The Fund's Estimated Economic Value Exceeds 3 Percent of Insurance-in-Force

On the basis of our economic model of FHA's home loan program and  forecasts of several key economic factors, we estimate that at the end of  fiscal year 1999, the Fund had an economic value of about $15.8 billion. As a result of the inherent uncertainty and the need for  professional judgment in this type of analysis, we believe that our estimates  and Deloitte's estimates of the Fund's economic value and capital ratio are  comparable. A 2-percent Capital Ratio Appears Sufficient to Withstand Some Worse-Than- Expected Loan Performance

According to our estimates, worse-than-expected loan performance that  could be brought on by moderately severe economic conditions would not  cause the estimated value of the fund at the end of fiscal year 1999 to  decline by more than 2 percent of insurance-in-force. Reliably measuring the impacts of  these options on the Fund's capital ratio and FHA borrowers is difficult  without using tools designed to estimate the multiple impacts that policy  changes often have. However, any option  that results in a reduction in the Fund’s reserve, if not accompanied by a  similar reduction in other government spending or by an increase in  receipts, would result in either a reduction in the surplus or an increase in  any existing deficit. HUD agreed with the report's findings regarding the  estimated value of the fund, and the ability of the fund to withstand  moderately severe economic downturns that could lead to worse-than- expected loan performance.
What GAO Found

The Mutual Mortgage Insurance Fund has maintained an economic value of at least two percent of the Fund's insurance-in-force, as required by law. GAO's and the Department of Housing and Urban Development's (HUD) analysis show that the Fund had an economic value of $15.8 billion (3.20 percent) and $16.6 billion (3.66 percent), respectively. Given the economic value of the Fund and the state of the economy at the end of fiscal year 1999, a two-percent capital ratio appears sufficient to withstand moderately severe economic downturns that could lead to worse-than-expected loan performance. However, under more severe economic conditions, the economic value of two percent of insurance-in-force would not be adequate. Because of the uncertainty and professional judgment associated with this type of economic analysis, GAO cautions against relying on one estimate or even a group of estimates to determine the adequacy of the Fund's reserves over the longer term. HUD could exercise several options under current legislative authority to reduce the capital ratio for the Fund. It is difficult, however, to reliably measure the impact of policy changes on the Fund's capital ratio and Federal Housing Administration borrowers without using tools designed to estimate the multiple impacts that policy changes often have. Nonetheless, any option that reduces the Fund's reserve, if not accompanied by a similar reduction in other government spending, would result in a budget surplus reduction or a deficit increase.