Program- and Market- Related Changes that Could Explain Higher Foreclosure Rates

Although economic factors such as house-price-appreciation rates are key  determinants of mortgage foreclosure, a number of program- and market- related changes occurring since 1995 could also affect the performance of  recently insured FHA loans. The combination of changes in FHA’s program and the  increased competition in the marketplace may partly explain the higher  foreclosure rates of FHA loans originated since fiscal year 1995. Performance of Recent Loans Suggests that FHA’s Portfolio May Be Riskier than Previously Estimated

The overall riskiness of FHA loans made in recent years appears to be  greater than we had estimated in our February 2001 report on the Mutual  Mortgage Insurance Fund, reducing to some extent the ability of the Fund  to withstand worse-than-expected loan performance. The impact of underwriting  changes and changes in the conventional mortgage market on the riskiness  of the portfolio is not fully understood.
What GAO Found

Federal Housing Administration (FHA) loans made in recent years have experienced somewhat higher foreclosure rates than loans made in earlier years. However, recent loans are performing much better than loans made in the 1980s. Although economic factors such as house price appreciation are key determinants of mortgage foreclosure, changes in underwriting requirements, as well as changes in the conventional mortgage market, may partly explain the higher foreclosure rates experienced in the 1990s. Factors not fully captured in the model GAO used may be affecting the performance of recent FHA loans and causing the overall risks of FHA's portfolio to be somewhat greater than previously estimated. Thus, the Mutual Mortgage Insurance Fund may be somewhat less able to withstand worse-than-expected loan performance resulting from adverse economic conditions.