Federal Housing Administration: Modernization Proposals Would Have Program and Budget Implications and Require Continued Improvements in Risk Management
Published: 2007-06-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In recent years, the Federal Housing Administration (FHA) has experienced a sharp decline in market share. Also, the agency has estimated that, absent program changes, its Mutual Mortgage Insurance Fund (Fund) would require appropriations in 2008. To adapt to market changes, FHA has implemented new procedures and proposed the following major legislative changes: raising FHA's loan limits, allowing risk-based pricing, and lowering down-payment requirements. GAO was asked to report on (1) the likely program and budget impacts of FHA's modernization efforts; (2) the tools, resources, and risk management practices important to FHA's implementation of the legislative proposals, if passed; and (3) other options that FHA and Congress could consider to help FHA adapt to market changes. To address these objectives, GAO analyzed FHA and Home Mortgage Disclosure Act (HMDA) data and interviewed officials from FHA and other mortgage institutions.
section_title: What GAO Found
paragraphs: FHA's recent changes to insurance approval and appraisal requirements have streamlined its insurance process, and FHA's major legislative proposals could affect the demand for FHA's loans, the cost and availability of insurance to borrowers, and the insurance program's budgetary costs. Based on GAO's analysis of HMDA data, the number of FHA-insured loans could have been from 9 to 10 percent greater in 2005 had the higher, proposed mortgage limits been in effect. GAO's analysis of data on 2005 FHA home purchase borrowers shows that 43 percent would have paid the same or less under the risk-based pricing proposal than they actually paid, 37 percent would have paid more, and 20 percent (those with the highest expected claim rates) would not have qualified for FHA insurance. While to be viewed with caution, FHA has made estimates indicating that the loans it expects to insure in 2008 would result in negative subsidies (i.e., net cash inflows) of $342 million if the major legislative changes were enacted, rather than requiring an appropriation of $143 million absent any program changes. FHA has taken or planned steps to enhance tools and resources and adopt risk-management practices important to implementing the legislative proposals, but does not intend to use a common industry practice, piloting, to mitigate the risks of any zero-down-payment product it is authorized to offer. In response to prior GAO recommendations, FHA has taken steps to improve the loan performance and scoring models it would use in risk-based pricing. It also has identified minor changes to its information systems and staff increases needed to implement the proposals but faces long-term challenges in these areas. Additionally, the legislative proposals would introduce new risks. The proposal to lower down-payment requirements is of particular concern given the higher default rates on these loans and the difficulty of setting prices for new products whose risks may not be well known. GAO has previously indicated that Congress may want to consider requiring FHA to limit the initial availability of any new products and also recommended that FHA itself consider piloting. However, FHA has indicated that it does not plan to pilot any no-down-payment product it might offer. Mortgage industry participants and researchers have suggested more options that Congress and FHA could consider to help FHA adapt to changes in the mortgage market, but some changes could have budget impacts and complicate oversight efforts. Some administrative changes--such as implementing a more limited form of risk-based pricing--are within FHA's existing authority. Congress also could grant FHA additional authority that would allow it to invest the Fund's current resources in information technology and human capital, but this would increase the federal government's budget deficit. Finally, Congress could contemplate other approaches to the provision of federal mortgage insurance, such as creating a government corporation. However, any fundamental changes to how the federal government provides mortgage insurance could require new oversight mechanisms and would require careful deliberation.

section_title: Letter
paragraphs: The Department of Housing and Urban Development (HUD), through its  Federal Housing Administration (FHA), has helped millions of families  purchase homes by providing insurance for single-family home mortgages  made by private lenders. However, FHA’s single-family insurance program  has faced several challenges in recent years, including rising delinquency  rates and a sharp decline in the number of participating borrowers, due  partly to increased competition from conventional mortgage providers. As  conventional providers have improved their ability to evaluate risk, FHA  has begun to experience adverse selection—that is, conventional  providers have identified and approved relatively lower-risk borrowers in  FHA’s traditional market segment, leaving relatively higher-risk borrowers  for FHA. Furthermore, the agency has estimated that, absent any program  changes, the program would for the first time operate with a positive  subsidy in fiscal year 2008—meaning that the present value of estimated  cash outflows (such as insurance claims) to FHA’s Mutual Mortgage  Insurance Fund (Fund) would exceed the present value of estimated cash  inflows (such as borrower premiums). To avoid a positive subsidy in fiscal  year 2008, FHA estimates that it would have to increase slightly the  insurance premiums charged to borrowers.
To adapt to market changes, FHA has implemented new administrative  procedures and proposed legislation designed to modernize its insurance  processes and products. FHA’s recent administrative changes include  allowing higher-performing lenders to endorse, or approve, loans for FHA  insurance without prior review by FHA and adopting conventional market  appraisal requirements. The legislative proposals would, among other  things, raise FHA’s mortgage limits, give the agency flexibility to set  insurance premiums based on the credit risk of borrowers, and reduce  down-payment requirements from the current 3 percent to potentially  zero. However, as we testified in June 2006, weaknesses in FHA’s risk  management raise questions about the agency’s ability to successfully  implement the proposed legislation. Given these concerns, you asked us  to evaluate FHA’s modernization efforts. Specifically, this report discusses  (1) the likely program and budgetary impacts of FHA’s modernization  efforts; (2) the tools, resources, and risk-management practices important  to FHA’s implementation of the legislative proposals, if passed; and   (3) other options that FHA and Congress could consider to help FHA  adapt to changes in the mortgage market and the pros and cons of these  options.
To determine the likely program and budgetary impacts of FHA’s  modernization efforts, we analyzed data collected under the Home  Mortgage Disclosure Act (HMDA) and from FHA’s Single Family Data  Warehouse (SFDW). Specifically, we used 2005 HMDA data (the most  current available) to examine the effect of raising loan limits on demand  for FHA-insured loans. We determined the number of additional loans in  different geographic areas that would have been eligible for FHA  insurance under the revised loan limits and, based on FHA’s current  market share, estimated the percentage of those loans that FHA might  have insured. We estimated the effects of risk-based pricing on borrowers’  eligibility for FHA insurance and the premiums they would pay by  analyzing SFDW data on FHA’s 2005 home purchase borrowers to  determine the characteristics of borrowers that could fall into FHA’s  proposed pricing categories. We reviewed recent administrative changes  made by FHA and interviewed FHA officials, several FHA lenders, and  mortgage and real estate industry groups about their effects on loan and  insurance processing times and costs. We also examined the potential  budgetary impacts of the legislative proposals by reviewing the President’s  fiscal year 2008 budget and FHA’s cost estimates. To evaluate the tools,  resources, and risk-management practices important to FHA’s  implementation of the proposals, we relied on our prior work, reviewed  information provided by FHA, and interviewed officials from FHA, private  mortgage insurers, and the government-sponsored enterprises (GSE)  Fannie Mae and Freddie Mac. To determine other options that FHA and  Congress could consider, we reviewed relevant literature and interviewed  FHA officials, academic experts, FHA lenders, and private mortgage  insurers. Appendix I contains additional information on our scope and  methodology. We conducted this work in Washington, D.C., from  September 2006 to June 2007 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: Congress established FHA in 1934 under the National Housing Act (P.L. 73- 479) to broaden homeownership, protect and sustain lending institutions,  and stimulate employment in the building industry. FHA insures a variety  of mortgages for initial home purchases, construction and rehabilitation,  and refinancing. In fiscal year 2006, FHA insured almost 426,000 mortgages  representing $55 billion in mortgage insurance. FHA’s single-family  programs insure private lenders against losses from borrower defaults on  mortgages that meet FHA criteria for properties with one to four housing  units. FHA has played a particularly large role among minority, lower- income, and first-time homebuyers and 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 are experiencing  economic downturns. In fiscal year 2006, 79 percent of FHA-insured home  purchase loans went to first-time homebuyers, 31 percent of whom were  minorities.
FHA is a government mortgage insurer in a market that also includes  private insurers. Generally, borrowers are required to purchase mortgage  insurance when the loan-to-value (LTV) ratio—the ratio of the amount of  the mortgage loan to the value of the home—exceeds 80 percent. Private  mortgage insurance policies provide lenders coverage on a portion  (generally 20 to 30 percent) of the mortgage balance. However, borrowers  who have difficulty meeting down-payment and credit requirements for  conventional loans may find it easier to qualify for a loan with FHA  insurance, which covers 100 percent of the value of the loan. Because the  credit risk is mitigated by the federal guaranty, FHA borrowers are  allowed to make very low down payments and generally pay interest rates  that are competitive with prime mortgages.
subsections: section_title: FHA Insurance Requirements
paragraphs: Legislation sets certain standards for FHA-insured loans. FHA-insured  borrowers are required to make a cash investment of a minimum of 3  percent. This investment may come from the borrowers’ own funds or  from certain third-party sources. However, borrowers are permitted to  finance their mortgage insurance premiums and some closing costs, which  can create an effective LTV ratio of close to 100 percent for some FHA- insured loans. Congress also has set limits on the size of the loans that  may be insured by FHA. These limits vary by county. The limit for an FHA- insured mortgage is 95 percent of the local median home price, not to  exceed 87 percent or fall below 48 percent of the Freddie Mac conforming  loan limit, which was $417,000 in 2006. Therefore, in 2006, FHA loan limits  fell between a floor in low-cost areas of $200,160 and a ceiling in high-cost  areas of $362,790. Eighty-two percent of counties nationwide had loan  limits set at the low-cost floor, while 3 percent had limits set at the high- cost ceiling. The remaining 15 percent of counties had limits set between  the floor and ceiling, at 95 percent of their local median home prices.
section_title: FHA’s Mutual Mortgage Insurance Fund
paragraphs: FHA insures most of its single-family mortgages under its Mutual Mortgage  Insurance Fund, which is supported by borrowers’ insurance premiums.  FHA has the authority to establish and collect a single up-front premium in  an amount not to exceed 2.25 percent of the amount of the original insured  principal obligation of the mortgage, and annual premiums of up to 0.5  percent of the remaining insured principal balance, or 0.55 percent for  borrowers with down payments of less than 5 percent. Currently, FHA  uses a flat premium structure whereby all borrowers pay the same 1.5  percent up-front fee and a 0.5 percent annual fee.
The Omnibus Budget Reconciliation Act of 1990 requires an annual  independent actuarial review of the economic net worth and soundness of  the Fund. The actuarial review estimates the economic value of the Fund  as well as the capital ratio to see if the Fund has met the capital standards  in the act. The analysis considers the historical performance of the  existing loans in the Fund, projected future economic conditions, loss  given claim rates, and projected mortgage originations. The Fund has met  the capital ratio requirements since 1995, and the single-family mortgage  insurance program has maintained a negative overall credit subsidy rate,  meaning that the present value of estimated cash inflows from premiums  and recoveries exceeds estimated cash outflows for claim payments  (excluding administrative costs). However, in recent years, the subsidy  rate has approached zero.
A few single-family mortgage insurance programs are insured as  obligations under either the General Insurance or Special Risk Insurance  Funds. These programs are Section 203(k) rehabilitation mortgages, which  enable borrowers to finance both the purchase (or refinancing) of a house  and the cost of its rehabilitation through a single mortgage; Section 234(c)  insurance for the purchase of a unit in a condominium building; and  reverse mortgages under the Home Equity Conversion Mortgage (HECM)  program, which can be used by homeowners age 62 and older to convert  the equity in their home into a lump sum payment, monthly streams of  income, or a line of credit to be repaid when they no longer occupy the  home.
section_title: Trends in the Mortgage Market and Their Impact on FHA
paragraphs: Two major trends in the conventional mortgage market have significantly  affected FHA. First, in recent years, members of the conventional  mortgage market increasingly have been active in supporting low- and no- down-payment mortgages, increasing consumer choices for borrowers  who may have previously chosen an FHA-insured loan. Subprime lenders,  in particular, have offered mortgage products featuring flexible payment  and interest options that allowed borrowers to qualify for mortgages  despite a rise in home prices. Second, to help assess the default risk of  borrowers, particularly those with high LTV ratios, the mortgage industry  increasingly has used mortgage scoring and automated underwriting  systems. Underwriting refers to a risk analysis that uses information  collected during the origination process to decide whether to approve a  loan, and automated underwriting refers to the process by which lenders  enter information on potential borrowers into electronic systems that  contain an evaluative formula, or algorithm, called a scorecard. The  scorecard algorithm attempts to measure the borrower’s risk of default  quickly and objectively by examining data such as application information  and credit scores. (Credit scores assign a numeric value generally ranging  from 300 to 850 to a borrower’s credit history, with higher values  signifying better credit.) The scorecard compares these data with specific  underwriting criteria (e.g., cash reserves and credit requirements) to  predict the likelihood of default. Since 2004, FHA has used its own  scorecard called Technology Open to Approved Lenders (TOTAL). FHA  lenders now use TOTAL in conjunction with automated underwriting  systems to determine the likelihood of default. Although TOTAL can  determine the credit risk of a borrower, it does not reject a loan. FHA  requires lenders to manually underwrite loans that are not accepted by  TOTAL to determine if the loan should be accepted or rejected.
Further, as we noted in a recent report, the share of home purchase  mortgage loans insured by FHA has fallen dramatically, from 19 percent in  1996 to 6 percent in 2005, with almost all the decline occurring since 2001.  The combination of (1) FHA product restrictions and a lack of process  improvements relative to the conventional market and (2) product  innovations and expanded loan origination and funding channels in the  conventional market—coupled with interest rate and house price  changes—provided conditions that favored conventional mortgages over  FHA products. Conventional subprime loans, in particular, emerged as an  alternative to FHA-insured mortgages but often at a higher ultimate cost to  certain borrowers.
At the same time, FHA’s financial performance has worsened. As we noted  in a recent testimony, one reason for deteriorating loan performance has  been the increase in FHA-insured loans with down-payment assistance  from nonprofit organizations funded by home sellers. Down-payment  assistance programs provide cash assistance to homebuyers who cannot  afford to make the minimum down payment or pay the closing costs  involved in obtaining a mortgage. From 2000 to 2006, the total proportion  of FHA-insured home purchase loans with down-payment assistance from  nonprofits (the large majority of which received funding from property  sellers) increased from about 2 percent to approximately 33 percent.
section_title: Legislative Proposals for FHA Modernization
paragraphs: To help FHA adapt to recent trends in the mortgage market, in 2006 HUD  submitted a legislative proposal to Congress that included changes that  would adjust loan limits for the single-family mortgage insurance program,  eliminate the requirement for a minimum down payment, and provide  greater flexibility to FHA to set insurance premiums based on risk factors.  HUD’s proposal, as it currently stands, reflects revisions made by the  Expanding American Homeownership Act of 2006, which was passed by  the House of Representatives in July 2006. Specifically, as shown in figure  1, the proposal would increase the loan limit for FHA-insured mortgages  from 95 to 100 percent of the local median home price. It would also raise  the loan limit floor in low-cost areas from 48 to 65 percent of the  conforming loan limit, and the ceiling in high-cost areas from 87 to 100  percent of the conforming limit. The proposal would also repeal the 3  percent minimum cash investment requirement and allow FHA to set  premiums commensurate with the risk of the loan. FHA would establish a  premium structure allowing either a combination of upfront and annual  premiums or annual premiums alone, subject to specified maximum  amounts.
In addition to these three major changes, the modernization proposal also  contained other provisions, including:    Permanently eliminating the limit on the number of HECM (reverse)  mortgages that can be insured, setting a single nationwide loan limit for  HECMs, and authorizing a HECM program for home purchases.
Extending the permissible term of FHA-insured mortgages from 35 to  40 years.
Moving HECMs, Section 203(k) rehabilitation mortgages, and Section  234(c) condominium unit mortgages from the General Insurance and  Special Risk Insurance Funds to the Mutual Mortgage Insurance Fund.  Moving the condominium program to the Fund would simplify the  origination and underwriting process for these loans because they  would no longer be subject to more complex requirements for  multifamily housing loans.
While FHA’s planning has reflected revisions made to its original proposal  by the House of Representatives in the 109th Congress, new bills  introduced in the 110th Congress could further affect FHA’s planning.
section_title: Modernization Efforts Have Streamlined FHA Processes and Likely Would Affect Program Participation and Costs
paragraphs: FHA’s modernization efforts, which include completed administrative and  proposed legislative changes, have streamlined the agency’s insurance  processes and likely would affect program participation and costs.  According to FHA and mortgage industry officials with whom we spoke,  FHA’s recent administrative changes have resulted in efficiency  improvements, making FHA products more attractive to use. FHA’s  proposed legislation would grant the agency new leeway to help address  challenges, such as adverse selection, resulting from innovations and  increased competition in the mortgage market. If passed, the legislative  changes likely would have a number of program and budgetary impacts.  For example, we estimate that raising the FHA loan limits could increase  demand for FHA-insured loans, all other things being equal. The risk-based  pricing proposal would decrease premiums for lower-risk borrowers,  increase them for higher-risk borrowers, and disqualify other potential  borrowers. In addition, FHA estimates that the legislative proposals would  have a favorable budgetary impact.
subsections: section_title: Mortgage Industry Officials Report That FHA’s Recent Administrative Changes Have Increased the Efficiency of Loan and Insurance Processing
paragraphs: FHA has taken a number of steps to make the loans it insures easier to  process and bring the agency more in line with the conventional market.  For example, in January 2006, FHA introduced the Lender Insurance  Program, which enables higher-performing lenders to endorse all FHA  loans except HECMs without a prior review by FHA. Prior to that time,  all lenders were required to mail loan case files to FHA for review by  contract staff before the loan could be endorsed for insurance. If the  contractor found a problem with the case file, FHA would mail the file  back to the lender for correction. Under the new program, approved  lenders are allowed to perform their own pre-endorsement reviews and  submit loan data electronically to FHA. If the loan data pass checks for  accuracy and completeness, the lender is able to endorse the loan  automatically. As of December 31, 2006, 405 (31 percent) of the 1,314 FHA  lenders eligible for the program had been approved to participate.  Between January 1, 2006, and December 31, 2006, 46 percent of FHA- insured loans were endorsed through the program.
In addition to implementing the Lender Insurance Program, FHA revised  its appraisal protocols and closing cost guidelines to align them more  closely with conventional standards. Specifically, the agency simplified the  appraisal process by adopting appraisal forms used in the conventional  market and eliminating the requirement that minor property deficiencies  be corrected prior to the sale of the property. Under the revised  procedures, FHA limits required repairs to those necessary to protect the  health and safety of the occupants, protect the security of the property, or  correct physical deficiencies or conditions affecting structural integrity.  Examples of property conditions that must be repaired include inadequate  access to the exterior of the home from bedrooms, leaking roofs, and  foundation damage. The agency requires the appraiser to identify minor  property deficiencies (such as missing handrails, cracked window glass,  and minor plumbing leaks) on the appraisal form, but no longer stipulates  that they be repaired. These changes went into effect for all appraisals  performed on or after January 1, 2006. In January 2006, FHA also  eliminated its list of “allowable” and “non-allowable” closing costs and  other fees that may be collected from the borrower. The agency made this  change because FHA lenders had advised the agency that home sellers  sometimes balked at accepting a sales contract from a homebuyer wishing  to use FHA-insured financing because its guidelines differed from standard  practice and did not consider regional variations. Lenders may now charge  and collect from borrowers those customary and reasonable costs  necessary to close the mortgage.
According to FHA lenders and industry groups, these changes have  increased the efficiency of loan processing, making FHA products more  attractive to use. Representatives of a mortgage industry group told us that  feedback from the group’s members on the Lender Insurance Program had  been positive. Similarly, the FHA lenders we interviewed stated that the  program had resulted in efficiency improvements, such as reduced  processing times or costs. For example, one large FHA lender estimated  that participating in the program had reduced the time it took to process  an FHA-insured loan by about 35 percent (or 15 to 20 days). The same FHA  lender also estimated that participation in the program had reduced the  operating costs (mostly printing and shipping costs) for its FHA business  by about 25 percent. Additionally, the FHA lenders we interviewed and  representatives of a real estate industry group noted that FHA’s revised  appraisal protocols and closing costs had made it easier to originate FHA  loans. Representatives of the industry group noted that the revisions had  shortened the time it took to close an FHA loan, which was important in a  competitive market. Finally, the lenders we interviewed estimated that the  administrative changes had contributed, at least in part, to recent modest  increases in the number of FHA-insured loans they had made.
According to FHA officials, the Lender Insurance Program also has  reduced the time it takes FHA to process insurance endorsements and led  to cost savings. They estimated that it takes FHA from 2 to 3 days to  endorse applications for insurance on loans that are not part of the  program. For loans endorsed through the program, they noted that  approval is virtually instantaneous if the loan passes quality checks. In  addition to reducing insurance processing times, the program has resulted  in cost savings for FHA. During the first year of the program, FHA realized  a reduction in contracting costs of more than $2 million, as its contractors  were required to perform fewer pre-endorsement reviews. FHA also saved  more than $70,000 in mailing costs during the first 9 months of the  program. FHA estimates that contract costs will continue to decline as the  program is expanded to include the HECM program.
section_title: Raising Loan Limits Likely Would Increase Demand for FHA Loans, but the Effect of Other Major Proposals on FHA Loan Volume Is Uncertain
paragraphs: Our analysis indicates that raising FHA’s loan limits likely would increase  the number of loans insured by FHA by making more loans eligible for  FHA insurance. In some areas of the country, particularly in parts of  California and the Northeast, median home prices have been well above  FHA’s maximum loan limits, reducing the agency’s ability to serve  borrowers in those markets. For example, the 2005 loan limit in high-cost  areas was $312,895 for one-unit properties, while the median home price  was about $399,000 in Boston, Massachusetts; about $432,000 in Newark,  New Jersey; $500,000 in Salinas, California; and about $646,000 in San  Francisco, California. If the limits were increased, FHA insurance would  be available to a greater number of potential borrowers. Our analysis of  HMDA data indicates that the agency could have insured from 9 to 10  percent more loans in 2005 had the higher mortgage limits been in place.  The greatest portion of this increase resulted from raising the loan limit  floor in low-cost areas from 48 to 65 percent of the conforming loan limit.  In particular, 82 percent of the new loans that would have been insured by  FHA and 74 percent of the dollar amount of those loans in our analysis  occurred in areas where the loan limits were set at the floor. Only 14  percent of the new loans (22 percent of the dollar amount of new loans)  would have resulted from increasing the loan limit ceiling. Our analysis  also found that the average size of an FHA-insured loan in 2005 would  have increased from approximately $123,000 to about $132,000 had the  higher loan limits been in place.
The effect of the other major legislative proposals on the demand for FHA- insured loans is difficult to estimate. Although FHA has not estimated the  effect on demand, FHA officials expect that risk-based pricing would  enable them to serve more borrowers. By reducing premiums for relatively  lower-risk borrowers, FHA expects to attract more of these borrowers.  However, increased premiums for higher-risk borrowers could reduce  these borrowers’ demand for FHA products. Additionally, some high-risk  borrowers who previously would have qualified for FHA insurance would  not qualify under risk-based pricing. The effect of lowering down-payment  requirements on demand for FHA-insured loans is also difficult to  estimate. FHA expects a new zero-down-payment product to attract  borrowers who otherwise would have used down-payment assistance  from nonprofit organizations funded by home sellers. However,  underwriting restrictions could limit the number of borrowers who would  qualify for the product.
Developments in the subprime market also may affect the demand for  FHA loans. Since 2001, FHA’s share of the mortgage market has declined  as the subprime market has grown. However, relatively high default and  foreclosure rates for subprime loans and a contraction of this market  segment could shift market share to FHA. For example, one major lender  we interviewed said that FHA’s continued modernization efforts combined  with a weakening subprime market likely would result in renewed demand  for FHA products as simplified processes make it easier for lenders to  originate FHA-insured loans.
section_title: Risk-Based Pricing Could Help Address Adverse Selection but Would Affect the Cost and Availability of FHA Insurance for Some Borrowers
paragraphs: To help address the problem of adverse selection, FHA has sought  authority to price insurance premiums based on borrower risk, which  would affect the cost and availability of FHA insurance for some  borrowers. Currently, all FHA-insured borrowers pay an up-front premium  of 1.5 percent of the original insured loan amount, and annual premiums of  0.5 percent of the remaining insured principal balance. Under this flat  pricing structure, lower-risk borrowers subsidize higher-risk borrowers. In  recent years, innovations in the mortgage market have allowed  conventional mortgage lenders and insurers to identify and approve  relatively low-risk borrowers and charge fees based on default risk. As  relatively lower-risk borrowers in FHA’s traditional market segment have  selected conventional financing, FHA has been left with more high-risk  borrowers who require a subsidy and fewer low-risk borrowers to provide  that subsidy.
Partly due to this trend, the President’s fiscal year 2008 budget stated that,  in the absence of risk-based pricing, FHA would need to raise premiums to  avoid the need for a positive subsidy. FHA officials told us that they would  have to raise premiums for all borrowers to 1.66 percent up front and 0.55  percent annually. Raising premiums for all borrowers could exacerbate  FHA’s adverse selection problem by causing even more lower-risk  borrowers to opt for more competitive conventional products rather than  FHA-insured loans, leaving FHA with even fewer lower-risk borrowers to  subsidize higher-risk borrowers. Rather than raise premiums for all  borrowers, FHA has proposed risk-based pricing as a solution to the  adverse selection problem. Under risk-based pricing, some future FHA  borrowers would pay more than the current premiums while others would  pay about the same or less. As previously noted, discounting premiums  could make FHA a more attractive option for relatively lower-risk  borrowers.
As of May 2007, FHA’s risk-based pricing proposal established six different  risk categories, each with a different premium rate, for purchase and  refinance loans. FHA used data from its most recent actuarial review to  establish the six risk categories and corresponding premiums based on the  relative performance of loans with various combinations of LTV ratio and  credit score. Borrowers in categories with higher expected lifetime claim  rates would have higher premiums than those in categories with lower  claim rates. Premiums would range from 0.75 percent up front and 0.50  percent annually for the lowest-risk borrowers, to 3.00 percent up front  and 0.75 percent annually for the highest-risk borrowers. Although the  premiums that FHA would charge borrowers in the six risk categories  would be more commensurate with the risks of the loans, lower-risk  borrowers would continue to subsidize higher-risk borrowers to some  extent.
If FHA were granted the authority to implement its risk-based pricing  proposal, the agency would publish a pricing matrix that would allow  borrowers to identify their likely premiums based on their credit scores  and LTV ratios. As shown in figure 2, lower borrower credit scores and  higher LTV ratios would result in higher insurance premiums. However,  FHA would use its TOTAL mortgage scorecard to make the final  determination of a borrower’s placement in a particular risk category.  While TOTAL takes into account more borrower and loan characteristics  than LTV ratio and credit score (such as borrower reserves and payment- to-income ratio), it was designed to predict the probability of claims or  defaults that would later result in claims within 4 years of loan origination  rather than lifetime claim rates. Therefore, FHA rescaled the TOTAL  scores to reflect lifetime claim rates. Because of the additional risk  characteristics considered by TOTAL, a borrower’s TOTAL score could  indicate that a borrower belongs in a higher risk category than would be  suggested by LTV ratio and credit score alone. FHA has not produced a  formal estimate of how often this would occur, but plans to include this  caveat in its pricing matrix.
Our analysis of how the proposed pricing structure would affect home  purchase borrowers similar to those insured by FHA in 2005 found that  approximately 43 percent of borrowers would have paid the same or less  while 37 percent would have paid more. As discussed more fully later, 20  percent would not have qualified for FHA insurance had the risk-based  pricing proposal been in effect. These percentages hold true whether  comparing the proposed risk-based premiums to the current premiums of  1.5 percent up front and 0.5 percent annually or the higher premiums of  1.66 percent up front and 0.55 percent annually that, according to FHA,  would be needed to maintain a negative subsidy rate in fiscal year 2008. As  shown in figure 3, risk-based pricing would have had a similar impact on  first-time and low-income homebuyers FHA served in 2005.
Among FHA’s 2005 borrowers, 47 percent of white borrowers and 40  percent of Hispanic borrowers would have paid the same or less under the  new proposed risk-based pricing structure than they did under the present  pricing structure, while 28 percent of black borrowers would have paid the  same or less. A little more than one-third of borrowers in each racial  category would have paid more (see fig. 4). FHA officials concluded, in  their analysis of an earlier version of the risk-based pricing proposal, that  any disparate impacts of risk-based pricing using consumer credit scores  would be based on valid business reasons. Specifically, they noted that,  although some racial differences do exist in the distribution of credit  scores and LTV ratios, these variables are strongly associated with claim  rates and have become the primary risk factors used for pricing credit risk  in the conventional market.
Risk-based pricing would also affect the availability of FHA insurance for  some borrowers. Approximately 20 percent of FHA’s 2005 borrowers  would not have qualified for FHA mortgage insurance under the  parameters of the risk-based pricing proposal we evaluated. FHA  determined that the expected claim rates of these borrowers were higher  than it found tolerable for either the borrower or the Fund. Those  borrowers who would not have qualified had high LTV ratios and low  credit scores. Their average credit score was 584, and their expected  lifetime claim rates are more than 2.5 times higher than the average claim  rate of all FHA loans. FHA officials stated that setting risk-based  premiums for potential future FHA borrowers with similar characteristics  would require prices higher than borrowers may be able to afford.
The overall distribution of 2005 FHA borrowers (by income, first-time  borrower status, or race) would not have changed substantially had the  policy not to serve borrowers with these higher expected lifetime claim  rates been in place that year (all other things being equal). If the 20  percent of borrowers with the higher expected claim rates were removed  from FHA’s 2005 borrower pool, our analysis found that low-income  homebuyers would have remained about 51 percent of the pool. First-time  homebuyers would have constituted about 78 percent of the pool,  compared with 79 percent when all borrowers are included. Similarly, the  overall racial distribution of borrowers would have changed modestly (see  fig. 5). The percentage of Hispanic borrowers would have remained about  14 percent, black borrowers would have decreased from 13 to 11 percent,  and white borrowers would have increased from 69 to 70 percent.
All other things being equal, implementing the legislative proposals likely  would have had a slightly negative impact on FHA’s ability to meet certain  performance measures related to the types of borrowers it serves. HUD’s  strategic plan for fiscal years 2006 to 2011 calls for the share of first-time  minority homebuyers among FHA home purchase mortgages to remain  above 35 percent. Our analysis shows that 34 percent of fiscal year 2005  home purchase mortgages were for first-time minority home buyers.  Under risk-based pricing, a slightly lower percentage, 32 percent, would  have been first-time minority home buyers. The strategic plan also calls for  the share of FHA-insured home purchase mortgages for first-time  homebuyers to remain above 71 percent. Our analysis shows that   79 percent of fiscal year 2005 FHA home purchase borrowers were first- time home buyers. Under risk-based pricing, 77 percent would have been  first-time home buyers.
section_title: Legislative Proposals Likely Would Have a Beneficial Budgetary Impact
paragraphs: According to FHA’s estimates, the three major legislative proposals would  have a beneficial impact on HUD’s budget due to higher estimated  negative subsidies. According to the President’s fiscal year 2008 budget,  the credit subsidy rate for the Fund would be more favorable if the  legislative proposals were enacted. Absent any program changes, FHA  estimates that the Fund would require an appropriation of credit subsidy  budget authority of approximately $143 million. If the legislative proposals  were not enacted, FHA would consider raising premiums to avoid the need  for appropriations. If the major legislative proposals were passed, FHA  estimates that the Fund would generate $342 million in negative  subsidies.
FHA’s subsidy estimates for fiscal year 2008 should be viewed with  caution given that FHA has generally underestimated the subsidy costs for  the Fund. To meet federal requirements, FHA annually reestimates subsidy  costs for each loan cohort dating back to fiscal year 1992. The current  reestimated subsidy costs for all except the fiscal year 1992 and 1993  cohorts are higher than the original estimates. For example, the current  reestimated cost for the fiscal year 2006 cohort is about $800 million  higher than originally estimated. As discussed more fully later in this  report, FHA has taken some steps to improve its subsidy estimates.
section_title: FHA Has Enhanced Tools and Resources Important to Implementing Proposals but Does Not Intend to Mitigate Risks by Piloting New Products
paragraphs: FHA has enhanced the tools and resources it uses that would be important  to implementing the legislative proposals, but has not always used  industry practices that could help the agency manage the risks associated  with program changes. To implement risk-based pricing, FHA would rely  on historical loan-level data, models that estimate loan performance, and  its TOTAL mortgage scorecard. Although FHA has improved the  forecasting ability of its models by adding variables found to influence  credit risk, the agency is still addressing limitations in TOTAL that could  reduce its effectiveness as a pricing tool. FHA also has identified changes  in information systems needed to implement the legislative proposals and  requested additional staff to help promote new FHA products but faces  long-term challenges in these areas. However, the legislative proposals  would introduce new risks and challenges such as the difficulty of pricing  loans with very low or no down payments whose risks may not be well  understood. While other mortgage institutions use pilot programs to  manage the risks associated with changing or expanding their product  lines, FHA has indicated that it does not plan to pilot any no-down- payment product it is authorized to offer.
subsections: section_title: Credit Score Information Has Enhanced the Data FHA Would Use to Implement Proposals
paragraphs: Mortgage institutions use detailed information on the characteristics and  performance of past loans to help predict the performance of future loans  and price them correctly. Like other mortgage institutions we contacted,  FHA has extensive loan-level data. These data are contained in the  agency’s SFDW, which FHA implemented in 1996 to assemble critical data  from 12 single-family systems. SFDW is updated monthly and currently  contains data on approximately 33 million FHA-insured loans dating back  to fiscal year 1975. These data include information on the borrower (such  as age, gender, race, income, and first-time home buyer status) and the  loan (including whether it is an adjustable- or fixed-rate mortgage, the  source and amount of any down-payment assistance, interest rate,  premium rate, original mortgage amount, and LTV ratio).
FHA has added information on borrower credit scores to the loan-level  data that it plans to use to assess risk and set insurance premiums if the  legislative proposals were enacted. Research has shown that credit scores  are a strong predictor of loan performance—that is, borrowers with higher  scores experience lower levels of default. FHA started collecting credit  score data in the late 1990s when it began allowing its lenders to use  automated underwriting systems and mortgage scorecards. Upon  approving the use of Fannie Mae and Freddie Mac’s mortgage scorecards  in fiscal year 1998, FHA began receiving credit score data for loans  underwritten using these scoring tools. To develop its own mortgage  scorecard, FHA purchased archived credit scoring data for loan  origination samples dating back to 1992. Since implementing its TOTAL  mortgage scorecard in May 2004, FHA has collected credit scores on  almost all FHA borrowers.
section_title: FHA Has Made Some Improvements to Key Statistical Models, but Additional Challenges Remain
paragraphs: FHA would rely on both its loan performance models and TOTAL  mortgage scorecard to set insurance premiums if authorized to implement  risk-based pricing. Although FHA has improved the forecasting ability of  its loan performance models by incorporating additional variables found  to influence credit risk, FHA is still in the process of addressing a number  of limitations in TOTAL that could reduce its effectiveness for risk-based  pricing. The agency’s actuarial review contractor developed the loan  performance models to estimate the economic value of the Fund for the  annual actuarial review. The models estimate lifetime claim and  prepayment (the payment of a loan before its maturity date) rates based  on factors such as origination year, age, interest rate, mortgage product  type, initial LTV ratio, and loan amount. FHA used the projected lifetime  claim and prepayment rates from the most recent actuarial review as the  basis for its proposed risk-based insurance premiums.
FHA has improved its loan performance models by adding factors that  have been found to influence credit risk. In September 2005, we reported  that FHA’s subsidy reestimates, which use data from FHA’s loan  performance models, reflect a consistent underestimation of the costs of  its single-family insurance program. We recommended that FHA study and  report the impact (on the forecasting ability of its loan performance  models) of variables that have been found in other studies to influence  credit risk, such as payment-to-income ratios, credit scores, and the  presence of down-payment assistance. In response, HUD indicated that  its contractor was considering the specific variables that we had  recommended FHA include in its annual actuarial review of the Fund. The  contractor subsequently incorporated the source of down-payment  assistance in the fiscal year 2005 actuarial review and borrower credit  scores in the fiscal year 2006 review.
FHA also intends to use TOTAL to determine risk-based premiums, but we  have identified weaknesses in the scorecard that could limit its  effectiveness as a pricing tool. As previously noted, FHA plans to use  TOTAL to make the final determination regarding premium rates if  authorized to implement risk-based pricing. However, we reported in April  2006 that TOTAL excludes a number of important variables included in  other mortgage scoring systems. For example, TOTAL does not  distinguish between adjustable- and fixed-rate mortgages. However,  adjustable-rate mortgages generally are considered to be higher risk than  otherwise comparable fixed-rate mortgages because borrowers are subject  to higher payments if interest rates rise. Unlike the mortgage scorecards of  other institutions, TOTAL also does not include an indicator for property  type (single-family detached homes or condominiums, for example).  While currently a small component of FHA’s business, FHA expects that it  would insure more condominium loans if the condominium program were  moved to the Fund, as set forth in its legislative proposal. Additionally,  TOTAL does not indicate the source of the down payment. We have  reported that the source of a down payment is an important indicator of  risk, and the use of down-payment assistance in the FHA program has  grown substantially since 2000. Finally, our April 2006 report noted that  the data used to develop TOTAL were not current and FHA had no plans  to update the scorecard on a regular basis.
Consistent with our recommendations concerning TOTAL, FHA developed  policies and procedures that call for (1) an annual evaluation of the  scorecard’s predictive ability, (2) testing of additional predictive variables  to include in the scorecard, and (3) populating the scorecard with more  recent loan performance data. An FHA contractor is helping the agency to  implement these procedures and is scheduled to issue a final report on its  work in August 2007. After receiving the contractor’s report, FHA will  decide what changes to TOTAL are necessary. Because the magnitude of  these changes has not yet been determined, FHA does not have a  completion date for this effort. FHA officials indicated that they would  initially implement risk-based pricing using the current version of TOTAL  but would use the updated version when it became available.
section_title: FHA Has Identified Needed Changes in Information Technology but Faces Funding and Implementation Challenges
paragraphs: FHA has identified changes needed in its information technology to  implement the legislative proposals. FHA has divided these changes into  two phases. The first phase consists of simpler changes that it can make in  the short term, such as revising the system used to originate FHA-insured  loans to allow for down payments of less than 3 percent. FHA also would  need to make other changes to the system to support the new loan limits,  such as allowing the loan amount to equal 100 percent of the conforming  loan limit in applicable areas. The second phase includes modifications to  the computer programs that calculate the up-front and annual insurance  premiums to reflect risk-based pricing and revisions related to the  proposed changes to the HECM and condominium programs.
FHA has not yet obtained some of the funding needed to make the  technology changes and does not have estimates for how long it would  take to complete all of the changes. In fiscal year 2006, the agency  obligated $2.8 million of the $10.9 million it estimated was needed to make  all anticipated changes. Specifically, FHA plans to use funds  reprogrammed from HUD’s salaries and expense account and other  available funds to complete the first phase of changes. FHA estimates that  most of this work could be completed in a few months. The President’s  fiscal year 2008 budget requests an additional $8.1 million to fund the  second phase of changes needed to implement the legislative proposals.  However, FHA officials told us that they did not have an implementation  schedule for this phase and were waiting until the legislative proposals  were approved and they had secured the funding to develop one.
Although FHA officials indicated that they could implement the legislative  proposals after making these minor information technology changes, they  also told us that major systems changes and integration would be needed  to bring FHA’s systems up to levels comparable with other mortgage  institutions. Currently, over 40 systems support FHA’s single-family  business activity. While a thorough evaluation of large-scale systems  changes was outside the scope of our review, FHA has indicated that its  systems are poorly integrated, expensive to maintain, and do not fully  support the agency’s operations and business requirements. For example,  the systems cannot easily share or provide critical information because  they use different database platforms with varying capabilities; some of  the older systems use an outdated programming language; and the  creation of ad hoc systems that do not interface with other systems has  resulted in duplicate data entry. However, FHA has limited resources to  devote to the development of new systems for two main reasons. First, it  has to compete with other divisions within HUD for information  technology resources. Of the approximately $300 million that HUD has  requested for information technology development and maintenance in  fiscal year 2008, about 5 percent would be for FHA’s single-family  operations. Second, FHA spends what resources it has primarily on  systems maintenance. Of the $19 million that FHA has budgeted for single- family information technology in fiscal year 2007, FHA officials estimate  that $15 million would be devoted to systems maintenance.
In contrast with FHA, officials from other mortgage institutions with  whom we spoke indicated that they devote substantial resources to  developing new systems and enhancing existing systems that help them  price products and manage risk. To illustrate, officials from one mortgage  institution stated that they had a $15 million annual budget for capital  improvements in information technology. Officials from another mortgage  institution told us that 17 percent of the company’s total expenses were  related to information technology and that they recently spent about $15  million to develop a new system to price a mortgage product for the  foreign market. These and other mortgage industry officials stressed that  investments in state-of-the-art information systems were critical to  operating successfully in the highly competitive mortgage market.
section_title: FHA Has Sought Limited Staff Increases to Help Implement Proposals, but Other Workforce Challenges Remain
paragraphs: According to FHA officials, the legislative proposals would not  fundamentally alter how the agency administers its single-family mortgage  insurance program and, therefore, would not require major increases in  staff above the approximately 950 single-family housing employees it had  as of March 2007. Although implementing the legislative proposals would  require considerable program analysis and monitoring, much of the  analysis required to develop the proposals was performed primarily by  staff from FHA’s Offices of Finance and Budget and Single Family Housing  with assistance from several contractors, who will continue to support the  implementation. FHA officials told us that marketing any new products  authorized and explaining program changes to lenders would be their next  major challenge if the legislative proposals were passed. They also noted  that successful implementation would require them to stay abreast of  developments in the mortgage market. Therefore, the President’s fiscal  year 2008 budget requests an additional 21 full-time equivalent (FTE)  positions to help promote new FHA products, analyze industry trends, and  align the agency’s single-family business processes with current mortgage  industry practices.
Although a detailed assessment of FHA’s staffing needs was outside the  scope of our review, a HUD contractor’s 2004 workforce analysis suggests  that FHA faces broader challenges that could affect the agency’s  operations going forward. The analysis projected that FHA would have 78  fewer FTEs than needed to handle anticipated work demands by fiscal  year 2008, assuming hires and transfers equal to the average numbers for  2001 through 2003. In addition to anticipated FTE shortfalls, the report  also identified existing and projected deficits of FHA staff with certain  important competencies such as technical credibility and knowledge of  single-family programs, policies, and regulations. For example, the  consultant projected a difference of 28 percentage points between the  percentage of staff requiring technical credibility and the percentage that  would meet this requirement in fiscal year 2008. FHA officials have  acknowledged the agency’s staffing challenges and have developed plans  to address the projected gaps. In fiscal years 2005 and 2006, FHA gained  228 staff through hiring or transfers. However, the contractor had assumed  gains of 362 staff during those years, which means that the projected fiscal  year 2008 shortfall will be worse than originally estimated without  substantial staff accessions in fiscal years 2007 and 2008.
FHA also faces hiring and salary constraints that other mortgage  institutions do not. FHA’s hiring authority is limited by statute and  congressional appropriations. Federal statute (Title 5 of the U.S. Code)  restricts the amounts that FHA can pay staff, and each year’s  appropriation determines how many staff it can hire. Further, FHA must  compete with other divisions within HUD for staffing resources and may  not always receive its full request. Other mortgage institutions have  greater flexibility in their ability to hire and compensate staff. For  example, Fannie Mae and Freddie Mac are not subject to federal pay and  hiring restrictions. These restrictions create challenges for FHA as it  competes for qualified staff in the competitive mortgage labor market.
section_title: FHA’s Prior Risk Management Did Not Always Utilize Common Industry Practices Such as Piloting, but Some Planned Actions Could Help Address New Risks and Challenges
paragraphs: Although FHA has not always utilized risk-management practices that  other mortgage institutions use, it plans to take some steps to help address  the new risks and challenges associated with the legislative proposals. In  November 2005, we reported that HUD needed to take additional actions  to manage risks related to the approximately one-third of its loans with  down-payment assistance from seller-funded nonprofits. Unlike other  mortgage industry participants, FHA does not restrict homebuyers’ use of  such assistance. Our 2005 analysis found that the probability that these  loans would result in an insurance claim was 76 percent higher than for  comparable loans without such assistance, and we recommended that  FHA revise its underwriting standards to consider such assistance as a  seller contribution (which cannot be used to meet the borrower  contribution requirement). Despite the detrimental impact of these loans  on the Fund, FHA did not act promptly to mitigate the problem by  adjusting underwriting standards or using its existing authority to raise  premiums. However, in May 2007, FHA published a proposed rule that  would prohibit seller-funded down-payment assistance.
In addition, as we reported in February 2005, other mortgage institutions  limit the availability of or pilot new products to manage risks associated  with changing or expanding product lines. We have previously indicated  that, if Congress authorizes FHA to insure new products, it should  consider a number of means, including limiting their initial availability, to  mitigate the additional risks these loans may pose. We also recommended  that FHA consider similar steps for any new or revised products. However,  in response, FHA officials told us that they lacked the resources to  effectively manage a program with limited volumes. We noted that if FHA  did not limit the availability of new or changed products, the potential  costs of making widely available a product with risks that may not be well  understood could exceed the cost of a pilot program. With respect to its  legislative proposal, FHA officials told us that they do not plan to pilot or  limit the initial availability of any zero-down-payment product the agency  was authorized to offer. They also indicated that they expected that a zero- down-payment product would perform similarly to loans with seller- funded down-payment assistance. While the experience of loans with this  type of assistance is informative, a zero-down-payment product could be  utilized by a different population of borrowers and may not perform the  same as these loans.
Nevertheless, if the legislative proposals were to be enacted, FHA plans to  take some steps to help address risks and challenges associated with   (1) managing the risks of no-down-payment loans, (2) setting premiums to  achieve a modestly negative subsidy rate, and (3) modifying oversight of  lenders. First, loans with low or no down payments carry greater risk  because of the direct relationship that exists between the amount of equity  borrowers have in their homes and the risk of default. The higher the LTV  ratio, the less cash borrowers will have invested in their homes and the  more likely it is that they may default on mortgage obligations, especially  during times of economic hardship or price depreciation in the housing  market. No-down-payment loans became common in the conventional  market when rapid appreciation in home prices helped mitigate the risk of  these loans. However, if authorized to offer a zero-down-payment  mortgage in the near future, FHA would be introducing this product at a  time when home prices have stagnated or are declining in some parts of  the country. And because FHA would continue to allow borrowers to  finance some portion of closing costs and up-front insurance premiums,  the effective LTV ratio for loans with very low or no down payments could  be greater than 100 percent, further increasing FHA’s insurance risk. To  mitigate the risks associated with loans with no down payments, FHA  plans to impose stricter underwriting criteria for such loans:    FHA would limit the amount of up-front premium and closing costs  that could be financed; therefore, all borrowers would be making some  minimum cash contribution.
FHA plans to require a minimum credit score of 640 to obtain FHA  insurance on loans with no down payments.
FHA would limit its zero-down-payment product to loans for owner- occupied, one-unit properties.
Second, FHA’s legislative proposal would fundamentally change the way  the agency manages the Fund in that FHA would set premiums to achieve  a modestly negative overall subsidy rate, representing the weighted  average of the subsidy rates for the different risk-based pricing categories.  The President’s budget for fiscal year 2008 estimates that the weighted  average subsidy rate would be -0.6 percent (meaning that the Fund would  generate negative subsidies amounting to 0.6 percent of the total dollars  insured for loans originated that year). Achieving a modestly negative  credit subsidy rate would depend on FHA’s ability to price new products  whose risks may not be well understood, although risk-based pricing could  help FHA be more precise in setting and adjusting premiums for different  segments of its portfolio. FHA officials told us that they would monitor the  proportion of loans in its two highest-risk categories and consider raising  premiums or tightening underwriting standards if unexpectedly high  demand exposed FHA to excessive financial risk. Fannie Mae, Freddie  Mac, and the four private mortgage insurers we interviewed noted that  they carefully monitor their portfolios to make sure that they do not have  too many loans in any given risk category and take similar steps when they  determine that this is the case.
Third, FHA may need to modify the way that it oversees lenders if the  legislative proposals were enacted. FHA has indicated that its legislative  proposals would help the agency to expand service to higher-risk  borrowers in a financially sound manner. However, FHA may need to  revise its Credit Watch program if it is to achieve this end. Under Credit  Watch, FHA terminates the loan origination authority of any lender branch  office that has a default and claim rate on mortgages insured by FHA in the  prior 24 months that exceeded both the national average and 200 percent  of the average rate for lenders in its geographic area. Because termination  currently is based on how a lender’s loans perform relative to other  lenders in its geographic area, lenders that chose to make loans to higher- risk borrowers could suffer in comparison with lenders that served only  lower-risk borrowers. To encourage lenders to serve borrowers in the  higher-risk categories, FHA officials told us that they would consider  taking into account the mix of borrowers in the various risk categories  when evaluating a lender’s performance. Because higher-risk loans can be  expected to incur higher default and claim rates, they stated that FHA  would not want to penalize lenders with larger shares of these loans as  long as the loans were performing within expected risk parameters. FHA  also has improved the accuracy and timeliness of the loan performance  data it uses to evaluate lenders by requiring lenders to update the  delinquency status of their loans more frequently.
section_title: Congress and FHA Could Consider Other Administrative and Legislative Changes to Help FHA Adapt to Changes in the Mortgage Market
paragraphs: Mortgage industry participants and researchers have suggested additional  options that Congress and FHA could consider to help FHA adapt to  changes in the mortgage market, but some changes could have budget and  oversight implications. FHA already has authority to undertake some of  these options. Other options would require additional authorities from  Congress to increase the agency’s operational flexibility. Congress also  could consider alternative approaches to the provision of federal mortgage  insurance such as converting FHA to a government corporation or  implementing risk-sharing arrangements with private partners.
subsections: section_title: FHA Has Existing Authority to Make More Administrative Changes
paragraphs: Although FHA already has made several administrative changes to  streamline the agency’s insurance processes, additional administrative  changes within FHA’s existing authority could alleviate, to some extent,  the need for a positive subsidy in fiscal year 2008. More specifically, FHA  could exercise its existing authority to raise up-front premiums up to 2.25  percent and, for borrowers with down payments of less than 5 percent,  annual premiums to 0.55 percent.
To moderate the need for a positive subsidy in fiscal year 2008, FHA could  use its existing authority to increase premiums in one of three ways:   (1) FHA could raise premiums for all borrowers, as the President’s fiscal  year 2008 budget suggests will be necessary; (2) FHA could charge the  higher 0.55 percent annual premium to borrowers with lower down  payments; or (3) FHA could implement a more limited form of risk-based  pricing than it has proposed by adjusting premiums within the current  statutory limits. HUD’s Office of General Counsel determined in March  2006 that FHA has the authority to structure premiums for programs under  the Fund on the basis of risk. FHA could implement premium adjustments,  either for all or some borrowers, through the regulation process. However,  according to FHA officials, the current statutory limits on premiums are  too low to allow FHA to implement a risk-based pricing plan that would  allow the agency to set prices high enough to compensate for the expected  losses from the highest-risk borrowers or a new zero-down-payment  product. And while raising premiums for some higher-risk borrowers  could improve the Fund’s credit subsidy rate, raising premiums for all  borrowers might exacerbate FHA’s adverse selection problem. That is,  FHA could lose higher credit quality borrowers, resulting in fewer  borrowers to subsidize lower credit quality borrowers. This, in turn, could  require FHA to raise premiums again.
section_title: Additional Authorities for Investment in Technology, Pay and Hiring, and Introduction of Products Could Increase FHA’s Operational Flexibility
paragraphs: According to mortgage industry participants and researchers, Congress  also could consider granting FHA additional authorities to increase the  agency’s ability to invest in technology and staff or offer new insurance  products. First, Congress could grant FHA specific authority to invest a  portion of the Fund’s current resources—that is, negative subsidies that  accrue in the Fund’s reserves—in technology enhancement. The  congressionally-appointed Millennial Housing Commission (MHC) found  that FHA’s dependence on the appropriations process for budgetary  resources and competition for funds within HUD had led to under- investment in technology, increasing the agency’s operational risk and  making it difficult for FHA to work efficiently with lenders and other  industry partners. Because FHA’s single-family insurance program  historically has generated estimated negative subsidies, FHA and some  mortgage industry officials have suggested that the agency be given the  authority to use a portion of the Fund’s current resources to upgrade and  maintain its technology.
One benefit of this option is that the technology enhancements could  improve FHA’s operations. As previously noted, FHA has more than 40  single-family information systems that are poorly integrated, expensive to  maintain, and do not fully support the agency’s business requirements.  However, according to FHA, the option would require a statutory change  to allow FHA to use the Fund’s current resources to pay for technology  improvements. Also, the Fund is required by law to operate on an  actuarially sound basis. Because the soundness of the Fund is measured  by an estimate of its economic value—an estimate that is subject to  inherent uncertainty and professional judgment—the Fund’s current  resources should be used with caution. Spending the Fund’s current  resources would lower the Fund’s reserves, which in turn would lower the  economic value of the Fund. As a result, the Fund’s ability to withstand  severe economic conditions could be diminished. Also, using the Fund’s  current resources would increase the federal budget deficit unless  accompanied by corresponding reductions in other government spending  or an increase in receipts.
Second, Congress could consider allowing FHA to manage its employees  outside of federal pay scales. Some federal agencies, such as the Securities  and Exchange Commission, the Office of Thrift Supervision, and the  Federal Deposit Insurance Corporation, are permitted to pay salaries  above normal federal pay scales in recognition of the special skills  demanded by sophisticated financial market operations. The MHC and  mortgage industry officials have suggested that FHA be given similar  authority. This option could help FHA to recruit experienced staff to help  the agency adapt to market changes. Like the authority to invest in  technological enhancement, this option could be funded with the Fund’s  current resources but would have similar implications for the financial  health of the Fund and the federal budget deficit.
Third, Congress could authorize FHA to offer and pilot new insurance  products without prior congressional approval. A variety of new mortgage  products have appeared in the mortgage market in recent years, but FHA’s  ability to keep pace with market innovations is limited. For example, the  MHC found that the statutes and regulations to which FHA is subject  dramatically increase the time necessary to develop and implement new  products. The MHC and mortgage industry officials have recommended  that Congress expressly authorize FHA to introduce new products without  requiring a new statute for each. Such authority would offer FHA greater  flexibility to keep pace with a rapidly changing mortgage market.  However, Congress would have less control over FHA’s product offerings  and, in some cases, it might take years before a new product’s risks were  well understood.
To manage the risks of new products, mortgage institutions may impose  limits on the volume of the new products they will permit and on who can  sell and service those products. Limits on the availability of new or revised  FHA mortgage insurance products are sometimes set through legislation  and focus on the volume of loans that FHA may insure. In a prior report,  we recommended that FHA consider using pilots for new products and  making significant changes to its existing products. Since FHA officials  questioned the circumstances in which they could use pilots or limit  volumes when not required by Congress, we also recommended that FHA  seek the authority to offer new products on a limited basis, such as  through pilots, if the agency determines it currently lacks sufficient  authority. However, FHA has not sought this authority. Furthermore, while  piloting could help FHA manage the risks associated with implementing  new products, FHA officials told us that they lack the resources to manage  a program with limited volumes effectively.
Finally, Congress could authorize FHA to insure less than 100 percent of  the value of the loans it guarantees. Unlike private mortgage insurers,  which offer several levels of insurance coverage up to a maximum of 40 or  42 percent (depending on the company) of the value of the loan, FHA  insures 100 percent of the value of the loan. But since most FHA insurance  claims are offset by some degree of loss recovery, some mortgage industry  observers have suggested that covering 100 percent of the value of the  loan may not be necessary. In prior work, we examined the potential  effects of reducing FHA’s insurance coverage and found that while lower  coverage would cause a reduction in the volume of FHA-insured loans and  a corresponding decline in income from premiums, it would also result in  reduced losses and ultimately have a beneficial effect on the Fund.  However, we also noted that partial FHA coverage could lessen FHA’s  ability to stabilize local housing markets when regional economies decline  and may increase the cost of FHA-insured loans as lenders set higher  prices to cover their risk.
section_title: Alternative Approaches for Providing Federal Mortgage Insurance Include Converting FHA to a Government Corporation
paragraphs: The MHC, HUD officials, and other mortgage industry participants have  suggested alternative approaches to provide federal mortgage insurance in  a changing mortgage market. First, since the mid-1990s, several groups  including HUD and the MHC have proposed converting FHA into either an  independent or a HUD-owned government corporation—that is, an agency  of government, established by Congress to perform a public purpose,  which provides a market-oriented service and produces revenue that  meets or approximates its expenditures. Government corporations operate  more independently than other agencies of government and can be  exempted from executive branch budgetary regulations and personnel and  compensation ceilings. Therefore, converting FHA to a corporation could  provide the corporation’s managers with the flexibility to determine the  best ways to meet policy goals set by Congress or HUD.
This option could have budgetary and oversight implications that would  need to be considered when setting up the new corporation. For example,  Congress would have to determine the extent to which (1) the  corporation’s earnings in excess of those needed for operations and  reserves would be available for other government activities and (2) the  corporation would be subject to federal budget requirements. Also, if the  corporation were created outside of HUD, Congress would have to  consider whether oversight of the corporation would require a new  oversight institution or could be performed by an existing organization.
Alternatively, rather than maintaining all the functions of a mortgage  insurer within a government entity, the MHC and private mortgage  insurers have suggested that the federal government could provide  mortgage insurance through risk-sharing agreements with private  partners. FHA already works with partners to conduct various activities  related to its operations. For example, FHA has delegated underwriting  authority to approved lenders, and contractors perform many day-to-day  activities (such as marketing foreclosed properties) that once were  performed by FHA employees. A public-private risk-sharing arrangement  would recognize that government has a better ability to spread risk, while  private mortgage industry participants generally are more flexible and  responsive to market pressures and better able to innovate and adopt new  technologies quickly. There are many different possible ways to structure  a risk-sharing approach, with variables such as the amount of insurance  coverage provided, the number and type of risk-sharing partners, the  degree of risk accepted by each partner, and the roles and responsibilities  of the partners.
Whatever the structure, a risk-sharing approach could result in greater  efficiency and allow FHA to reach new borrowers through new partner  channels. However, risk sharing also could diminish the federal  government’s ability to stabilize markets if private partners lacked  incentive to serve markets where economic conditions were deteriorating.  Additionally, implementing risk-sharing arrangements might require more  specialized expertise than FHA currently has among its staff. For example,  careful analysis in both program design and monitoring would be needed  to ensure that FHA’s financial interests were adequately protected.
Finally, Congress and FHA could elect to make no changes at this time and  allow the private market to play the definitive role in determining the  future need for federal mortgage insurance. The recent decline in FHA’s  market share occurred at a time when interest rates were low, house price  appreciation was high, and mortgage credit was widely available.  However, changes in the mortgage market, such as higher interest rates  and stricter underwriting standards for subprime loans, may lead to an  increasing role for FHA in the future or at least a continued role for the  federal government in guaranteeing mortgage credit for some borrowers.  Therefore, even if Congress and FHA were to make no changes at this  time, FHA’s market share might increase due to the recent change in  market conditions. Or it might eventually become so small as to indicate  that there is no longer a need for a federal role in providing mortgage  insurance. If FHA’s market share continues to decline to such a level, FHA  might be eliminated or critical functions reassigned to maintain a minimal  federal role in guaranteeing mortgage credit.
Making no changes to FHA at this time would acknowledge the substantial  role the private market now plays in meeting the mortgage credit needs of  borrowers. However, some home buyers might find it more difficult and  more costly to obtain mortgages if FHA were eliminated or its functions  reduced and reassigned to another federal agency. And allowing FHA to  become too small could impact the federal government’s ability to play a  role in stabilizing mortgage markets during an economic downturn. Also,  any option that might lead to the eventual elimination of FHA’s single- family mortgage insurance program would have broader implications for  FHA and its other programs, such as the multifamily mortgage insurance  and regulatory programs, which this report does not address. Such  implications would, therefore, require further study.
section_title: Observations
paragraphs: Recent trends in the mortgage market, including the prevalence of low-  and no-down-payment mortgages and increased competition from  conventional mortgage and insurance providers, have posed challenges for  FHA. FHA’s market share has declined substantially over the years, and  what was a negative subsidy rate for the single-family insurance program  has crept toward zero. To adapt to market changes, FHA has implemented  new administrative procedures and proposed legislation designed to  modernize its mortgage insurance processes, introduce product changes,  and provide additional risk-management tools. To its credit, FHA has  performed considerable analysis to support its legislative proposal and has  made or planned enhancements to many of the specific tools and  resources that would be important to its implementation.
However, the proposals present risks and challenges and should be viewed  with caution for several reasons. First, FHA has not always effectively  managed risks associated with product changes, most notably the growth  in the proportion of FHA-insured loans with seller-funded down-payment  assistance. In that case, FHA did not use the risk-management tools  already at its disposal to mitigate adverse loan performance that has had a  detrimental impact on the Fund. Second, the proposal to lower down- payment requirements potentially to zero raises concerns given the greater  default risk of loans with high LTVs, policies that could result in effective  LTV ratios of over 100 percent, and housing market conditions that could  put borrowers with such loans in a negative equity position. Sound  management of very low or no-down-payment products would be  necessary to help ensure that FHA and borrowers do not experience  financial losses. Piloting or otherwise limiting the availability of new  products would allow FHA the time to learn more about the performance  of these loans and could help avoid unanticipated insurance claims.  Despite the potential benefits of this practice, FHA generally has not  implemented pilots, unless directed to do so by Congress. We have  previously indicated that, if Congress authorizes FHA to insure new  products, Congress and FHA should consider a number of means,  including limiting their initial availability, to mitigate the additional risks  these loans may pose. We continue to believe that piloting would be a  prudent approach to introducing the products authorized by FHA’s  legislative proposal. Finally, FHA would face the challenge of setting risk- based premiums—potentially for products whose risks may not be well  understood—to achieve a specific financial outcome, a relatively small  negative subsidy. Because the estimated subsidy rate is close to zero and  FHA has consistently underestimated its subsidy costs, FHA runs some  risk of missing its target and requiring a positive subsidy. Additionally,  limitations we have identified in FHA’s TOTAL scorecard, which would be  a key tool used in risk-based pricing, could reduce the agency’s ability to  set prices commensurate with the risk of the loans. Accordingly, it will be  important for FHA to continue making progress in addressing these  limitations.
Our recent report on trends in FHA’s market share underscores the  challenges that FHA has faced in adapting to the changing mortgage  market. For example, we noted that FHA’s share of the market for home  purchase mortgages has declined precipitously since 2001 due in part to  FHA product restrictions and a lack of process improvements relative to  the conventional market. While FHA has taken some steps to improve its  processes and enhance the tools and resources that it would use to  implement the modernization proposals, additional changes may be  necessary for FHA to operate successfully in the long run in a competitive  and dynamic mortgage market. Other mortgage industry participants have  greater flexibility to hire and compensate staff, invest in information  technology, and introduce new products, enhancing their ability to adapt  to market changes and manage risk. A number of policy options that go  beyond FHA’s modernization proposals would give FHA similar flexibility  but would have other implications that would require careful deliberation.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided HUD with a draft of this report for review and comment.  HUD provided comments in a letter from the Assistant Secretary for  Housing-Federal Housing Commissioner (see app. II). HUD said that the  draft report provided a balanced assessment but also that the report’s  concerns about FHA’s risk management and emphasis on the need for  piloting lower-down-payment products were unwarranted.
HUD said that it welcomed the draft report’s acknowledgement of FHA’s  improvements in program administration and risk management but  questioned the report’s concerns about FHA’s ability to understand and  manage risk. HUD indicated that its proposal to diversify FHA’s product  offerings and pricing structure grew out of recognition that FHA was  subject to adverse selection, as evidenced by the loss of borrowers with  better credit profiles and growth in seller-funded down-payment  assistance loans. In addition, HUD listed steps it had taken to curtail seller- funded down-payment assistance, including publishing a proposed rule in  May 2007 that would effectively eliminate seller-funded down-payment  assistance in conjunction with FHA-insured loans. Our draft report cited a  number of improvements in FHA’s risk management, such as  enhancements to its loan performance models. However, we continue to  believe that our concerns about FHA’s ability to manage risk are  warranted. As our draft report noted, FHA did not take prompt action to  mitigate the adverse financial impact of loans with seller-funded down- payment assistance. Furthermore, our draft report identified additional  steps, such as improvements to TOTAL scorecard, that would help address  the risks and challenges associated with the legislative proposals.
With regard to piloting, HUD said that pilot programs are appropriate  where a concept is untested but that the concept of zero- or lower-down- payments was well understood. HUD indicated that it had a firm basis for  anticipating the performance of zero- and lower-down-payment loans as a  result of its experience with mortgages with seller-funded down-payment  assistance. HUD said it used this experience to establish risk-based  insurance premiums and minimum credit scores for zero- and lower-down- payment borrowers. Additionally, HUD said that it had recently started to  collect 30-day and 60-day delinquency data, giving the agency the  capability to track performance trends for different segments of its loan  portfolio on a monthly basis. HUD stated that, for these reasons, the risks  of zero- or lower-down-payment loans were sufficiently well known or  knowable to not warrant a pilot program.
As our draft report noted, we previously have reported that other  mortgage institutions limit the availability of, or pilot, new products to  manage the risks associated with changing or expanding their product  lines and have recommended that FHA consider adopting this practice.  Our draft report also acknowledged that FHA’s experience with seller- funded down-payment assistance could inform assessment of how a zero- down-payment product would perform. However, we continue to believe  that FHA should consider limiting the availability of a loan product with  no down payment. In particular, our draft report discussed two factors  that indicate the need for caution in introducing such a product. First, a  zero-down-payment product could be utilized by a different population of  borrowers than seller-funded down-payment assistance loans and may not  perform similarly to these loans. Second, zero-down-payment loans  became common in the conventional mortgage market when rapid  appreciation in home prices helped mitigate the risks of these loans. If  authorized to offer a zero-down-payment product in the near future, FHA  would be introducing it at a time when home prices have stagnated or are  declining in some parts of the country. Because of these risks and  uncertainties, we continue to believe that a prudent way to introduce a  zero-down-payment product would be to limit its initial availability such as  through a pilot program.
We are sending copies of this report to the Chairman, Senate Committee  on Banking, Housing, and Urban Affairs; Chairman and Ranking Member,  Subcommittee on Housing and Transportation, Senate Committee on  Banking, Housing, and Urban Affairs; Chairman and Ranking Member,  House Committee on Financial Services; and Chairman and Ranking  Member, Subcommittee on Housing and Community Opportunity, House  Committee on Financial Services. We will also send copies to the  Secretary of Housing and Urban Development and to other interested  parties and make copies available to others upon request. In addition, the  report will be made available at no charge on the GAO Web site at  http://www.gao.gov.
Please contact me at (202) 512-8678 or shearw@gao.gov if you or your staff  have any questions about this report. 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Ranking Member of the Senate Committee on Banking, Housing, and  Urban Affairs and Senator Wayne Allard requested that we evaluate FHA’s  modernization efforts, which include administrative and proposed  legislative changes. Specifically, we examined (1) the likely program and  budgetary impacts of FHA’s modernization efforts, (2) the tools, resources,  and risk-management practices important to FHA’s implementation of the  legislative proposals, if passed, and (3) other options that FHA and  Congress could consider to help FHA adapt to changes in the mortgage  market and the pros and cons of these options.
To determine the likely program and budgetary impacts of FHA’s  modernization efforts, we reviewed FHA guidance on three administrative  changes implemented in 2006: the Lender Insurance Program and  revisions to the agency’s appraisal protocols and closing cost guidelines.  To determine the extent to which these administrative changes have  affected the processing of FHA-insured loans, we interviewed  representatives of Countrywide Financial, Wells Fargo, Bank of America,  and Lenders One (a mortgage co-operative representing about 90  independent mortgage bankers). We selected Countrywide Financial and  Wells Fargo because they are large FHA lenders, Bank of America because  it had recently decided to grow its FHA business, and Lenders One  because some of its members make FHA loans. We also interviewed  representatives of three mortgage and real estate industry groups— Mortgage Bankers Association, National Association of Realtors, and  National Association of Home Builders. To determine how the Lender  Insurance Program has affected the processing of FHA insurance, we  interviewed FHA officials and obtained documentation from them on the  extent of lender participation in the program and its effect on insurance  processing time and costs.
In evaluating the likely program impacts of FHA’s proposed legislative  changes, we focused on the proposals to raise FHA loan limits, institute  risk-based pricing of mortgage insurance premiums, and lower down- payment requirements. To examine the effect of raising loan limits on  demand for FHA-insured loans, we analyzed 2005 HMDA data (the most  current available). Specifically, we analyzed the home purchase loans  recorded in 2005 to determine the number of loans in each of 380 core  based statistical areas (CBSA) and used that data to calculate FHA’s  market share in each CBSA. (These 380 CBSAs were those for which we  had data and included one aggregate “nonmetro” category.) We then  determined the number of additional loans that, based on their loan  amounts, would have been eligible for FHA insurance in 2005 had the  higher proposed loan limits been in effect. Finally, we estimated the  percentage of the newly-eligible loans in each CBSA that FHA would have  insured using the following range of assumptions: (1) that FHA’s market  share would have been approximately the same as it was among all loans  in that CBSA under the actual 2005 loans limits, (2) that FHA’s market  share would have been approximately the same as its share of loans with  loan amounts ranging from 70 to 100 percent of the actual 2005 loan limits  in that CBSA, (3) that FHA’s market share would have been approximately  the same as its share of loans with loan amounts ranging from 75 to 100  percent of the actual 2005 loan limits in that CBSA, and (4) that FHA’s  market share would be approximately the same as its share of loans with  loan amounts ranging from 80 to 100 percent of the actual 2005 loan limits  in that CBSA.
For each of these four scenarios, we calculated the total number and  dollar amount of new loans across all 380 CBSAs that could have been  insured by FHA had the higher loan limits been in effect. All four  assumptions yielded similar results. After arriving at an estimate of an  overall increase in the number of FHA-insured loans, we then determined  the proportions of the increase that would have resulted from raising the  loan limit floor in low-cost areas, raising the loan limit ceiling in high-cost  areas, or raising the limits in areas that fell between the floor and the  ceiling. Finally, we calculated the average FHA-insured loan amount in  2005, as well as the average loan amount that FHA might have insured had  the loan limits been increased. We assessed the reliability of the HMDA  data we used by reviewing information about the data, performing  electronic data testing to detect errors in completeness and  reasonableness, and interviewing a knowledgeable official regarding the  quality of the data. We determined that the data were sufficiently reliable  for the purposes of this report.
To estimate the effects of risk-based pricing on borrowers’ eligibility for  FHA insurance and the premiums they would pay, we reviewed FHA’s  risk-based pricing proposal and interviewed FHA officials regarding their  plans to implement risk-based pricing, if authorized. We then analyzed  SFDW data on FHA’s 2005 home purchase borrowers to determine how  they would have been affected by FHA’s risk-based pricing proposal. (We  focused on 2005 borrowers because that was the most recent year for  which we had complete data, and we restricted our analysis to purchase  loans because they comprise the bulk of FHA’s business.) First, we  assigned borrowers to one of seven categories (FHA’s six proposed risk- based pricing categories and one category for those who would not have  been eligible for FHA insurance) based upon their LTV ratio and credit  score. Since FHA does not currently insure loans without a down payment,  we identified borrowers with down-payment assistance and determined  the source and amount of assistance to approximate borrowers with LTV  ratios of 100 percent. We recalculated the LTV ratio of their loans by  adding the amount of their assistance to the principal balance of their  loan. We then examined the demographic characteristics (race, income,  and first-time home buyer status) of borrowers in each of the six pricing  categories, as well as those borrowers who would no longer qualify for  FHA insurance. We assessed the reliability of the SFDW data we used by  reviewing information about the system and performing electronic data  testing to detect errors in completeness and reasonableness. We  determined that the data were sufficiently reliable for the purposes of this  report.
We also interviewed representatives of the following consumer advocacy  groups to obtain their views on FHA’s proposed legislative changes:  Center for Responsible Lending, Consumer Action, Consumer Federation  of America, National Association of Consumer Advocates, National  Community Reinvestment Coalition, National Consumer Law Center, and  National Council of La Raza. We examined the potential budgetary impacts  of the legislative proposals by reviewing the President’s fiscal year 2008  budget and FHA cost estimates as shown in the 2008 Federal Credit  Supplement. (The Federal Credit Supplement provides summary  information about federal direct loan and loan guarantee programs,  including current subsidy rates and reestimated subsidy rates.)
To determine the tools, resources, and risk-management practices  important to FHA’s implementation of the legislative proposals, we  interviewed and reviewed documentation from FHA officials regarding the  agency’s plans for implementing the legislative proposals, if passed. We  focused on completed and planned enhancements to FHA’s SFDW data,  loan performance models, TOTAL mortgage scorecard, information  technology, human capital, and risk-management practices. To help us  evaluate the need for enhancements to FHA’s tools, resources, and  practices, we followed up on our past work on (1) FHA’s development and  use of TOTAL, (2) FHA’s estimation of subsidy costs for its single-family  insurance program, (3) practices that could be instructive for FHA in  managing the risks of new mortgage products, and (4) FHA’s management  of loans with down-payment assistance. To obtain information on the  tools and resources that other mortgage institutions use to set prices and  manage risk, we interviewed Fannie Mae, Freddie Mac, the Mortgage  Insurance Companies of America (the industry group that represents the  private mortgage insurance industry), and four private mortgage insurance  companies—AIG United Guaranty, Genworth Mortgage Insurance  Company, Mortgage Guaranty Insurance Corporation, and PMI Mortgage  Insurance Company.
To determine other options that FHA and Congress could consider and the  pros and cons of these options, we reviewed relevant literature, including  the report of the Millennial Housing Commission, articles discussing past  FHA restructuring proposals, and our past work on various options for  FHA. We also interviewed FHA officials, academic experts, FHA lenders,  and private mortgage insurance companies.
We conducted this work in Washington, D.C., from September 2006 to  June 2007 in accordance with generally accepted government auditing  standards.
section_title: Appendix II: Comments from the Department of Housing and Urban Development
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition, Steve Westley (Assistant Director), Steve Brown, Laurie  Latuda, John McGrail, Barbara Roesmann, Paige Smith, and Richard  Vagnoni made key contributions to this report.