The Recovery Act of 2009 was enacted in response to significant weakness in the economy to, among other things, help promote economic recovery and assist those most affected by the recession. The Congressional Budget Office (CBO) estimated the Recovery Act’s cost at $825 billion as of August 2011. The Recovery Act included provisions to help stimulate the housing market, including increasing loan limits for FHA-insured mortgages in 669 high-cost counties in calendar year The provision allowed FHA to insure mortgages at a higher 2009.amount than would have been authorized without the Recovery Act. Under this provision, FHA insured over $20 billion in mortgages for 87,000 homeowners who were approved for FHA mortgage insurance in 2009. The Recovery Act also adapted and extended the FTHBC through November 2009. Through July 3, 2010, IRS reported that about 1.7 million individuals claimed more than $12 billion in FTHBCs under the Recovery Act for homes purchased in 2009. Office of Management and Budget (OMB) Circular A-129 states that delinquent tax debtors are ineligible for federal loan insurance, such as FHA mortgage insurance, unless they repaid the debt or were in a valid repayment agreement with IRS, but the FTHBC was available to those who qualified regardless of their tax debt. FHA’s single-family programs insure private lenders against 100 percent of the value of the loan for foreclosures on mortgages that meet FHA criteria, including mortgages for initial home purchases, construction rehabilitation, and refinancing. As of September 2011, almost 3,700 lenders were approved to participate in these programs. The insurance covers the principal, interest, and associated foreclosure costs, among other things. Lenders usually require mortgage insurance when a home buyer makes a down payment of less than 20 percent of the value of the home. FHA mortgage insurance allows a home buyer to make a modest down payment—as low as 3.5 percent—and obtain a mortgage for the balance of the purchase price. As the recent housing and economic recession set in, FHA’s share of the market for home purchase mortgages grew sharply due to the contraction of other mortgage market segments—rising from about 5 percent in 2006 to nearly 30 percent in 2009. FHA insured almost 2 million single-family mortgages valued at more than $300 billion in mortgage insurance in 2009. FHA generally is thought to promote stability in the market by ensuring the availability of mortgage credit in areas that may be underserved by the private sector or that are experiencing economic downturns. It has played a particularly large role among minority, lower-income, and first-time home buyers; almost 80 percent of FHA-insured home purchase loans in 2010 went to first-time home buyers. The FHA home mortgage insurance programs are funded by the FHA Mutual Mortgage Insurance Fund (MMIF), which is supported by insurance premiums charged to borrowers. The MMIF is used to cover claims on foreclosed mortgages, among other things. The Omnibus Budget Reconciliation Act of 1990 required the Secretary of HUD to take steps to ensure that the MMIF attained a capital ratio (i.e., economic value divided by the unamortized insurance-in-force) of at least 2 percent by November 2000 and maintain a 2 percent ratio at all times thereafter.The act also required an annual independent actuarial review of the economic net worth and soundness of the MMIF. The actuarial review estimates the economic value of the MMIF as well as the capital ratio to determine whether the MMIF has met the capital standards in the act. The capital ratio has dropped sharply in recent years due to declines in home prices and increases in seriously delinquent loans and foreclosures. The most recent actuarial study shows that the capital ratio is currently below the statutorily mandated level, at 0.24 percent, representing $2.6 billion in estimated capital resources against an active portfolio of $1.08 trillion. The MMIF has historically been sufficient to fund the FHA home mortgage insurance programs without additional funding from the federal government, but if the reserve were to be depleted, FHA would need to draw on permanent and indefinite budget authority to cover additional increases in estimated losses. A weakening in the performance of FHA-insured loans could increase the possibility that FHA will require additional federal funds. Our work has previously shown that the increased reliance on FHA mortgage insurance highlights the need for FHA to ensure that it has the proper controls in place to minimize financial risks to the federal government while meeting the housing needs of borrowers. Lenders are responsible for underwriting the loans to determine an applicant’s eligibility for FHA mortgage insurance in accordance with FHA policies. Underwriting is a risk analysis that uses information collected during the loan origination process to decide whether to approve a loan for FHA insurance. Lenders employ automated underwriting— the process by which lenders enter information on potential borrowers into electronic systems that contain an evaluative formula, or algorithm, known as a scorecard. The scorecard attempts to quickly and objectively measure the borrower’s risk of default by examining data such as application information and credit score. 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 assess the credit risk of a borrower, it does not reject a loan outright. Rather, TOTAL will assign a risk assessment of either “accept” or “refer” for each borrower. FHA requires lenders to manually underwrite loans that are assessed as “refer” by TOTAL to give a final determination if the loan should be accepted or rejected. According to FHA policy, a lender remains accountable for compliance with FHA eligibility requirements, regardless of the risk assessment provided by TOTAL. Virtually all of the lenders that participate in FHA’s mortgage insurance programs for single-family homes have direct endorsement authority. These lenders can underwrite and close mortgage loans without FHA’s prior review or approval. FHA insures lenders against nearly all losses resulting from foreclosed loans and covers 100 percent of the value of the loan. In general, foreclosure may be initiated when three monthly installments are due and unpaid, and it must be initiated when six monthly installments are due and unpaid, except when prohibited by law. To minimize the number of FHA loans entering foreclosure, servicers are responsible for pursuing various loss mitigation strategies, including suspended payments, loan modification, reduced mortgage payments, and sale of the property by the borrower. If, despite these loss mitigation strategies, the lender forecloses on the loan, the lender can file an insurance claim with FHA for the unpaid balance of the loan and other costs. However, FHA reviews a selection of insured loans, including early payment defaults (loans at least 60 days delinquent in the first six payments), in part to minimize potential FHA losses and ensure the underwriting for these mortgages met FHA guidelines. Reviews revealing serious deficiencies may result in FHA requiring the lenders to compensate the department for financial losses, known as indemnification, which requires the lender to repay FHA for any losses that it incurs after a loan has gone into default and the property has been sold. Congress, through legislation, sets limits on the size of loans that may be insured by FHA. These loan limits vary by county and can change from year to year. To mitigate the effects from the economic downturn and the sharp reduction of mortgage credit availability from private sources, Congress increased FHA loan limits. The Economic Stimulus Act (ESA) enacted in February 2008 stipulated that FHA loan limits be set temporarily at 125 percent of the median house price in each area, with a maximum loan limit of $729,750 for a one-unit home. Immediately prior to ESA’s enactment, the limits had been set at 95 percent of area median house prices. In July 2008, 5 months after passing ESA, Congress passed the Housing and Economic Recovery Act (HERA), which established new statutory limits of 115 percent of area median home prices. Then, in February 2009, Congress passed the Recovery Act, which stipulated that FHA loan limits for 2009 be set in each county at the higher dollar amount when comparing loan limits established under 2008 ESA requirements and limits for 2009 under HERA. Congress passed the FTHBC to assist the struggling real estate market and encourage individuals to purchase their first home. The credit was initially enacted by HERA and later revised by the Recovery Act. The 2008 HERA FTHBC provided taxpayers a credit of up to $7,500 to be paid back over 15 years, essentially serving as an interest-free loan. In 2009, the Recovery Act was enacted and increased the maximum credit for the 2009 FTHBC to $8,000, with no payback required unless the home is sold or ceases to be the taxpayer’s principal residence within 3 years of the purchase. The credit of up to $8,000 was a refundable tax credit paid out to the claimant if there was no tax liability or the credit exceeded the amount of any federal tax due. In July 2010, the Homebuyer Assistance and Improvement Act (HAIA) of 2010 extended the date to close on a home purchase to September 30, 2010. To protect federal government assets and minimize unintended costs to the government, OMB Circular A-129 states that individuals with delinquent federal debts are ineligible for loan insurance and prohibits federal agencies from issuing loans to such applicants; however, OMB’s policy allows individuals with delinquent federal taxes or other federal debt to attain eligibility by repaying their debt in full or entering into a valid repayment plan with the agency they owe. The policy states that agencies should determine if the applicant is eligible by including a question on loan applications asking applicants if they have such delinquencies.