GAO Raps FHA Loan Performance Estimates

The Federal Housing Administration's inability to predict single-family claims and prepayments makes it difficult to estimate the "long-term viability" of the FHA insurance fund, according to a newly issued Government Accountability Office report.The GAO report points out that FHA models have underestimated loan performance by more than $1 billion in fiscal years 2002, 2003, and 2004. The FHA had to make a $7 billion re-estimate in its fiscal 2003 financial report, which prompted Rep. Bob Ney, R-Ohio, to ask the GAO to investigate. GAO auditors expect prepayment rates to decline, but they are concerned about the impact of declining FHA originations and continuing high claim activity on the FHA's capital position. The FHA's capital ratio of 5.5% is well above the 2% minimum set by Congress. FHA originations declined by 25% in fiscal 2004, and a 45% decline is expected for fiscal 2005, which ended Sept. 30. "Without better estimates of loan performance, FHA cannot reasonably estimate the economic worth of the [single-family insurance] fund or its capital ratio," the GAO says. FHA Commissioner Brian Montgomery told the GAO that recent improvements to the model have "reduced the likelihood of future sizable" re-estimates.