More specifically, the report looks at how well the programs are meeting their goals, identifies their benefits for participating financial institutions and the Department of Housing and Urban Development (HUD), and considers opportunities for improving the programs and HUD’s administration of them. The key statutory objectives of the risk-sharing partnerships with qualified financial institutions are to ensure that the qualified participating entities bear a share of the risk that is sufficient to create strong, market-oriented incentives to maintain sound underwriting and loan management practices; use the resources of FHA to assist in increasing multifamily lending as provide a more adequate supply of mortgage credit for sound multifamily rental housing projects in underserved urban and rural markets; encourage major financial institutions to expand their participation in mortgage lending; increase the efficiency, and lower the costs to the federal government, of processing and servicing multifamily housing mortgage loans insured by FHA; and improve the quality and expertise of FHA staff and other resources, as required for the sound management of reinsurance and other market-oriented forms of credit enhancement. Although HUD delegates most of its traditional loan management responsibilities to its risk-sharing reinsurance partners, it retains monitoring and oversight functions. According to HUD, permanency would allow the demonstration programs to operate under the same rules as HUD’s other insurance programs. The Risk-Sharing Credit Enhancement Program Is Supporting the Financing of Affordable Multifamily Housing

In the 32 states and localities with participating housing finance agencies, the credit enhancement program is increasing access to capital markets and thereby supporting the production of affordable multifamily housing. Most of the properties are serving more low-income households than required because the credit enhancement is being combined with other subsidies, especially low-income housing tax credits. While it is still too early to evaluate the financial performance of the properties insured through the program, the available financial indicators appear to reflect sound underwriting criteria. As noted in chapter 1, HUD has identified smaller properties as an unmet capital need. 4). Conclusions

The credit enhancement demonstration program is meeting several key objectives, including facilitating the financing of affordable multifamily housing and making affordable multifamily housing available in a timely manner. The Risk-Sharing Reinsurance Program Is Largely Untested Because Participation Has Been Limited

Today, more than 5 years after the reinsurance program was authorized, the program remains largely untested. Although HUD’s risk-sharing partners have the potential to expand the participation of major financial institutions in mortgage lending, as envisioned in the risk-sharing statute, only one of the four institutions that was allocated units authorized in 1992—Fannie Mae—has participated extensively in the program, and one lender—Banc One Capital Funding Corporation—has originated over half of the loans that Fannie Mae has reinsured. Banc One Capital’s experience has demonstrated that the reinsurance program can expand participation in mortgage lending, including lending for smaller properties in rural areas. Freddie Mac has asked HUD to resolve this uncertainty. HUD has successfully met this legislative objective. A comparable system does not exist for the reinsurance program because activity in this program has been so limited. HUD is aware of these problems and plans to address them. These five field offices oversee housing finance agencies that account for about 60 percent of the units reserved through September 1997 under the credit enhancement program.
Why GAO Did This Study

Pursuant to a legislative mandate, GAO reviewed the risk-sharing demonstration programs established under section 542 of the Housing and Community Development Act of 1992, focusing on: (1) how well the programs' goals are being met; (2) the benefits for participating financial institutions and the Department of Housing and Urban Development (HUD); and (3) opportunities for improving the programs and HUD's administration of them.

What GAO Found

GAO noted that: (1) the credit enhancement program, together with the reinsurance program, was established under the Housing and Community Development Act of 1992 to facilitate the financing of affordable multifamily housing and to make that financing available in a timely manner; (2) the credit enhancement program is meeting these goals; (3) as of September 1997, 32 participating state and local housing finance agencies had reserved about 84 percent of the risk-sharing units allocated to these agencies through March 1996; (4) most of the insured loans are financing properties that serve more low-income households than required, apparently because the credit enhancement is being used with other subsidies, particularly low-income housing tax credits; (5) while it is still too soon to evaluate the financial performance of the insured loans, the available financial indicators reflect sound underwriting standards; (6) activity in the reinsurance program has been so limited that the program remains largely untested; (7) only one institution--Fannie Mae--has participated extensively in the program, and one lender--Banc One Capital Funding Corporation--has originated over half of the loans that Fannie Mae has reinsured; (8) Banc One's activity has demonstrated that the risk-sharing reinsurance program can expand participation in mortgage lending, including lending for smaller properties in rural areas--an unmet capital need, according to HUD's studies; (9) participation in the demonstration programs has enabled HUD to facilitate the financing of affordable multifamily housing while limiting its loss exposure through risk sharing; (10) participation has also allowed HUD to increase the efficiency and reduce the costs of its operations through delegation, compared with the Federal Housing Administration's (FHA) traditional multifamily program; (11) HUD has retained responsibility for monitoring its risk-sharing partners' performance, but its data system for monitoring the progress of credit enhancement projects is unreliable; (12) HUD is aware of the system's problems and plans to resolve them in the course of overhauling all of its information management systems; (13) HUD has also retained responsibility for overseeing its risk-sharing partners' compliance with the demonstration programs' requirements; however, GAO's review identified one default that was not reported to HUD headquarters for over a year; and (14) HUD recognizes that effective oversight is critical, particularly if one or both of the demonstration programs are made permanent and lenders' activity increases.