Detailed Information on the
FHA Single-Family Mortgage Insurance Assessment

Develop a measure in HUD??s 2006 Annual Performance Plan that assesses FHA??s ability to identify and address fraud in the program. Further, FHA will continue to develop strategies and initiatives to reduce program risk and target program fraud. Also, the FHA modernization legislation provides a risk-based pricing model that will reduce risk to the insurance fund.

Continue development of a credit model that more accurately and reliably predicts claims costs.

Establish quantifiable annual and long-term performance goals for the percentage of FHA Single Family endorsements for first-time and minority homeowners. Set 2006 targets for current measures higher than actual experience.

Publish efficiency measures in HUD??s 2006 Annual Performance Plan to show improved efficiencies or cost effectiveness in the disposition of foreclosed properties.

Modify FHA's "gift-letter source" categories to include "nonprofit seller-funded" and "nonprofit non seller-funded" and require lenders to accurately identify and report this information when submitting loan information to FHA. Require lenders to inform appraisers about the presence of downpayment assistance from a seller-funded source.

Measure: The ratio of minority and non-minority low- and moderate-income families with children increases by 0.4 percentage points annually.

Explanation:This indicator measures progress in reducing barriers to homeownership among racial and ethnic minorities, as measured by the ratio of minority homeownership rates to homeownership of non-Hispanic whites.

Measure: The share of first-time minority homebuyers among FHA home purchase-endorsements

Explanation:This measure allows FHA to better quantify its affect on the national minority homeownership rate

Measure: The percentage of foreclosed loans or at risk loans to the total number of loans two years after origination.

Explanation:

Measure: The percentage of FHA-insured home-purchase mortgages for first-time homebuyers.

Explanation:

Measure: The percentage of FHA-insurable Real Estate Owned properties that are sold to owner-occupants

Explanation:This measure shows gains in efficiency

Measure: The percentage of loss mitigation claims to total claims on FHA-insured single family mortgages.

Explanation:This indicator measures the success of FHA loan servicers in implementing statutorily required loss-mitigation techniques when borrowers default on their FHA mortgages.

Measure: The percentage of loans at risk that have been reviewed and determined to have findings.

Explanation:

Is the program purpose clear?

Explanation: The Federal Housing Administration (FHA) insures private FHA-approved lenders against losses from default on single-family mortgages they issue. The program's purpose is to expand homeownership opportunities for first-time and minority homebuyers. FHA also fights predatory lending and works to keep existing homeowners from losing their homes when they default.

Evidence: The program purpose and objectives are outlined in Section 203(b) of the National Housing Act and in HUD's Annual Performance Plans (APP) and the HUD Strategic Plan for FY2003 ' FY2008.

Does the program address a specific and existing problem, interest or need?

Explanation: Without the Government's guarantee protecting lenders against default, most of the borrowers FHA serves under its more liberal underwriting guidelines and downpayment requirements, would not qualify for a loan.

Evidence: Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan and have more flexibility in calculating household payment to income ratios. Some studies which demonstrate FHA single-family insurance fills a gap among borrowers with impaired credit and/or less cash on hand include: 'Credit History and the FHA-Conventional Choice' Pennington-Cross and Nichols, 2000; and 'The Federal Housing Administration in the New Millennium' Pennington-Cross and Yezer, 2000.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: FHA is unique in that it operates the Federal government's largest single-family mortgage insurance program, insuring almost $150 billion in mortgages in 2003 and generating $2 billion to $3 billion in annual revenue. While other Federal agency programs serve some borrowers who could potentially qualify for FHA insurance, these other programs target distinct classes of borrowers, such as veterans.

Evidence: Other federal programs available serve very distinct classes of borrowers, such as native Americans, native Hawaiians, veterans, or households located in rural areas. A 1995 Policy Development and Research (PD&R) study 'An Analysis of FHA's Single Family Insurance Program' showed that there is no significant overlap between FHA borrowers and products and those of private mortgage insurance (PMI) providers. FHA targets borrowers with a higher level of risk than private providers are willing to accommodate. FHA insures loans for 100 percent of unpaid mortgage principal balances --- instead of 30 percent like PMI ' which gives lenders the protection they require to serve higher risk borrowers. In addition, a 1996 GAO study, 'FHA's Role in Helping People Obtain Home Mortgages,' showed that 2/3 of FHA loans would not have qualified for PMI and that FHA programs promote homeownership among homebuyers that are typically underserved by other agencies and PMI.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: FHA uses private lenders, appraisers, and other contractors to insure mortgages and dispose of foreclosed properties. Given FHA-approved lenders are protected against default and therefore have little incentive to minimize losses, FHA has had to build in performance incentives and monitoring and enforcement mechanisms to increase compliance with program guidelines and protect against fraud.

Evidence: FHA-designed protections and incentives include: pre-approving private lenders to directly endorse mortgages insured by FHA; listing appraisers on an FHA-approved roster; holding lenders and appraisers accountable for the quality of appraisals; conducting targeted reviews for quality compliance with FHA underwriting standards, as part of its Credit Watch effort, which identifies higher than average default rates among lenders; prohibiting FHA insurance on a property resold within 90 days; and paying lenders a bonus for exploring different loss mitigation techniques that are less costly than foreclosure and often help sustain homeownership.

Is the program effectively targeted, so that resources will reach intended beneficiaries and/or otherwise address the program's purpose directly?

Explanation: FHA effectively targets lower-income, first-time, and minority homeowners who can afford homeownership, but do not typically qualify for loans using conventional underwriting standards.

Evidence: In 2004, seventy-three percent of FHA purchase endorsements were for first-time homebuyers and 37 percent were for minorities.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The overarching long-term objective of the FHA is clearly outlined in HUD's 2003-2008 Strategic Plan and includes FHA does have long-term performance goals that reflect the purpose of the program. FHA tracks data on the number of first-time and minority homeowners among its purchase endorsements, while recognizing that these figures are affected by market forces outside FHA's control. In addition, FHA monitors the statutorily mandated capital ratio, a critical long-term measure of FHA's fiscal soundness.However, the goals focus on outputs and processes to improve program administration and not on outcomes such as homeownership rates.

Evidence: In HUD's 2003-2008 Strategic Plan, FHA outlines several long-term output and process goals including: the share of FHA-insured home-purchase mortgages for first-time homebuyers remains above 80 percent in each year through 2008; between 2004 and 2008 approximately 400,000 claims will be submitted under the loss mitigation program; through the Section 601 Accelerated Claims Disposition demonstration, enhance policy objectives, such as savings to the government and homeownership retention; and implement regulatory changes to combat predatory lending. The Plan also cites the President's goal to create 5.5 more minority homeowners by 2010 - -a goal several other private partners have committed to. FHA does not articulate how it will contribute to this goal.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: The overarching long-term objective of the FHA is clearly outlined in HUD's 2003-2008 Strategic Plan. However, FHA does not have long-term outcome measures and has only established targets and timeframes for some of its long-term output and process measures.

Evidence: HUD's 2003-2008 Strategic Plan outlines targets and timeframes for its output and process goals. The Plan also cites the President's goal to create 5.5 more minority homeowners by 2010. The private partners that have signed on to this goal have quantified their contributions, but FHA does not articulate what portion it will contribute to achieving the President's goal.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: FHA has a limited number of annual performance measures and several tracking indicators. However, FHA does not have long-term outcome performance measures for which the annual measures can mark progress toward.

Evidence: HUD's 2005 APP includes annual performance measures that set goals for increasing the ratio of homeownership rates among minorities and non-minorities and the use of loss mitigation techniques to successfully sustain families in their homes. The APP includes several tracking indicators showing the percentage of first-time and minority buyers among its purchase endorsements. However, there are no long-term outcome measures for which the annual measures can mark the achievement of progress.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: The majority of FHA's annual performance measures are categorized as tracking indicators which FHA uses to report on actual performance without setting numerical targets. For those annual outcome measures which FHA establishes targets, the goals are not ambitious.

Evidence: More than half of the annual measures for the FHA single-family mortgage insurance program in HUD's 2005 APP are tracking indicators without numerical targets. For outcome measures with targets, the goals are set low, sometimes lower than actual experience. See measures H.2.2 and H.6.1 in HUD's 2005 APP.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: FHA program partners do not explicitly commit to annual or long-term goals. However, program partners, such as lenders and servicers, contribute to program objectives to expand and sustain homeownership opportunities for underserved borrowers by complying with FHA guidelines, mortgagee letters, and regulations in determining eligibility and by instituting loss mitigation techniques to help households that miss mortgage payments sustain homeownership.

Evidence: Guidance for the PART requires a program that receives "no" responses to questions 2.1 and 2.3 must receive a "no" under question 2.5.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: The program receives frequent, independent evaluations of sufficient scope and quality, which are used to improve the effectiveness of some elements of the program's delivery.

Evidence: HUD's Office of Policy Development and Research, HUD's Inspector General, the General Accounting Office (GAO) and other independent evaluators regularly examine different aspects of the FHA single-family mortgage insurance program. Finally, FHA has improved the program's effectiveness in response to a series of GAO recommendations (see question 3.7) and has contracted with an independent evaluator to examine the use of its Section 601 Accelerated Claims Disposition demonstration to determine whether this disposition method increases recoveries to the insurance fund relative to current methods while meeting other policy objectives such as maximizing homeownership retention.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Budget proposals, such as the Zero Downpayment and Payment Incentives proposals included in the 2005 Budget, support the program's objectives and contribute to the President's goal to expand minority homeownership by 5.5 million by 2010. However, budget requests and policy proposals are not explicitly tied to annual performance goals as published in HUD's APP or Congressional Justifications.

Evidence: While FHA proposed two new mortgage insurance products to expand opportunities for first-time and minority homebuyers, FHA does not increase the percentage of its purchase endorsements made by those groups in the 2005 APP because FHA considers them tracking indicators for which they do not set numerical targets.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: FHA does not have a systematic way of analyzing its own impact on homeownership, nor has it created long-term performance goals. FHA maintains the percent of first-time and minority buyers among FHA's purchase endorsements is entirely dependent on market forces outside its control.

Evidence: HUD's Strategic Plan does not include long-term outcome performance goals or measures.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: FHA regularly collects timely, credible data on borrower characteristics, loan volume, defaults, foreclosures, return on the sale of foreclosed properties, as well as other information necessary to improve credit subsidy estimates, monitor compliance with program guidelines, and detect and sanction fraudulent lenders and/or appraisers.

Evidence: Monthly portfolio analysis reports, Housing Mortgage Disclosure Act reporting requirements, and other regulatory requirements, such as the Credit Watch initiative, are just some of the information sources FHA uses to manage and improve program performance.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: FHA holds lenders, servicers, appraisers, and other contractors accountable for complying with program guidance, mortgagee letters, and regulations. Depending on the violation, FHA can refer a participating lender or servicer to the mortgagee review board for appropriate action, remove an appraiser from the HUD-approved appraiser roster, or terminate a contract with a non-performing contractor.

Evidence: FHA issues mortgagee letters and regulations outlining standards of performance as well as sanctions FHA can impose when partners fail to comply. In 2003, FHA reviewed 21,115 loans 11,983 of which had findings. FHA's Credit Watch system enabled FHA to terminate the ability of 58 lender branches to originate FHA-insured mortgages. The Mortgagee Review Board (MRB) took action against 36 lenders and assessed $2.35 million in civil money penalties, and executed indemnification agreements on 233 FHA-insured mortgages for a potential savings to the FHA fund of approximately $5.83 million. Appraiser Watch, which is used to target appraisers for field reviews, resulted in the removal of 132 poorly performing appraisers from the FHA Roster in 2003. Further, since the May 2004 publication of the anti-flipping regulations, FHA has prevented 394 loans on properties resold within 90 days from being insured and has requested additional evidence regarding an increase in property value in 635 cases.

Are funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: FHA obligates funds in a timely manner and spends them for the intended purpose.

Evidence: Quarterly obligation and spending reports (SF 133s) as well as Congressional Justifications and operating plans show the timely obligation of funds.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: FHA measures and compares the efficiency and cost effectiveness of its standard foreclosed property disposition methods to its Accelerated Claims Disposition demonstration and other alternatives. FHA statute also requires lenders and servicers to explore other loss mitigation techniques that will be less expensive than foreclosure.

Evidence: A major efficiency measure of the Accelerated Claims and Asset Disposition demonstration is the recovery rate (adjusted for the claim cost) as a percentage of unpaid principal balance. A secondary efficiency measure is the actual claim cost which experience is showing to be approximately 6% of the unpaid principal balance. The legislative goal is to increase the recoveries to the FHA fund over other disposition methods and the recovery rate is the best measure for doing this. HUD tracks loss mitigation usage through the number of home retention claims paid per month. HUD also developed a Tier Ranking System to track Servicer use of loss mitigation by calculating workout ratios based on each servicers' foreclosure and loss mitigation activity for the prior 12 month period. Based on work out ratios, servicers are separated into 4 Tier groups denoting the percentage of loss mitigation use. Quarterly, Servicers are notified of their Tier Ranking. Servicers in the bottom 2 Tiers are required to provide remediation plans.

Does the program collaborate and coordinate effectively with related programs?

Explanation: HUD's housing counseling program works with potential and current FHA-insured borrowers to prepare them for and sustain them in homeownership, which also protects the FHA insurance fund against defaults. GNMA also collaborates with FHA by purchasing FHA-insured loans from servicers and selling them in pools to investors.

Evidence: In 2003, 29,896 FHA borrowers received housing counseling.

Does the program use strong financial management practices?

Explanation: Currently, FHA is unable to manage financial transactions in accordance with the Federal Financial Management Improvement Act (FFMIA). However, FHA has begun implementation of a new system that manages financial transactions in accordance with FFMIA. FHA implemented a new general ledger on October 1, 2002 and plans to have the new integrated financial management system in place by the end of fiscal year 2006. FHA just completed Phase II of the system integration and now has a new core financial system supporting its general ledger accounting operations, financial statement reporting, central funds control, accounting for certain contracts and grants, and cash management.

Evidence: FHA remains on GAO's Major Management Challenges and Risks report (GAO-03-103) which found FHA's financial management systems lack integration with the financial management process. However, Tthe FY2003 Financial Statement audit recognized FHA's key improvement in developing the general ledger. As a result of the implementation of the ledger and progress toward the integrated financial management system, the auditor reduced the number of material weaknesses from 2 to 1 and the number of other reportable conditions from 4 to 2.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: FHA's single-family mortgage insurance program has been on GAO's high-risk list since 1994. However, as part of the President's Management Agenda, FHA has implemented new standards, monitoring protocols, and enforcement mechanisms to reduce fraud and risk within the program.

Evidence: In GAO's Major Management Challenges and Risks report (GAO-03-103), FHA's single-family mortgage insurance program maintains its high-risk status, but the report acknowledges FHA has made significant management improvements by implementing new regulations. Among them are rules that prohibit property flipping, strengthen the licensing and certification requirements for FHA-approved appraisers, clarify FHA's authority to hold lenders accountable for the quality of appraisals on properties holding FHA insured mortgages, and enable FHA to analyze trends in default and claim data by lender and impose sanctions on non-compliant or fraudulent lenders.

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: FHA meets the requirements of the Credit Reform Act. The National Affordable Housing Act requires FHA's single-family mortgage insurance fund to achieve a capital ratio of at least 2 percent. For FY 2003, the capital ratio is estimated to be 5.21 percent . However, the frequency and magnitude of upward reestimates over the last decade call into question whether FHA can meet its capital ratio requirements under adverse conditions as currently managed.

Evidence: Annual Actuarial Review of the Federal Housing Administration's Mutual Mortgage Insurance Fund Fiscal Year 2003.

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: FHA's single-family mortgage insurance credit subsidy model is not accurate or reliable. One of its major weaknesses is that it consistently under predicts claims even in good economic times. However, FHA hopes to correct those and other weaknesses in the model through a new contract to develop a new model for the FY 2006 budget cycle.

Evidence: Eleven of the twelve initial estimates for the 1992 through 2003 cohorts have been adjusted upward, i.e., higher costs. The total upward reestimate has been over $13 billion, more than 50 percent of the $25 billion in negative subsidy booked since 1992.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: The program does not have long-term outcome performance goals.

Evidence: A "yes" answer would require that the program is on track to meet all the long-term performance goals - -including ambitious targets and timeframes - evaluated in questions 2.1 and 2.2 and the program does not have long-term outcome-oriented performance goals.

Does the program (including program partners) achieve its annual performance goals?

Explanation: The majority of FHA's annual measures are tracking indicators. For those measures with annual targets, FHA met two of its goals in FY 2003 --to increase the share of FHA mortgage defaults resolved by loss mitigation and the number of FHA single-family mortgages endorsements in underserved areas.

Evidence: Performance and Accountability Report FY 2003 measures 2.1.3 and 2.2.9.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: FHA has improved the efficiency and cost-effectiveness of its foreclosed property disposition sales by decreasing the average days in inventory from 192 days in FY 2001 to 163 days in 2003. FHA also increased net recoveries on the sale of foreclosed properties by 10.58% during the same period.

Evidence: HUD's monthly profit and loss statement is the data source for property sales information.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: Compared to other private and government mortgage lending programs, FHA's single-family mortgage insurance program better serves the intended set of borrowers --primarily lower income first-time and minority homebuyers by enabling more of them to obtain mortgages sooner albeit at higher cost (premiums and interest) than conventional private sector loans.

Evidence: In its 2005 APP, HUD reported that seventy-seven percent of FHA purchase endorsements were for first-time homebuyers and 35 percent were for minorities. In comparison, only 26.5 percent of Fannie Mae and Freddie Mac's purchases of mortgages used to buy homes were first-time homeowners.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Studies evaluating FHA's impact on homeownership draw mixed conclusions. Some studies do suggest that FHA simply accelerates homeownership for households who could be served in the conventional market with additional savings to meet higher downpayment requirements. In those studies which conclude FHA increases homeownership rates, the increase is marginal, 0.6 percent on average between 1970 and 1990. However, when considering homeownership rates among targeted borrowers and specific geographic areas, compared with conventional single-family lenders, FHA serves a higher percentage of low to moderate income borrowers and borrowers living in underserved areas (i.e., central cities).

Evidence: Some of the numerous evaluations of FHA's single-family mortgage insurance program include: "FHA Role in Helping People Obtain Home Mortgages," GAO 1996; "How the Federal Housing Administration Affects Homeownership" Monroe, 2001; "The Federal Housing Administration in the New Millennium" Pennington-Cross and Yezer, 2000; and "Does FHA Increase Homeownership or Just Accelerate It?" Goodman and Nichols, 1997. The share of low income and underserved borrowers among FHA purchase endorsements comes from the Federal Financial Institutions Examination Council, 1999 Home Mortgage Disclosure Act data.