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RCED-00-280R 1 (2000-09-08)

handle is hein.gao/gaobaallt0001 and id is 1 raw text is: SGAO Accountabiity * Integrity * Rehiability United States General Accounting Office Resources, Community, and Washington, DC 20548 Economic Development Division B-285175 September 8, 2000 The Honorable Rick Lazio Chairman, Subcommittee on Housing and Community Opportunity Committee on Banking and Financial Services House of Representatives Subject: Mortgage Financing: Level of Annual Premiums That Place a Ceiling on Distributions to FHA Policyholders Dear Mr. Chairman: From 1943 to 1990, the programs supported by the Federal Housing Administration's (FHA) Mutual Mortgage Insurance Fund paid distributive shares to homeowners who had voluntarily terminated their mortgages by paying off the mortgage on time, or early, such as when refinancing.1 In 1990, after the Fund began experiencing substantial losses, the Congress required FHA to stop paying distributive shares until the Fund had accumulated adequate reserves- current cash plus the net present value of future cash flows. While not defining what level of reserves are adequate, the Congress required that the Secretary take steps to ensure that the Fund achieve minimum reserves equaling 2 percent of the insurance-in-force. Thus, in determining whether there is a surplus for distributing to borrowers, the Secretary must now take into account the actuarial status of the entire Fund.2 After several years of improved Fund performance, the reserve was estimated to have first met the 2-percent minimum requirement in 1995 and was estimated to have reached 3.66 percent in 1999. FHA has not renewed paying distributive shares and believes that it would only be prudent to consider doing so if the Fund's capital ratio exceeded 3 percent. 'Because the risk of an insurance claim is usually the greatest during the first 7 years of a mortgage, FHA generally did not pay distributive shares to borrowers who had terminated their mortgages within 7 years of receiving them. 2 In contrast, borrowers who had voluntarily terminated their mortgages within a specified time period-now 7 years-have received refunds of their up-front insurance premiums regardless of the actuarial status of the Fund. GAO/RCED-00-280R FHA Distributive Shares