About 3.8 million borrowers took out mortgages in 1996 for purchasing homes, according to information collected through requirements contained in the Home Mortgage Disclosure Act (HMDA). While most of these mortgages were not insured, about 39 percent, or about 1.5 million, were insured. FHA’s share of the home purchase mortgage market was 16 percent in fiscal year 1996, the private mortgage insurers’ (PMIs) share was 17 percent, and the Department of Veterans’ Affairs (VA) share was 5 percent. Lenders usually require mortgage insurance when a home buyer has a down payment of less than 20 percent of the value of the home. In these cases, the loan-to-value (LTV) ratio of the mortgage is higher than 80 percent. Most lenders require mortgage insurance for these loans because they are more likely to default than loans with lower LTV ratios. If a loan with mortgage insurance defaults, the lender may foreclose on the loan and collect all or a portion of the losses from the insurer. Virtually all single-family mortgage insurance is provided by PMIs, FHA, and VA. In general, PMIs operate standard programs for typical borrowers and special affordable programs for qualified borrowers who have fewer down payment funds and need increased underwriting flexibility. FHA provides most of its single-family mortgage insurance through the Section 203(b) program. The Section 203(b) program has not required any federal funds to operate because FHA has collected enough revenue from insurance premiums and foreclosed property sales to cover claims and other expenses. FHA also operates some smaller, specialized single-family mortgage insurance programs. A primary goal of FHA’s single-family programs is to assist households that may be underserved by the private market. VA provides insurance through its Home Loan Guaranty Program to U.S. veterans and their families. FHA, VA, and PMIs provide lenders with guidelines for deciding whether or not a mortgage is eligible for mortgage insurance. In addition, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) establish their own guidelines for the loans they will purchase in the secondary mortgage market. A borrower’s ability to repay the mortgage is often evaluated by computing the ratios of the borrower’s total debt burden and housing expenses to his/her income (referred to as “qualifying ratios”). The “total-debt-to-income ratio” compares all of the borrower’s long-term debt payments, including housing expenses, with his/her income. The “housing-expense-to-income ratio” compares the borrower’s expected housing expenses with his/her income. The HMDA database contains information on mortgages insured through FHA’s principal single-family mortgage insurance program—the Section 203(b) program—and loans insured through FHA’s smaller single-family mortgage insurance programs, but does not distinguish between them. Consequently, sections of this testimony on FHA’s market share, the characteristics of FHA borrowers, and the borrowers who may have qualified for private mortgage insurance pertain to all single-family loans insured by FHA. FHA has been a major player in single-family home financing for over 60 years and it remains so today—particularly in certain market segments. Between 1986 and 1990, FHA was the largest insurer of single-family mortgages. The factors contributing to FHA’s large market share during these years may include an increase in FHA’s maximum loan limit in 1988 and economic downturns in some areas of the country that decreased the availability of private mortgage insurance. Except for FHA’s loan limit, the terms, such as maximum LTV ratio, under which FHA and VA mortgage insurance are available do not generally vary across different geographic locations, according to program guidelines. However, PMI companies may change the conditions under which they will provide new insurance in a particular geographic area to reflect the increased risk of losses in an area experiencing economic hardship. By tightening up the terms of the insurance they would provide, PMIs may have decreased their share of the market in economically stressed regions of the country. However, throughout the period from 1991 through 1996, the PMIs had a greater share of all insured single-family mortgage originations than FHA or VA. This change may be a result, in part, of increased premiums for FHA insurance implemented as a result of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). By 1996, the PMIs’ share of insured home purchase mortgages was 44 percent, FHA’s was 42 percent, and VA’s was 13 percent. In our report on FHA’s role, we found that in 1994, FHA-insured home purchase loans were concentrated to a greater extent on low-income and minority borrowers, first-time home buyers, and borrowers with higher LTV ratios than those with loans insured by private mortgage-insurers. In addition, solely on the basis of our analysis of the LTV and qualifying ratios of borrowers who obtained loans in 1995, 66 percent of FHA’s borrowers might not have qualified for private mortgage insurance for the loans they received. However, it is important to note that as with home buyers in general, most low-income and minority home buyers who obtained mortgages in fiscal year 1996 did not have insured mortgages. Recent HMDA, Mortgage Insurance Companies of America (MICA), and HUD data show that FHA-insured loans continue to be concentrated to a greater extent on borrowers with these same characteristics than those with loans insured by private mortgage-insurers. Specifically, we estimate based on HMDA, MICA, and HUD data for loans in 1996 that: FHA insured 23 percent of the 984,495 home purchase loans made to low-income home buyers, and such home buyers represented about 39 percent of FHA-insured loans. We also estimate that FHA insured more of these loans than the PMIs (14 percent) or VA (5 percent). FHA insured 30 percent of all loans made to minority home buyers, and such home buyers represented about 31 percent of FHA-insured loans. FHA insured more loans for minority borrowers in 1996 than the PMIs (14 percent) and substantially more than the VA (6 percent). About 74 percent of FHA-insured loans in 1996 were made to first-time home buyers. FHA insured a higher percentage of loans for first-time home buyers than its overall share of the insured home purchase market. While 63 percent of FHA-insured loans made in 1996 had LTV ratios exceeding 95 percent, only about 7 percent of conventional loans below the maximum FHA loan limit had LTV ratios exceeding 95 percent in 1997. Another major achievement of FHA’s single-family mortgage insurance program has been to restore the financial health of the Mutual Mortgage Insurance Fund (the Fund)—the insurance fund supporting 91 percent of the dollar value of FHA-insured single-family mortgages outstanding as of the end of fiscal year 1997. According to Price Waterhouse’s 1998 actuarial study, the Fund had an economic value/reserves of about $11.3 billion as of September 30, 1997. Over time, insurance premiums and other income have more than covered costs. The $11.3 billion estimate represents an improvement of about $14 billion from the lowest level reached by the Fund—a negative $2.7 billion economic value/reserves estimated by Price Waterhouse at the end of fiscal year 1990. Price Waterhouse also reported that the Fund’s capital reserve ratio (economic value/reserves as a percentage of value of outstanding loans) was 2.81 percent surpassing the legislative target for reserves (a 2-percent capital ratio by November 2000). In addition, Price Waterhouse reported that the Fund will meet the legislative target for fiscal year 2000. They estimate that by then the Fund will have a capital ratio of 3.21 and economic value/reserves of about $15.7 billion. In our 1996 report on FHA’s role, we reported that the FHA, PMIs, and VA mortgage insurance programs differed in terms of maximum LTV ratios and mortgage amounts, the financing of closing costs, and the amount that each will pay lenders to cover the losses associated with foreclosed loans, according to the guidance prepared by the insurers for lenders. Specifically, in our 1996 report, we reported that while both FHA and VA could insure loans with effective LTVs ratios that exceed 100 percent (due to the financing of closing costs or other fees), PMIs did not offer insurance for loans with LTVs ratios greater than 97 percent. Recently, both Fannie Mae and Freddie Mac announced the introduction of conventional 97 percent LTV mortgage products that offer many of the advantages of FHA’s single-family program. Both programs—Fannie Mae’s “Flexible 97 Mortgage” and Freddie Mac’s “Alt 97 Mortgage”—allow down payments as low as 3 percent that can be funded through gifts, unsecured loans from relatives, or grants from nonprofits or local governments. With regard to limits on loan size, FHA today may insure loans only up to a maximum of $170,362 in certain areas with high housing costs, while PMIs and VA permit insurance of larger loans. In connection with settlement costs, FHA allows borrowers to finance most closing costs, but PMIs and VA do not. However, both FHA and VA allow borrowers to finance their insurance premiums. Finally, while FHA protects lenders against nearly 100 percent of the loss associated with a foreclosed mortgage, PMIs and VA limit their coverage to a portion of the mortgage balance. PMIs generally cover only 20 to 35 percent, and VA covers only 25 to 50 percent of the mortgage balance, even if a loss exceeds that amount.