From the U.S. Government Accountability Office, www.gao.gov Transcript for: Improving the Federal Housing Administration’s Finances and Implications for Homebuyers Description: Audio interview by GAO staff with Mathew Scire, Director, Financial Markets and Community Investment Related GAO Work: GAO-13-682 Federal Housing Administration: Analysis of Options for Modifying Its Products, Market Presence, and Powers AND GAO-13-722 FHA Mortgage Insurance: Applicability of Industry Requirements is Limited, but Certain Features Could Enhance Oversight Released: October 2013 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's October 2013. Historically, the Federal Housing Administration has insured mortgages for homebuyers, particularly first-time, minority, and lower-income borrowers. Since the housing crisis, many factors have weakened FHA financially. Two teams led by Mathew Scire, a director in GAO's Financial Markets and Community Investment team, recently reviewed ways to improve FHA's financial situation. GAO's Sarah Kaczmarek sat down with Mathew to talk about what they found. [ Sarah Kaczmarek: ] So let's start with a question on first-time homebuyers. How has the housing crisis affected their ability to get FHA insured loans? [ Mathew Scire: ] Well, FHA’s been a constant source of mortgage credit during the housing crisis. FHA insures lenders against losses on loans that they might make and for FHA, it’s always served a lot of borrowers who are first-time homebuyers and the same is true during the recent crisis. In 2012 alone, 78 percent of FHA-insured mortgages went to first-time homebuyers. [ Sarah Kaczmarek: ] In your review of options for improving FHA's financial situation, what do you see as the effect on potential homebuyers if FHA changes its product terms and conditions? [ Mathew Scire: ] So, there's three things we look at there. FHA could increase premiums, for example, or require that borrowers make larger down payments, or it could tighten underwriting. If it were to do any of those, that would make it more difficult for a borrower to obtain a home mortgage. And part of the reason FHA would consider these is the potential effect it could have on its fund. But there are tradeoffs here. So you could potentially tighten underwriting too much or raise premiums too much to the point where FHA may no longer be attracting a wide spectrum of borrowers. I would also point out that with higher premiums, borrowers would pay more each month for their mortgage, and also if they were to make increased down payments, they would need to bring more cash to the table if they were to purchase a home. [ Sarah Kaczmarek: ] Now let me ask you—now that the housing market has started to improve, if FHA limits insurance to smaller loans, how would that affect potential homebuyers? [ Mathew Scire: ] So, right now FHA can insure loans up to almost $730,000, and I think everyone agrees that's a fairly large loan. But, you have to look at this carefully as well because in certain markets, house prices are much higher; and so for example, in California, 10 percent of FHA loans were for amounts greater than $450,000. So, although you may wish to lower the loan limit, you have to be careful where you set it, and you would likely want to recognize differences in house prices across locations. [ Sarah Kaczmarek: ] In a second report, you looked at lessons learned from regulation of private mortgage insurers. What did you find there? [ Mathew Scire: ] Well, as you know, private mortgage insurers are regulated by the states and during the recent crisis many of them had significant losses and struggled to meet the capital requirements that the states placed upon them. So we took a look to see what the states do when that happens, and there's some lessons that could be drawn from that. For example, we saw that the regulators very often will require that the insurer develop a plan for restoring their capital position. And so we think that makes an awful lot of sense, and make recommendations that the Congress consider requiring that FHA report a capital restoration plan whenever their capital ratio does not meet the minimum requirement. [ Sarah Kaczmarek: ] And finally, for taxpayers and especially homebuyers, what's the bottom line here? [ Mathew Scire: ] Well, FHA's current financial condition and its prominence in the market--because of that, there's been a lot of proposals to make changes to FHA's operations, the market that it operates in, and how its financial condition is assessed. And so we think that there are a number of factors that you should consider in looking at each of these options. So for example, what impact might that option have on cost and risk to taxpayers, what impact might they have on borrowers’ access to credit, and what impact might it have on FHA's role going forward. [ Backgroung Music ] [ Narrator: ] To learn more visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the Congressional Watchdog, the U.S. Government Accountability Office.