Agencies with these programs  also face counterparty risk. The Fund’s Financial Condition Continues to Worsen, Increasing the Possibility That FHA Will Require Additional Funds

The Fund’s capital ratio dropped sharply in 2008 and fell below the  statutory minimum in 2009, when economic and market developments  created conditions that simultaneously reduced the Fund’s economic  value (the numerator of the ratio) and increased the insurance-in-force  (the denominator of the ratio).the Fund, the capital ratio fell from about 7 percent in 2006 to 3 percent in  2008 and 0.5 percent in 2009 (see fig. FHA’s Current Methodology for Assessing the Fund’s Condition Does Not Fully Account for Future Economic Volatility

As we reported in September 2010, FHA and its actuarial review  contractor enhanced their methods for assessing the Fund’s financial  condition but still were addressing other methodological issues that could  affect the reliability of estimates of the capital ratio. However, the current methodology is significantly limited by its reliance on  a single economic forecast to produce the estimate of the capital ratio that  is used to determine if the Fund is meeting the 2 percent capital reserve  requirement. This approach does not fully account for the variability in  future house prices and interest rates that the Fund may face. Given the uncertainty that always surrounds estimates of future economic  activity, the report we issued last year recommended that HUD require  the actuarial review contractor to use stochastic simulation of future  economic conditions, including house prices and interest rates, to  estimate the Fund’s capital ratio and include the results of this analysis in  FHA’s annual report to Congress on the financial status of the Fund. FHA Has Taken Steps to Address Risks, but Has Yet to Implement a Comprehensive Risk-Assessment Strategy

FHA faces risks resulting from its operations. More specifically, without an integrated risk-assessment  strategy, certain risks may not be fully addressed at the operational level  in a way that minimizes risk to the insurance programs; without annual  reassessments of its risks, Single Family Housing lacks assurance that its  quality control efforts address all its risks; and without ongoing  mechanisms in place to anticipate and address new or emerging risks,  FHA lacks a systematic approach to help the agency identify, analyze,  and formulate timely plans to respond most effectively to changed  conditions and risks. Therefore, we recommended that FHA (1) integrate  the internal quality control initiative of the Office of Single Family Housing  into the operational risk processes of the Office of Risk Management, (2)  conduct an annual risk assessment, and (3) establish ongoing  mechanisms—such as use of the report templates from the 2010  consultant’s report—to anticipate and address risks that might be caused  by changing conditions. FHA Has Taken Steps to Address Counterparty Risks, but Continues to Face Human Capital Challenges

With growth in loan volume, the number of lenders and appraisers (or  counterparties) participating in FHA’s single-family programs also has  grown. FHA also has revised its approach for overseeing  appraisers. While FHA has taken some steps to address succession planning, they  have been limited. The second initiative also began in 2010. FHA agreed, stating that it would  develop a formal workforce plan and had efforts underway to develop a  succession plan. Ginnie Mae’s Risk Management and Cost Modeling Require Continuing Attention

We released a report today about Ginnie Mae, which has experienced a  substantial increase in the volume of its business since 2007 as the  volume of federally insured or guaranteed mortgages increased.
Why GAO Did This Study

The Federal Housing Administration (FHA) has helped millions purchase homes by insuring private lenders against losses from defaults on single-family mortgages. In recent years, FHA has experienced a dramatic increase in its market role due, in part, to the contraction of other mortgage market segments. The increased reliance on FHA mortgage insurance highlights the need for FHA to ensure that it has the proper controls in place to minimize financial risks while meeting the housing needs of borrowers. This statement discusses (1) changes in the financial condition of FHA's fund used to insure mortgages--the Mutual Mortgage Insurance Fund (Fund)--and the budgetary implications of these changes; (2) how FHA evaluates the financial condition of the Fund; and (3) steps FHA has taken to assess and manage risks. This statement is drawn from a recent report on FHA's oversight capacity (GAO-12-15) as well as a report issued in September 2010 on the financial condition of the Fund (GAO-10-827R). GAO also obtained updated information on the status of the Fund from the recently issued actuarial report on the Fund.

What GAO Found

For the third consecutive year, FHA reported that the Fund's capital ratio (the ratio of economic value to insurance-in-force) has not met the 2 percent statutory minimum (see below). FHA cites declines in the Fund's economic value due to higher-than-expected defaults, claims, and losses. At the same time, the other component of the ratio, FHA's insurance-in-force, has grown rapidly. The Fund's condition also worsened from a budgetary perspective, with balances in the Fund's capital reserve account reaching new lows. If the account were depleted, FHA would require more funds to help cover costs on insurance issued to date. FHA enhanced methods for assessing the Fund's financial condition but has not yet addressed GAO's 2010 recommendation for improving the reliability of its estimates. It relies on a single economic forecast, which does not fully account for variability in future house prices and interest rates. An approach that would simulate hundreds of economic paths for house prices and interest rates would improve the reliability of its capital ratio estimates. FHA has taken or plans a number of steps to better assess and manage risk. It created a risk office in 2010 and hired a consultant to recommend best practices. FHA plans to charter committees to evaluate risks at enterprise-wide and programmatic levels. It began a quality control initiative in the Office of Single Family Housing, in which program and field offices assess and report on risks. FHA also enhanced lender and appraiser reviews. While FHA's consultant recommended integrating risk assessments, the quality control and risk office activities currently remain separate efforts. Also, the Office of Single Family Housing has not annually updated assessments since 2009 as required. Without integrated and updated risk assessments that identify emerging risks, FHA lacks assurance it has identified all its risks. GAO previously made recommendations on modeling the Fund's financial condition, risk assessments, and human capital. FHA agreed with these recommendations and told GAO they have efforts underway to implement them.