target capital ratio may not be appropriate for all of the 

circumstances the Fund may face. We therefore recommended that 

Congress or HUD determine the economic conditions the Fund would be 

expected to withstand without drawing on permanent and indefinite 

budget authority.37 Congress has considered but not enacted legislation 

consistent with this recommendation.38 In addition, HUD disagreed with 

this recommendation at the time of the report and has not acted upon it.

 

35In fiscal year 2009, the reverse mortgage program was added to the Fund. Since then, 

the 2 percent statutory requirement has applied to forward and reverse mortgages 

combined.

36The baseline estimate is an average of 100 separate estimates based on 100 

stochastically-generated scenarios of future economic conditions. Some of these 

scenarios generate significantly better or significantly worse outcomes than this baseline 

average. 

37GAO, 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).

38For example, see H.R. 3995, 107th Cong. (2002).
 

Page 18 GAO-13-722 FHA Mortgage Insurance

Figure 3: FHA Capital Ratio, Fiscal Years 2001-2012

Note: In fiscal year 2009, the reverse mortgage program was added to the Fund. Since then, the 2 

percent statutory requirement has applied to forward and reverse mortgages combined.

As shown in figure 4, PMIs also have struggled to meet their capital 

requirements in recent years, and regulators forced three large PMIs to 

cease writing new business for failing to meet these requirements. PMIs 

have relied heavily on capital and surplus contributions from outside 

investors and their parent companies to meet their capital requirements. 

To illustrate, from 2008 through 2012, three of the four largest PMIs 

received capital and surplus contributions that were greater than their 

total capital as of the end of 2012. In addition, these PMIs completely 

exhausted their contingency reserves. Ceding risk to reinsurance 

companies and higher-quality books of business in recent years also 

have helped PMIs to lower their risk-to-capital ratios. In contrast, FHA 

(which has not met its capital requirement) has continued to write new 

business, as authorized through annual appropriations acts, and would 

not receive additional funding through permanent and indefinite budget 
 

Page 19 GAO-13-722 FHA Mortgage Insurance

authority until it is needed to help cover an upward credit subsidy 

reestimate.39

Figure 4: Risk-to-Capital Ratios of Selected PMIs, 2001-2012

Note: The risk-to-capital ratios in the figure include capital and surplus contributions from outside 

investors and parent companies. Radian Guaranty was granted waivers that were in effect in 2012 by 

10 states. Genworth Mortgage Insurance Company was granted waivers that were in effect in 2012 

by 11 states. Mortgage Guaranty Insurance Corporation was granted waivers that were in effect in 

2012 by 8 states.

PMIs face several potential consequences when their risk-to-capital ratios 

rise above the statutory ceiling of 25:1. When a PMI fails to meet state 

regulatory requirements, it must stop writing new business or receive a 

 

39As noted earlier, upward reestimates reflect increases in credit subsidy costs (or lower 

lifetime net revenues).
 

Page 20 GAO-13-722 FHA Mortgage Insurance

waiver from the state to continue operating.40 If a PMI is forced to stop 

writing new business, the PMI continues to insure existing business 

(collecting premiums and paying claims) until all current business is 

extinguished. If a PMI receives a waiver, the PMI still can write new 

business, but the regulator imposes restrictions and conditions on the 

PMI. According to state regulators we interviewed, they consider a 

number of factors when deciding to grant a waiver. In general, waivers 

are granted if the state regulator decides that the PMI can return to 

profitability. Requirements for PMIs that have been granted waivers differ 

by state, but may include increased frequency of financial reporting, 

actuarial reviews, remediation plans, and regulatory approval of dividend 

payments. Prior to breaching the 25:1 ceiling or MPP requirement, three 

of the four largest PMIs applied for and were granted waivers by many of 

the 16 states that require them.

The enterprises also impose financial requirements on PMIs. Before the 

financial crisis, the enterprises required PMIs to maintain at least an AArating from two credit rating agencies. However, the enterprises consider 

this requirement to be obsolete because no PMIs currently meet the 

rating level. Instead, the enterprises have established remediation plans 

that include alternative requirements for the PMIs. These remediation 

plans allow the PMIs to continue insuring loans that are eligible for 

purchase by the enterprises, but include provisions intended to increase 

PMI transparency and reporting. Although each plan is different, the 

enterprises and PMIs told us that the plans generally required enhanced 

disclosure, regular meetings with the enterprises, and specific actions, 

including

• raising capital;

• maintaining a minimum level of liquid assets;

• obtaining waivers from state capital requirements; or

• creating subsidiaries licensed in states where waivers were not 

granted.

 

40In some situations where PMIs were not granted state waivers, they established 

subsidiaries to conduct business in that state, subject to the approval of the PMI’s 

domiciliary state and the subsidiary’s ability to meet the requirements of the state in which 

it will conduct business.
 

Page 21 GAO-13-722 FHA Mortgage Insurance

In contrast to the PMIs, the statute that established FHA’s 2 percent 

capital ratio requirement does not define consequences if the ratio falls 

below the required level. In 2012 and again in 2013, legislation was 

introduced that would require FHA to develop an emergency capital plan 

to restore the Fund’s fiscal solvency and provide monthly reports to 

Congress on the condition of the Fund and any remediation steps taken 

that month.41 However, as of August 2013, this legislation had not been 

enacted.

State regulators and the Federal Housing Finance Agency (the regulator 

and conservator for the enterprises) have been considering ways to 

strengthen the financial condition requirements for PMIs, including capital 

requirements. The National Association of Insurance Commissioners has 

formed a working group that has been considering proposed capital 

requirements that would vary depending on the risk characteristics of the 

loans being insured (such as the loan-to-value ratio and borrower credit 

score). More specifically, PMIs would need to hold more capital for riskier 

loans than for loans with less risk. This approach contrasts with the fixed 

risk-to-capital ratio that currently applies. Eight PMIs issued a joint 

statement to the working group agreeing with this basic approach. The 

Federal Housing Finance Agency also has been working with the 

enterprises to develop new capital requirements for PMIs. Agency 

officials told us that the current risk-to-capital ratio requirements were not 

sufficient because they do not account for differences in loan risks, 

provide assurance of financial viability under severe stress scenarios, or 

differentiate between liquid and illiquid capital (that is, capital readily 

available to pay claims or not). The officials said that they expect to issue 

the new requirements by the end of 2013.

 

41H.R. 4264, the FHA Emergency Fiscal Solvency Act of 2012, was introduced in the 

House of Representatives in March 2012 and passed the House of Representatives on 

September 11, 2012. It was referred to the Senate, but was not voted on. H.R. 1145, the 

FHA Emergency Fiscal Solvency Act of 2013, was introduced in the House of 

Representatives in March 2013; H.R. 2767, the Protecting American Taxpayers and 

Homeowners Act of 2013, was introduced in the House of Representatives in July 2013; 

and S. 1376, the FHA Solvency Act of 2013, was introduced in the Senate in July 2013.
 

Page 22 GAO-13-722 FHA Mortgage Insurance

Certain features of the states’ regulatory framework for PMIs could 

enhance oversight of FHA by increasing transparency and accountability. 

Although the PMI industry’s reserving practices have limited applicability 

to FHA, separately disclosing reserve components for FHA would provide 

additional insight into FHA’s financial condition that is not readily apparent 

with current reporting. PMI capital requirements also have limited 

applicability to FHA because they involve concepts that are not 

meaningful in the context of a federal program. However, certain 

consequences PMIs face for not meeting capital requirements—

remediation plans and additional reporting—could be applied to FHA to 

enhance agency accountability.

The PMI industry’s reserving practices and capital requirements have 

limited applicability to FHA’s Fund because some of the underlying 

purposes and concepts are not pertinent to a federal credit program. For 

example, two of the liabilities that PMIs record under statutory accounting 

principles—unearned premium reserves and contingency reserves—are 

intended, in part, to protect policyholders by limiting payment of excessive 

dividends to stockholders, which reduce capital. The unearned premium 

reserve does this by matching revenues with the time periods in which 

they are earned rather than when they are received. This prevents PMIs 

from using unearned premiums to increase the surplus from which they 

pay dividends. The contingency reserve serves a similar purpose by 

setting aside half of earned premiums for 10 years. Because FHA does 

not pay dividends and virtually all of the premium revenues FHA receives 

remain in the Fund, a reserve for the purpose of preserving capital by 

preventing dividend payments is not needed.

A third liability that PMIs record, the loss reserve, also has limited 

applicability to FHA’s Fund because its purpose is to demonstrate to 

regulators that PMIs have sufficient resources today to pay claims to 

policyholders for anticipated losses on already-delinquent loans. The loss 

reserve is therefore a tool to mitigate a PMI’s liquidity risk—the risk of not 

having the capacity and perceived capacity to meet demands for cash. 

FHA does not face the same liquidity risk that PMIs do because the 

Fund’s financing account holds balances to cover expected future claims 

on existing loans, and FHA can draw upon permanent and indefinite 

budget authority to pay claims, if necessary. In addition, FHA includes 

Features of the 

Regulatory 

Framework for 

Private Insurers 

Could Enhance 

Oversight of FHA

Industry Practices and 

Requirements Have 

Limited Applicability to 

FHA’s Fund
 

Page 23 GAO-13-722 FHA Mortgage Insurance

estimates of losses on delinquent loans (and performing loans) in its 

liability for loan guarantees.42

Certain PMI reserves have other purposes that are pertinent to FHA, but 

FHA addresses them by other means. Although most unearned premium 

is not refundable, an additional purpose of the unearned premium reserve 

is to reflect a PMI’s refund liability in the event that the mortgage 

insurance policy is cancelled before premiums are fully earned. FHA 

accounts for premium refunds by including the amount of premiums that 

are expected to be refunded in its estimates of future cash flows. One 

purpose of the contingency reserve is to build up a capital buffer to help 

cover claims during economic downturns. While not fixed to a percentage 

of premiums like the contingency reserve, FHA’s capital reserve account 

holds all premiums in excess of anticipated claims and is available to pay 

higher-than-anticipated claims. Furthermore, calculating the current levels 

of these reserves would be difficult. For example, determining FHA’s 

contingency reserve liability is complicated by the fact that this liability 

may be reduced if incurred losses exceed 35 percent of earned 

premiums—a threshold FHA likely exceeded in recent years.43

PMI capital requirements also have limited applicability to FHA because 

they rely on definitions and components of capital that are not directly 

 

42Although the purpose of the loss reserve has limited applicability to FHA, it is 

nevertheless possible to calculate a loss reserve amount for the Fund. According to FHA 

data, the risk-in-force for loans 90 days or more delinquent or in foreclosure or bankruptcy 

as of September 30, 2012, was $107.7 billion. According to FHA, the estimated transitionto-claim rate for those loans was nearly 72 percent, and the estimated loss severity was 

about 61 percent. Using these data, the loss reserve would have been $47 billion as of 

September 30, 2012.

43FHA likely exceeded the 35 percent threshold because (1) although FHA does not 

calculate incurred losses or earned premiums as a PMI does, FHA’s claims payments as 

a percentage of premiums collected have exceeded 40 percent each year dating back to 

fiscal year 2000; and (2) our review of PMI financial statements indicated that using claims 

payments as a percentage of premiums collected (instead of incurred losses as a 

percentage of earned premiums) would tend to understate the actual loss ratio.
 

Page 24 GAO-13-722 FHA Mortgage Insurance

relevant to FHA’s operating environment.44 Specifically, PMIs use 

statutory surplus and contingency reserves from the statutory financial 

statements they file with insurance regulators to determine their capital. 

Statutory surplus includes components that FHA’s Fund does not have, 

including capital stock and gross paid-in and contributed surplus, which 

reflect the various means that PMIs use to raise capital.45 FHA’s capital 

does not have these components and consequently, they cannot be 

calculated for FHA. For example, as a federal agency, FHA does not 

have stock or stockholders. FHA’s capital comes almost exclusively from 

premiums and minimal interest income. For PMIs, retained earnings—an 

entity’s net income since its inception—increase statutory surplus, and 

dividends paid to stockholders decrease it. The retained earnings or 

losses component of PMIs’ capital is somewhat similar to the net position 

of FHA’s Fund.46 However, FHA’s net position reflects estimates of 

lifetime premiums net of claims, while PMIs’ retained earnings reflect, 

among other things, revenues earned and losses incurred (on delinquent 

loans) to date.

 

44Nevertheless, because PMI capital requirements are expressed as a proportion of either 

risk-in-force or unamortized insurance-in-force, it is possible to calculate the dollar amount 

of capital that FHA would need under these requirements. For example, according to FHA 

data, as of September 30, 2012, FHA had a risk-in-force on performing loans of $961.3 

billion. Applying a 25:1 risk-to-capital ratio to this amount, FHA would need $38.4 billion in 

capital. However, because FHA makes recoveries on foreclosed properties, FHA’s 

effective risk-in-force could be 30-35 percent lower. If FHA’s risk-in-force was reduced by 

this amount, FHA would need from $25.0 billion to $26.9 billion in capital. However, for the 

reasons previously cited, calculating FHA’s actual capital level using the PMI definition of 

capital is problematic.

45The capital stock amount represents the number of authorized shares of capital stock 

issued multiplied by the par value of each share, as set forth in the articles of 

incorporation. Gross paid-in and contributed surplus is the amount of capital received in 

excess of the par value of the stock issued.

46The net position of the Fund is reflected in the capital reserve account balance, which 

holds (in present value terms) the estimated lifetime revenues in excess of estimated 

lifetime losses across all loan cohorts. 
 

Page 25 GAO-13-722 FHA Mortgage Insurance

Although specific PMI reserving practices have limited applicability to 

FHA, the concept of separately disclosing reserve components as PMIs 

do could be applied to the Fund. For example, the PMI loss reserve and 

unearned premium reserve focus on the timing of specific cash flows—

the loss reserve on claims that are likely to be paid on delinquent loans in 

the near-term and the unearned premium reserve on premiums as they 

are earned over time. In contrast, FHA has a single reserve from a 

financial accounting perspective, the liability for loan guarantees, which 

combines estimates of future claims payments with estimates of future 

premiums and recoveries over a 30-year period into a single number.47

While a single number is a useful measure of lifetime costs and aligns 

with federal budget requirements, it provides limited insight into the timing 

of specific cash flows and, therefore, the degree of uncertainty in the 

estimate.

As of September 30, 2012, the liability for loan guarantees for forward 

mortgages in FHA’s Fund was $37 billion. That is, claims payments on 

loans that were insured as of that date were expected to exceed future 

premiums and recoveries on foreclosed properties by $37 billion on a 

present value basis over the next 30 years. However, the timing of claims 

payments, premiums, and recoveries is not evident from this figure. This 

information is important for more fully understanding the Fund’s financial 

status because estimates of near-term cash flows are inherently more 

certain than estimates of longer-term cash flows. Disclosing the timing of 

specific cash flows would help illustrate the extent to which estimates of 

claims payments, premiums, and recoveries in the liability for loan 

guarantees are concentrated in the near term or longer term and 

therefore more or less certain.

The uncertainty of longer-term cash flow estimates also applies to FHA’s 

future business activity, which is estimated to help offset losses on its 

existing loans. The fiscal year 2012 actuarial review found that the 

economic value of the Fund’s forward mortgages without the fiscal year 

2013 book of business was negative $13 billion, meaning that the present 

value of estimated future cash flows on the existing portfolio exceeded 

current resources available to pay claims by that amount. The actuary 

estimated that FHA’s future business will generate positive economic 

 

47As previously noted, PMIs generally do not take possession of foreclosed properties and 

therefore do not make recoveries.

Industry Practice of 

Separately Disclosing 

Reserve Components 

Could Increase 

Transparency of Risks 

Facing FHA’s Fund
 

Page 26 GAO-13-722 FHA Mortgage Insurance

value, which will help rebuild the Fund’s capital resources. In its fiscal 

year 2012 annual report to Congress, FHA said it foresaw little risk that it 

would not be able to pay claims based on projections of its future 

business.48 However, like all long-term projections, the actuary’s 

estimates rest on assumptions that are inherently uncertain.

As previously noted, differences in the level of certainty between nearterm and longer-term cash flows underscore the importance of this 

information for assessing financial condition. The liability for loan 

guarantees is built upon a 30-year schedule of key cash flows—claims, 

premiums, and recoveries. Accordingly, separately disclosing these 

component parts and showing how they vary over time could provide 

additional insight into the financial condition of the Fund. Such disclosure 

would be consistent with information reported on the timing of cash flows 

for federal social insurance programs, which also rely on long-term 

estimates.49 It would also be consistent with federal internal control 

guidance for communicating with external groups.50 This guidance 

discusses the importance of communicating relevant information to 

Congress and others so that they can better understand the agency, 

including its mission, goals, objectives, and risks.

Unlike PMIs, which may be required to undertake actions such as 

remediation plans and additional reporting to state regulators as 

conditions of doing business when they do not meet capital requirements, 

FHA is not subject to such enhanced accountability measures. As 

previously stated, PMIs that have not met their capital or other 

requirements have had to provide additional reporting, more frequently 

 

48FHA based this conclusion on simulations of economic scenarios and projected FHA 

mortgage volume, which showed a nearly 95 percent chance that the forward loan 

component of the Fund would have positive capital resources each year over the next 7 

years. 

49Social insurance programs, such as Social Security and Medicare, report projections of 

cash flows as supplemental information to the consolidated financial statements of the 

U.S. government. See GAO, Financial Audit: U.S. Government’s Fiscal Years 2012 and 

2011 Consolidated Financial Statements, GAO-13-271R (Washington, D.C.: Jan. 17, 

2013).

50GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999) and Internal Control Management and Evaluation 

Tool, GAO-01-1008G (Washington, D.C.: August 2001).

Accountability Component 

of Industry Capital 

Requirements Could 

Strengthen Oversight of 

FHA
 

Page 27 GAO-13-722 FHA Mortgage Insurance

meet with regulators, and in some cases develop remediation plans to 

continue writing new business. For example, remediation plans may lay 

out a PMI’s plan for restoring its capital to the required level through 

capital contributions from the parent company, premium increases, and 

underwriting changes. In contrast, FHA has not been in compliance with 

its capital ratio requirement since 2009 and is not estimated to reach 

compliance until 2017. Yet failure to comply with the requirement does 

not trigger a defined process or set of steps to be taken by FHA. FHA’s 

annual reports to Congress in 2009 through 2011 described steps it 

already had taken to improve the Fund’s financial condition, including 

premium and underwriting changes. However, FHA did not issue a plan of 

action to restore the Fund’s capital ratio, including implementation time 

frames and estimated outcomes, until it submitted its 2012 annual report 

to Congress.

Requiring a capital restoration plan when the capital ratio approaches or 

falls below the required level could strengthen oversight of FHA by 

prompting the timely development and analysis of corrective actions and 

by providing benchmarks against which Congress could monitor progress 

of implementation. As noted earlier, legislative proposals that contain 

such a requirement have been introduced but have not been enacted. In 

addition, past congressional actions have emphasized the importance of 

remediation plans for financial institutions. For example, the Deficit 

Reduction Act of 2005 required the Federal Deposit Insurance 

Corporation to establish and implement a restoration plan when its 

Deposit Insurance Fund was either projected to fall or actually fell below 

the minimum level.51 The Dodd-Frank Wall Street Reform and Consumer 

Protection Act required the establishment of remediation requirements, 

including capital restoration plans, for certain institutions facing financial 

distress.52

FHA, like other mortgage market participants, suffered major losses as a 

result of the recent housing crisis and may require additional funds in the 

near future. These circumstances have focused attention on oversight of 

FHA’s single-family mortgage programs, including the practices and 

requirements FHA follows in managing the Fund. Although PMIs also 

 

51Pub. L. No. 109-171, § 2108.

52Pub. L. No. 111-203, § 166.

Conclusions 
 

Page 28 GAO-13-722 FHA Mortgage Insurance

experienced financial distress and some stopped issuing new policies, the 

PMI regulatory framework provides a basis for comparison and offers 

alternative practices and requirements to consider in deliberating on 

potential FHA reforms. However, the applicability of certain PMI practices 

and requirements to FHA is fundamentally limited because their 

underlying purposes or components are not directly relevant in FHA’s 

operating environment.

Nonetheless, the PMI regulatory framework has features that, if applied to 

FHA, could enhance transparency of the Fund’s financial condition and 

congressional oversight of FHA’s operations. First, the concept of 

separately disclosing reserve components as PMIs do could be applied to 

the Fund. FHA’s liability for loan guarantees—which FHA calculates and 

reports annually as required—has certain limitations. In particular, it does 

not show the timing of the different cash flows that comprise the liability 

for loan guarantees—claims, premiums, and recoveries—and therefore 

does not reveal the extent to which FHA may be relying on less certain 

future revenue to offset more certain near-term losses. Disclosing this 

information could enhance congressional oversight of FHA’s financial 

condition and would be consistent with reporting practices of other federal 

programs and federal internal control guidance. Second, accountability 

mechanisms like those included in PMI capital requirements also could 

enhance congressional oversight of the Fund. Unlike PMIs, which must 

obtain waivers and submit remediation plans when they have not met or 

are at risk of not meeting capital requirements, FHA does not have a 

defined process it must follow. In 2012, FHA provided Congress with a 

set of planned actions to address its capital shortfall, but had not done so 

in prior years. A capital restoration plan requirement triggered by 

noncompliance with the Fund’s statutory capital requirements could help 

ensure prompt action by FHA and focus Congress’s monitoring efforts 

should this situation arise in the future. This type of requirement is 

contained in legislative proposals currently before Congress and would be 

consistent with prior congressional actions for certain financial institutions 

and government entities.

To strengthen FHA accountability for complying with the Fund’s statutory 

capital requirement, Congress should consider requiring that FHA submit 

a capital restoration plan and regular updates on plan implementation 

whenever the capital ratio falls below 2 percent as calculated in the 

annual actuarial review of the Fund, or the Fund’s financial condition does 

not meet other congressionally-defined requirements.

Matter for 

Congressional 

Consideration 
 

Page 29 GAO-13-722 FHA Mortgage Insurance

To provide additional perspective on the Fund’s financial status, FHA 

should disclose estimates of the individual cash flows associated with the 

liability for loan guarantees (premiums, claims, and recoveries), including 

their value for each year of the 30-year estimation period.

We provided a draft of this report to HUD and the Federal Housing 

Finance Agency for their review and comment. We received written 

comments from HUD, which are reprinted in appendix II. HUD also 

provided a technical comment, which we incorporated into the final report. 

The Federal Housing Finance Agency had no comments on the draft 

report. 

In its letter, HUD agreed with our recommendation to disclose the 

component parts of the liability for loan guarantees—claims, premiums,

and recoveries. However, HUD suggested an alternative to disclosing 

cash flows for each year of the 30-year estimation period, as we 

recommended. Specifically, HUD proposed separately disclosing the 

liability for loan guarantees for delinquent loans and performing loans, 

which would implicitly break down losses into the near term (those arising 

from currently delinquent loans) and the longer term (reflecting potential 

loss projections on currently performing loans). HUD said that this 

approach would give a clearer picture of the Fund’s financial status at a 

given point in time. HUD’s suggestion is broadly consistent with our 

recommendation and could provide useful information. However, it does 

not clearly include the separate disclosure of claims, premiums, and 

recoveries and would not provide as much perspective on the timing of 

cash flows as the approach we recommend. Our recommendation, which 

calls for a more detailed disclosure of cash flow values for each year over 

the 30-year estimation period, would provide greater insight into the 

Fund’s financial condition by illustrating the uncertainty of future losses 

and revenue. For this reason, we made no change to our 

recommendation. 

We also provided excerpts of the draft report to the National Association 

of Insurance Commissioners, the Mortgage Insurance Companies of 

America and its three member companies (Radian Guaranty, Genworth, 

and Mortgage Guaranty Insurance Corporation), and United Guaranty for 

technical review. We received technical comments from the Mortgage 

Insurance Companies of America on behalf of its members and from 

United Guaranty, which we incorporated into the final report as 

appropriate.

Recommendation for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 30 GAO-13-722 FHA Mortgage Insurance

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Housing 

and Urban Development and the Acting Director of the Federal Housing 

Finance Agency. In addition, the report will be available at no charge on 

the GAO website at http://www.gao.gov. 

If you or your offices have any questions about this report, 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. Key contributors to this report are listed in appendix 

III.

Mathew Scirè

Director, Financial Markets and Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 31 GAO-13-722 FHA Mortgage Insurance

We examined the Federal Housing Administration’s (FHA) financial 

condition requirements for the Mutual Mortgage Insurance Fund (Fund) 

and compared them with those used by private mortgage insurers (PMI). 

Specifically, we discuss (1) how the reserving practices and capital 

requirements of FHA’s Fund compare with those for the PMI industry and 

(2) how, if at all, applicable PMI reserving practices and capital 

requirements could enhance oversight of FHA’s Fund.

To address the first objective, we identified and reviewed reserving 

practices and capital requirements pertinent to FHA and PMIs. We 

reviewed generally accepted accounting principles for federal entities and 

federal statutes that apply to FHA’s Fund. We also reviewed statutory 

accounting principles, generally accepted accounting principles for 

nongovernmental entities, Fannie Mae and Freddie Mac policies, and 

state statutes and regulations that apply to PMIs. We interviewed 

mortgage market participants and stakeholders, including officials from 

FHA, insurance regulatory agencies in three selected states (North 

Carolina, Pennsylvania, and Wisconsin), the National Association of 

Insurance Commissioners, major PMIs, a PMI trade association, Fannie 

Mae, Freddie Mac, and the Federal Housing Finance Agency to confirm 

our understanding of the practices and requirements. We selected the 

three states based on the market share of PMIs domiciled in those states 

and the diversity of state requirements for PMIs. These states were the 

domiciliary states and primary regulators for PMIs that accounted for 90 

percent of the PMI market. We compared and contrasted the practices 

and requirements for FHA and PMIs along several dimensions, including 

the financial measures used, the frequency of associated reporting, and 

the regulatory consequences of noncompliance. In addition, we examined 

scholarly articles and industry reports to determine possible reasons for 

any differences between FHA and PMI practices and requirements. 

Finally, to provide additional context, we reviewed actuarial and financial 

reports showing the extent to which FHA and selected PMIs met their 

respective capital requirements from 2001 through 2012. For this 

analysis, we reviewed the four largest PMIs, which accounted for 78 

percent of the PMI market in 2012, as well as three PMIs that ceased 

writing new business due to capital constraints during the time frame. We 

obtained these data from FHA’s annual actuarial reviews, PMIs’ public 

reports, and PMI officials.

To address the second objective, we reviewed statutes, regulations, and 

accounting standards that currently apply to FHA and PMIs. We also 

reviewed information FHA currently reports on the Fund’s financial 

condition, including annual actuarial reviews of the Fund, HUD 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 32 GAO-13-722 FHA Mortgage Insurance

appendixes to the President’s budget, and FHA’s audited financial 

statements. To determine the extent to which PMI reserving practices and 

capital requirements could be applied to FHA’s Fund, we considered 

factors such as the compatibility of underlying concepts and calculations 

with FHA’s operations. We analyzed data from FHA on the volume and 

performance of the mortgages it has insured through the end of fiscal 

year 2012 to calculate a loss reserve for FHA in the manner of a PMI. 

Specifically, FHA provided data on the amortized insurance-in-force on 

loans that were 90 or more days delinquent or in foreclosure as well as 

the assumptions used in the President’s budget on the percentage of 

those loans that will eventually result in a claim and the estimated loss 

severity. We also analyzed FHA data on its risk-in-force on performing 

loans, estimated recovery rates, and total amortized insurance-in-force as 

of the end of fiscal year 2012 to calculate the dollar amount of capital that 

FHA would need under PMI capital requirements. To assess the reliability 

of the data we obtained from FHA, we conducted reasonableness checks 

on data elements and discussed the sources and interpretation of the 

data with FHA officials. We determined that the data we used were 

sufficiently reliable for purposes of characterizing the financial condition of 

the Fund. In addition, we interviewed mortgage insurance regulators in 

the selected states to identify the information PMIs report under their 

current practices and requirements that regulators find useful in 

assessing financial condition. Additionally, to determine whether features 

of the PMI regulatory framework could enhance Fund oversight, we 

interviewed FHA officials, major PMIs, and other industry analysts to 

obtain their perspectives on the potential for increasing transparency and 

better understanding the Fund’s financial condition. We also identified 

relevant criteria in GAO’s Standards for Internal Control in the Federal 

Government and Internal Control Management and Evaluation Tool as 

well as examples of remediation plan requirements enacted by Congress 

for other financial institutions and government entities.1

We conducted this performance audit from February 2013 to September 

2013 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 

 

1

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999) and Internal Control Management and Evaluation 

Tool, GAO-01-1008G (Washington, D.C.: August 2001).
Appendix I: Objectives, Scope, and 

Methodology

Page 33 GAO-13-722 FHA Mortgage Insurance

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 34 GAO-13-722 FHA Mortgage Insurance

Appendix II: Comments from the Department 

of Housing and Urban Development 
Appendix II: Comments from the Department 

of Housing and Urban Development

Page 35 GAO-13-722 FHA Mortgage Insurance
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 36 GAO-13-722 FHA Mortgage Insurance

Mathew J. Scirè, (202) 512-8678 or sciremj@gao.gov

In addition to the contact named above, Robert Dacey (Chief 

Accountant), Marcia Carlsen and Steve Westley (Assistant Directors), 

Anne Akin, Don Brown, Stephen Brown, Jason Kelly, Melissa Kornblau, 

Aaron Livernois, John McGrail, Barbara Roesmann, Jena Sinkfield, 

Andrew Stavisky, and Frank Todisco made key contributions to this 

report.

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(250710)
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