The U.S. Government Accountability Office (GAO) recently made recommendations about the Federal Housing Administration’s (FHA) stress testing and capital requirements for the Mutual Mortgage Insurance (MMI) Fund.
FHA insures private lenders against losses from defaults on single-family mortgages. Between 2009–2014, FHA’s MMI Fund (which insures $1.2 trillion in single-family traditional and reverse mortgages) failed to meet its required 2 percent capital requirement. In addition, a budgetary review found that the fund required $1.69 billion in supplemental funds in 2013.
The FHA used the actuarial reviews to assess if the MMI Fund’s capital ratio (economic value divided by insurance obligations) meets the 2 percent requirement. It also looked at how fund components would perform under alternative economic scenarios.
GAO analyzed the FHA’s budgetary assessments of the MMI Fund. It looked at stress testing principles to develop a framework and applied it to FHA. It found that assessments and stress tests incorporate several relevant risk factors, but the GAO added that they need strengthening.
Specifically, GAO recommended that Congress should look at the economic conditions the MMI Fund would be expected to withstand without supplemental funds. In addition, it found that the FHA should conduct stress tests on a fund-wide basis and specify the objectives of those stress tests.
Further, GAO states that Congress should incorporate accountability mechanisms into FHA’s capital requirement. FHA agreed with GAO’s recommendations.