While most of these mortgages were not insured, about 39 percent, or about 1.5 million, were insured. FHA’s share of the home purchase mortgage market was 16 percent in fiscal year 1996, the private mortgage insurers’ (PMIs) share was 17 percent, and the Department of Veterans’ Affairs (VA) share was 5 percent. A primary goal of FHA’s single-family programs is to assist households that may be underserved by the private market. In addition, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) establish their own guidelines for the loans they will purchase in the secondary mortgage market. FHA Is an Important Source of Mortgage Insurance in Certain Markets

In our report on FHA’s role, we found that in 1994, FHA-insured home purchase loans were concentrated to a greater extent on low-income and minority borrowers, first-time home buyers, and borrowers with higher LTV ratios than those with loans insured by private mortgage-insurers. In addition, solely on the basis of our analysis of the LTV and qualifying ratios of borrowers who obtained loans in 1995, 66 percent of FHA’s borrowers might not have qualified for private mortgage insurance for the loans they received. FHA insured 30 percent of all loans made to minority home buyers, and such home buyers represented about 31 percent of FHA-insured loans. FHA’s Insurance Fund Exceeds Statutory Reserve Targets

Another major achievement of FHA’s single-family mortgage insurance program has been to restore the financial health of the Mutual Mortgage Insurance Fund (the Fund)—the insurance fund supporting 91 percent of the dollar value of FHA-insured single-family mortgages outstanding as of the end of fiscal year 1997. However, both FHA and VA allow borrowers to finance their insurance premiums. The Federal Government Promotes Affordable Homeownership in Many Other Ways

Besides FHA’s Section 203(b) and VA’s single-family loan programs, the federal government is involved in many other efforts to make homeownership affordable. The Neighborhood Reinvestment Corporation, through its network of local development organizations and its secondary market organization, promotes affordable homeownership primarily through second mortgages and home buyer education. Several of the other federal programs assist low- and moderate-income home buyers by combining their assistance with FHA mortgage insurance. A substantial portion of the mortgages made through state housing finance agencies and HUD’s Housing Opportunities for People Everywhere program were insured by FHA in 1994. Similarly, private mortgage insurance may also be combined with assistance from federal housing programs. Challenges Faced by FHA’s Single-Family Mortgage Insurance Fund

While FHA’s Fund is financially healthy and has surpassed the legislative target for reserves, there are challenges facing FHA today, including reducing the losses it incurs on foreclosed properties, maintaining financial self-sufficiency in the face of economic and other factors that could adversely affect future program costs, and resolving year 2000 computing risks. In particular, by lowering the required down payment, PMIs and others might attract some borrowers who might have otherwise insured their mortgages with FHA.
Why GAO Did This Study

GAO discussed: (1) the achievements of the Federal Housing Administration's (FHA) home mortgage insurance program, including the extent that home buyers use FHA insurance, the characteristics of these home buyers--including whether they were first-time home buyers--and how many of them might also qualify for private mortgage insurance; (2) how the insurance terms available through FHA's principal single-family mortgage insurance program compare with private mortgage insurance and guaranties from the Department of Veterans' Affairs (VA); (3) other federal activities that promote affordable homeownership; and (4) challenges faced by FHA in ensuring the financial health of its Mutual Mortgage Insurance Fund--the insurance fund supporting most FHA-insured single-family mortgages.

What GAO Found

GAO noted that: (1) FHA is a major participant in the single-family housing market; (2) of the approximately 3.8 million home purchase loans made in fiscal year 1996, FHA insured 16 percent; (3) while most of these mortgages were not insured, about 39 percent were; (4) FHA insured 42 percent of all home purchase loans in 1996 and fulfilled a larger role in some specific market segments, particularly low-income home buyers and minorities; (5) most borrowers were able to obtain a home purchase mortgage without insurance by either FHA, the private mortgage insurers, or VA; (6) while a third of the loans FHA insured in 1995 might have qualified for private mortgage insurance, the other two-thirds probably would not have qualified, on the basis of the loan-to-value and qualifying ratios of the loans FHA insured; (7) FHA and VA programs permit borrowers to make smaller down payments and have higher total-debt-to-income ratios than allowed by private mortgage insurers; (8) FHA's program differs from private mortgage insurers' and VA's programs in that it allows closing costs to be financed in the mortgage; (9) in addition to FHA and VA, the federal government promotes affordable homeownership through programs run by the Department of Housing and Urban Development, the Department of Agriculture's Rural Housing Service, the Federal Home Loan Bank System, state housing finance agencies, and Neighborhood Reinvestment Corporation; (10) although these other federal programs share FHA's mission to assist households who may be underserved by the private mortgage market, none reach as many households as FHA; (11) several of these other programs assist home buyers by combining their assistance with FHA mortgage insurance; (12) the federal government promotes homeownership among buyers who might otherwise by underserved through requirements placed upon the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and certain lenders; and (13) although FHA's single-family program is financially self-sufficient, there are challenges facing FHA today, including reducing the losses it incurs on foreclosed properties, maintaining financial self-sufficiency in the face of economic and other factors that could adversely affect future program costs, and resolving year 2000 computing risks.