GAO Categorizes FHA as a ‘High Risk’ Program

GAO Categorizes FHA as a ‘High Risk’ Program

BY: TORY BARRINGER

In response to the Federal Housing Administration’s (FHA) capital woes in the last several years, the Government Accountability Office (GAO) revealed Thursday it now considers the agency to be a “high risk” program “due to [its] greater vulnerability to fraud, waste, abuse and mismanagement or the need for transformation.”

In a 2013 update to its High-Risk Series, GAO noted that FHA’s single-family loan insurance portfolio has grown from about $300 billion in 2007 to $1.1 trillion in 2012 as the agency continues to edge out the private sector.

The report also noted that “[a]lthough required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured.”

As a result, GAO said, it is modifying the high-risk area of the government’s role in housing finance to include FHAand “acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role.”

Both HUD and FHA have had a tumultuous time in the months since last November, when it was revealed that the capital reserve ratio on FHA’s Mutual Mortgage Insurance Fund had fallen to -1.44. The fund has a negative economic value of $16.3 billion.

In response, FHA Commissioner Carol Galante rolled out a series of reforms designed to strengthen the agency’s financial situation. However, her planned efforts did little to placate some members of the House Financial Services Committee, which held two hearings in February to review FHA’s financial condition and its role in housing finance.

In a statement, Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said the high-risk classification “reinforces everything our committee has been saying about the FHA for some time now—it is a high risk to taxpayers, it is a high risk to the mortgage insurance market and it represents a high risk to our economy.”

“For Americans to have a healthy economy, we must put the nation on a sustainable fiscal path. And to have a sustainable fiscal path, we must also have a sustainable housing finance system,” Hensarling said. “Today’s announcement from GAO underlines my grave fears that FHA, as it is operating today, is an impediment to both.”

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