GAO Report on FHA Capital Requirements and Stress Testing Practices
The U.S. GAO published a report on the Federal Housing Administration's (FHA) budgetary reviews of the Mutual Mortgage Insurance Fund (MMI Fund). The report assesses whether MMI Fund needs more budget authority to cover expected future costs and whether independent actuarial reviews provide complementary information on the fund’s finances. The report finds that capital requirements and stress testing practices need strengthening.
Capital requirements and stress testing practices—tools for managing financial risks—for the MMI Fund are not consistent with all elements of the framework GAO developed to help assess these tools in the context of the FHA single-family mortgage insurance programs. FHA uses the actuarial reviews to assess whether the capital ratio of MMI Fund meets the 2% requirement and how fund components would perform under alternative economic scenarios. While the actuarial assessment does not directly determine the need for additional budget authority, it evaluates the fund’s ability to absorb unexpected losses and may prompt changes in FHA policies and insurance premiums. In accordance with the framework, capital assessments and stress tests of FHA are transparent and incorporate a number of relevant risk factors. However, areas of inconsistency include scenario-based requirement; accountability mechanisms; fund-wide stress tests; and stress test objectives.
The report highlights that strengthening the capital requirement and stress testing practices of FHA could help ensure that the MMI Fund is able to withstand economic downturns and that stress test results are as relevant and useful as possible for risk management. Including reverse mortgages in the fund’s capital assessment has advantages and disadvantages. Unlike for stress tests, FHA jointly assesses forward and reverse mortgages to calculate a combined capital ratio. Subjecting the reverse mortgage portfolio to capital assessment has made its financial condition more transparent. However, the portfolio’s sensitivity to changes in economic assumptions makes the combined ratio more unpredictable. Alternative approaches also pose trade-offs. For example, a separate reverse mortgage capital requirement may help ensure the financial transparency of both portfolios; requiring FHA to hold more capital to account for the volatility of the reverse mortgage portfolio could compel FHA to raise insurance premiums or lower borrowing limits.
Related Link: Press Release
Keywords: Americas, US, Insurance, Banking, MMI Fund, Capital Requirements, Stress Testing, FHA, GAO
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