The act defined the capital ratio as the ratio of the Fund’s capital, or economic net worth, to its unamortized insurance-in-force. Our Estimates of the Fund’s Economic Net Worth

The Fund had amortized insurance-in-force valued at about $305 billion as of September 30, 1994. The actual economic net worth and capital ratios of the Fund and the validity of our estimates will depend on a number of future economic factors, including the rate of appreciation in house prices over the life of the FHA mortgages of up to 30 years. Under this scenario, we estimate that the Fund had an economic net worth of about $6.1 billion and resulting capital ratio of 2.02 percent at the end of fiscal year 1994. Under our low-case economic scenario, which assumes house price rates of appreciation of 2 percentage points lower than our baseline and a higher unemployment rate, we estimate that the Fund’s economic net worth would be $3 billion. As a result, its economic net worth would decline. In its most recent report dated May 8, 1995, Price Waterhouse reported that the Fund had an economic net worth of about $6.68 billion—compared with our baseline estimate of $6.1 billion—and a resulting capital ratio of 1.99 percent of the unamortized insurance-in-force as of the end of fiscal year 1994—compared with our baseline estimate of 2.02 percent of the amortized insurance-in-force. Factors Contributing to the Growth in the Mutual Mortgage Insurance Fund’s Economic Net Worth in Fiscal Year 1994

We estimate that during fiscal year 1994, the economic net worth of the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund increased by about $1.2 billion. The rates of house price appreciation and unemployment are based on DRI/McGraw-Hill’s forecasts.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Federal Housing Administration's (FHA) Mutual Mortgage Insurance Fund, focusing on: (1) an estimate of the Fund's economic net worth as of the end of fiscal year 1994; (2) the results of the legislatively prescribed capital reserve ratio that expresses economic net worth as a percentage of insurance-in-force; and (3) a comparison between the GAO estimate of the Fund's economic net worth and an estimate prepared by an accounting firm.

What GAO Found

GAO found that: (1) in 1994, the Fund's economic net worth continued to improve; (2) as of September 30, 1994, the Fund had $305 billion in outstanding mortgage loans; (3) using moderate house price appreciation rates and unemployment rates, the Fund had an economic net worth of about $6.1 billion and a resulting capital ratio of 2.02 percent; (4) using low house price appreciation rates and high unemployment rates, the Fund had an economic net worth of $3 billion; (5) using high house price appreciation rates and low unemployment rates, the Fund had an economic net worth of $7.4 billion; (6) during fiscal year 1994, the Fund's capital ratio of 2.02 percent of the amortized insurance-in-force exceeded the November 2000 capital ratio goal of 2 percent; (7) the firm estimated that the Fund had an economic net worth of about $6.68 billion and a resulting capital ratio of 1.99 percent at the end of fiscal year 1994, which was about the same as GAO estimate; and (8) the Fund's future economic net worth will depend on a number of economic factors including the appreciation rates in housing prices and whether FHA is restructured.