FHA is a wholly owned government corporation within HUD. It was established in 1934 under the National Housing Act to broaden homeownership, shore up and protect lending institutions, and stimulate employment in the building industry. 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 primarily insures forward mortgages for initial home purchases and refinancing, but also insures reverse mortgages that permit persons 62 years and older to convert their home equity into cash advances through its Home Equity Conversion Mortgages for Seniors (HECM) program. single-family mortgage insurance through programs supported by the Fund.Deputy Assistant Secretary for Single Family Housing, who reports to the Assistant Secretary for Housing-Federal Housing Commissioner. With forward mortgages, the borrower’s monthly loan payments to the lender add to the borrower’s home equity and decrease the loan balance. With reverse mortgages, the borrower receives payments from the lender. The lender adds the principal and interest to the loan balance, reducing the homeowner’s equity. FHA is a government mortgage insurer in a market that also includes private mortgage insurers. 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 score requirements for conventional loans may find it easier to qualify for a loan with FHA insurance, which covers 100 percent of the principal balance of the loan involved in a claim and other eligible costs. Generally, borrowers are required to purchase mortgage insurance when the loan-to-value (LTV) ratio (the amount of the mortgage loan divided by the value of the home multiplied by 100) exceeds 80 percent. FHA-insured borrowers are required to make minimum cash investments of 3.5 percent, which may come from the borrowers’ own funds or from certain third-party sources. Borrowers are also permitted to finance their mortgage insurance premiums, a practice that can create an effective LTV ratio of close to 100 percent. Congress has set limits on the size of the forward mortgages FHA may insure, which can vary by county. For the period from January 1, 2013, through December 31, 2013, the limits range from $271,050 to $729,750 for one-unit properties in the contiguous United States. FHA’s single-family mortgage programs have played a prominent role in mortgage financing in the wake of the 2007-2009 financial crisis and housing downturn. In 2012, FHA insured about $227 billion in single- family mortgages, and its overall insurance portfolio was about $1.1 trillion. The agency has played a particularly large role among minority, lower-income, and first-time homebuyers. In 2012, about 78 percent of FHA-insured loans went to first-time homebuyers, about 32 percent of whom were minorities. FHA is generally 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 that are experiencing economic downturns. As the recent housing crisis and economic recession set in, the contraction of other segments of the mortgage market and legislated increases in the loan amounts eligible for FHA insurance resulted in higher demand for FHA-insured mortgages. FHA officials also noted that even if their volume had not increased, the agency’s share of the market would have increased because other segments of the market declined or were completely eliminated. According to HUD’s Housing Market Conditions, FHA’s share of the market for home purchase mortgages (in terms of loan originations) grew sharply, rising from approximately 4.5 percent in 2006 to approximately 26.1 percent in 2012.entire mortgage market (including refinance activity), FHA’s share of the market also rose dramatically, and stood at 14.6 percent in 2012 (see fig. 1). A number of other private-sector and government institutions participate in the mortgage market. Private lenders offer home purchase and refinance mortgages and often work with mortgage brokers, independent contractors that originate the loan products of multiple lenders. The Department of Veterans Affairs’ (VA) Loan Guaranty Service and the Department of Agriculture’s (USDA) Rural Housing Service (RHS) administer federal programs that insure or guarantee single-family mortgages made by private lenders. Private mortgage insurance companies offer mortgage insurance that protects private lenders against losses in the event the borrower defaults on the mortgage. Fannie Mae and Freddie Mac, two government-sponsored enterprises (the enterprises), purchase mortgages from lenders across the country, financing their purchases through borrowing or by issuing securities backed by the mortgages (mortgage-backed securities or MBS). The enterprises are currently under conservatorship. Ginnie Mae is another wholly owned government corporation in HUD. It guarantees the timely payment of principal and interest of MBS backed by pools of federally insured or guaranteed mortgage loans, such as FHA, VA, or RHS. The Omnibus Budget Reconciliation Act of 1990 required HUD to take steps to ensure that the Fund attained a capital ratio of at least 2 percent by November 2000 and maintained at least that level thereafter. The capital ratio is the Fund’s economic value divided by the insurance-in- force (outstanding insurance obligations). The act also required an annual independent actuarial review of the Fund’s economic net worth and soundness. This actuarial review is now a requirement in the Housing and Economic Recovery Act of 2008, which also requires an annual report to Congress on the results of the review. The Fund’s capital ratio dropped sharply in 2008 and fell below the statutory minimum in 2009, when economic and market developments created conditions that simultaneously reduced the Fund’s economic value (the numerator of the ratio) and increased the insurance-in-force (the denominator of the ratio). According to annual actuarial reviews of the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in 2008 and dropped to below 2 percent in 2009 (see fig. 2). In 2012, the ratio fell below zero to negative 1.44 percent. Under the Federal Credit Reform Act of 1990 (FCRA), FHA and other federal agencies must estimate the net lifetime costs—known as credit subsidy costs—of their loan insurance or guarantee programs and include the estimated costs to the government in their annual budgets. Credit subsidy costs represent the net present value of expected lifetime cash flows, excluding administrative costs. When estimated cash inflows (such as borrower insurance premiums) exceed expected cash outflows (such as insurance claims), a program is said to have a negative credit subsidy rate and generates offsetting receipts that reduce the federal budget deficit. When the opposite occurs, the program is said to have a positive credit subsidy rate and therefore requires appropriations. Generally, agencies must produce annual updates of their subsidy estimates—reestimates—on the basis of information about actual performance and estimated changes in future loan performance. FCRA recognized the difficulty of making credit subsidy estimates that mirrored actual loan performance and thus provided permanent and indefinite budget authority for reestimates that reflected increased program costs.Upward reestimates increase the federal budget deficit unless accompanied by reductions in other government spending or an increase in receipts. As the capital ratio declined, the Fund’s condition also worsened from the federal budgetary perspective. FHA annually estimates the subsidy costs of new activity for its loan insurance program and also reestimates, or annually updates, prior subsidy cost estimates. Historically, FHA estimated that its loan insurance program had a negative subsidy cost. On the basis of these estimates, FHA accumulated substantial balances in a capital reserve account, which represents amounts in excess of those needed for estimated claims or other costs and was used to cover reestimates reflecting unanticipated increases to those costs (such as higher-than-expected claims). In recent years, FHA has transferred billions of dollars annually from the capital reserve account to cover increases in estimated credit subsidy costs of the Fund (upward subsidy reestimates). As a result, balances in the capital reserve account fell dramatically, from $19.3 billion at the end of 2008 to an estimated $3.3 billion at the end of 2012 (see fig. 3). If the reserve account were to be depleted, FHA could draw on permanent and indefinite budget authority to cover reestimates indicating additional increases in estimated credit subsidy costs. The President’s budget for 2014 contained a $22.4 billion upward reestimate in FHA’s credit subsidy costs for the Fund. The budget indicated that the reestimate would be funded by depleting FHA’s capital reserve account in 2013, using premiums collected in 2013 from new endorsements, and potentially drawing on $943 million in permanent and indefinite budget authority. However, to the extent that such premiums collected in 2013 are different than FHA estimated, FHA may need to draw on more or less permanent and indefinite budget authority. Mortgage industry observers have suggested changes to FHA’s product terms and conditions to lower its exposure to risk and improve its capital position. These proposed changes include tightening its underwriting standards and increasing down payments and premiums charged. However, implementing one or a combination of these options could affect borrowers’ access to credit, create an adverse selection problem for FHA, or affect the agency’s role in terms of the types of borrowers it serves. Lenders must comply with FHA’s underwriting criteria when making FHA- insured loans. Underwriting is a risk analysis that uses information—such as a borrower’s credit history and cash assets, among other things— collected during the origination process to decide whether to approve a loan. In order to qualify for an FHA-insured loan, a borrower must have a decision credit score of at least 500.