The Fund’s Capital Ratio Exceeds 3 Percent

The economic value of the Fund consists of current capital resources and the net present value of future cash flows. Thus we arrived at an estimated economic value of $15.8 billion and a capital ratio of 3.20 percent. According to our estimates, worse-than-expected loan performance that could be brought on by moderately severe economic conditions would not have caused the estimated value of the fund at the end of fiscal year 1999 to decline by more than 2 percent of insurance-in-force. Once the scenarios are specified, it would be appropriate to calculate the economic value of the Fund or the capital ratio under the scenarios. It recognizes that FHA faces two principal risks: credit risk and operational risk. By establishing a 1 percent “minimum basic capital ratio,” the act recognizes the unknown risk, such as operational risk, the Fund faces. By defining the level of risk that the Fund must withstand, Section 226 will clarify what is meant by actuarial soundness and help FHA manage the Fund to achieve that goal. Related GAO Products

Mortgage Financing: Actuarial Soundness of the Federal Housing Administration’s Mutual Mortgage Insurance Fund (GAO-01-527T, Mar.
What GAO Found

The Housing Affordability for America Act of 2002 establishes risk-based capital requirements for the Mutual Mortgage Insurance Fund of the Federal Housing Administration (FHA). Through the fund, FHA operates a single-family insurance program that helps millions of Americans buy homes. The Fund's estimated value rose dramatically in 1999, prompting proposals to spend current resources or reduce net cash flows into the Fund. The value of the Fund at the end of fiscal year 1999 was $15.8 billion. This capital ratio of 3.20 percent of the unamortized insurance-in-force exceeded the minimum required capital ratio of two percent. A two-percent capital ratio appears sufficient to withstand moderately severe economic downturns that could lead to worse-than-expected loan performance. Determining an appropriate capital ratio depends on the level of risk Congress wishes the Fund to withstand. FHA faces the failure of borrowers to perform, or credit risk, and the risk of managerial shortcomings, or operational risk. By defining the risk that the Fund must withstand, the act will define actuarial soundness and help FHA manage the Fund.