FHA-Insured Home Loans: An Overview
Katie Jones
Analyst in Housing Policy
April 18, 2013
Congressional Research Service
7-5700
www.crs.gov
RS20530
CRS Report for Congress
Pr
epared for Members and Committees of Congress
FHA-Insured Home Loans: An Overview
Summary
The Federal Housing Administration (FHA) was created by the National Housing Act of 1934 in
order to broaden homeownership, protect lending institutions, and stimulate the building industry.
FHA does not make mortgage loans. Rather, it insures mortgage loans made by private lenders
that meet certain underwriting and other criteria, thereby expanding the availability of mortgage
credit beyond what may be available otherwise. If the borrower defaults on the mortgage, FHA
will repay the lender the remaining amount owed. While FHA insures a range of mortgage types,
including multifamily properties and hospital facilities, this report focuses on FHA’s single-family
insurance program.
FHA requires a minimum downpayment of 3.5% from most borrowers, which is lower than the
downpayment required for most other types of mortgages. FHA-insured mortgages cannot exceed
a statutory maximum mortgage amount, which varies by area but cannot exceed a specified
ceiling in high-cost areas. (The ceiling is currently set at $729,750, but is scheduled to fall to
$625,500 after December 31, 2013.) Borrowers are charged fees, called mortgage insurance
premiums, in exchange for the insurance.
FHA’s share of the mortgage market tends to vary with economic conditions and other factors. In
recent years, due to housing market turmoil and a contraction of private lending, FHA has been
insuring more mortgages than it had in previous years. In FY2012, FHA insured about 1.2 million
new loans with a combined principal balance of over $200 billion. FHA-insured mortgages, like
all mortgages, have experienced increased default rates in recent years, leading to concerns about
the stability of the FHA insurance fund for single-family mortgages, the Mutual Mortgage
Insurance Fund (MMIF). In response to these concerns, FHA has recently adopted a number of
policy changes, including changes related to the fees that it charges and its mortgage
requirements, in an attempt to limit risk to the MMIF. These policy changes have included
increasing mortgage insurance premiums, instituting a minimum credit score requirement, and
raising downpayment requirements for borrowers with lower credit scores.
This report briefly discusses the basic features of the FHA program to insure loans on single-
family homes and describes some recent changes to program requirements.
Congressional Research Service
FHA-Insured Home Loans: An Overview
Contents
A Brief History of the FHA Home Loan Insurance Program .......................................................... 1
Features of the Program ................................................................................................................... 1
Eligibility and Underwriting Guidelines ................................................................................... 1
Maximum Mortgage .................................................................................................................. 2
Loan Term.................................................................................................................................. 4
Downpayment............................................................................................................................ 4
Owner Occupancy ..................................................................................................................... 5
Eligible Loan Purposes .............................................................................................................. 5
Mortgage Insurance Fees ........................................................................................................... 5
Annual Mortgage Insurance Premiums ............................................................................... 5
Up-Front Mortgage Insurance Premiums ............................................................................ 6
Premium Refunds and Cancellations .................................................................................. 7
Interest Rates ............................................................................................................................. 8
Defaults and Loss Mitigation .................................................................................................... 8
Program Funding ....................................................................................................................... 9
Program Activity ..................................................................................................................... 10
Tables
Table 1. FHA Maximum Mortgage Amounts, through December 31, 2013.................................... 4
Table 2. Annual and Up-Front Mortgage Insurance Premiums ....................................................... 7
Table 3. Loss Mitigation Strategies ................................................................................................. 9
Contacts
Author Contact Information........................................................................................................... 11
Acknowledgments ......................................................................................................................... 11
Congressional Research Service
FHA-Insured Home Loans: An Overview
A Brief History of the FHA Home Loan
Insurance Program
The Federal Housing Administration (FHA) was created by the National Housing Act of 1934,1
during the height of the Great Depression, to broaden homeownership, shore up and protect home
financing institutions, and stimulate employment in the building industry.
Prior to the creation of FHA, few mortgages exceeded 50% of the property’s value and most
mortgages were written for terms of five years or less. At the end of the five-year term, the
remaining loan balance had to be repaid or the mortgage had to be renegotiated. Borrowers
generally had little trouble in obtaining new mortgages. During the Great Depression, however,
lenders were unable or unwilling to refinance many of the loans that became due. Thus, many
borrowers lost their homes through foreclosure, and lenders lost money because property values
were falling. Lenders became wary of the mortgage market.
FHA institutionalized a revolutionary idea: 20-year mortgages on which the loan would be
completely repaid at the loan term. If borrowers defaulted, FHA insured that the lender would be
fully repaid. Mortgage instruments were standardized, and a new confidence was instilled in the
mortgage market. Investment in housing was stimulated, and its ripple effects were felt
throughout the economy. Eventually, lenders began to make long-term mortgages without FHA
insurance if borrowers made significant downpayments. Over time, 25- and 30-year mortgages
have become standard mortgage products.
When the Department of Housing and Urban Development (HUD) was created in 1965, FHA
became an agency of HUD. This report discusses the features of the FHA program to insure loans
on single-family homes. Single-family homes are defined as properties containing from one to
four dwelling units.2
Features of the Program
Eligibility and Underwriting Guidelines
FHA-insured loans are available to owner-occupants who can demonstrate the ability to repay the
loans according to the terms of the contract. In general, parties who have previously defaulted on
a mortgage are not eligible for FHA-insured loans for at least three years. FHA-insured loans
must be underwritten in accordance with accepted practices of prudent lending institutions and
FHA requirements.3 The FHA credit analysis worksheet is used to examine the applicant’s
personal and financial status, monthly shelter expenses, funds required for closing expenses,
effective monthly income, and debts and obligations.
1 The National Housing Act is P.L. 73-479, and is codified at 12 U.S.C. 1701 et seq.
2 FHA also insures other types of mortgage loans, including mortgages for multifamily properties, nursing homes, and
hospitals, but these insurance programs are not discussed in this report.
3 FHA’s underwriting and eligibility requirements can be found in HUD Housing Handbook 4155.1, “Mortgage Credit
Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans,” http://portal.hud.gov/hudportal/HUD?src=/
program_offices/administration/hudclips/handbooks/hsgh/4155.1.
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FHA-Insured Home Loans: An Overview
As a general rule, the applicant’s prospective mortgage payment should not exceed 31% of gross
effective monthly income. The applicant’s total obligations, including the proposed housing
expenses, should not exceed 43% of gross effective monthly income. If these ratios are not met,
the borrower should present compensating factors, such as savings history and past credit
management.4
Effective October 4, 2010, FHA imposed a minimum credit score requirement of 500 and
increased downpayment requirements for borrowers with credit scores below 580.5 See the
“Downpayment” section for more information on downpayment requirements for FHA-insured
loans.
Maximum Mortgage
There is no income limit for borrowers seeking FHA-insured loans. However, FHA-insured
mortgages cannot exceed a maximum mortgage amount set by law. The maximum mortgage
amounts allowed for FHA-insured loans vary by area, and different limits are in effect for one-
family, two-family, three-family, and four-family properties. The limits are subject to a statutory
floor and ceiling; the loan limit in a given area cannot be lower than the floor, nor can it be higher
than the ceiling.6
The maximum mortgage amounts have been amended several times in recent years. In early
2008, Congress enacted the Economic Stimulus Act of 2008 (ESA, P.L. 110-185), which
temporarily increased the maximum mortgage amounts to 125% of area median home prices,
with a floor of $271,050 and a high-cost area ceiling of $729,750.7 This temporary increase was
enacted in response to tightening lending standards as the mortgage market began to deteriorate.
As both lenders and private mortgage insurers tightened their underwriting requirements, fewer
borrowers were able to qualify for loans without FHA insurance or other types of guarantees.
However, the FHA loan limits prevented some borrowers from being able to purchase a home
with an FHA-insured mortgage, particularly in high-cost markets. The increased loan limits
allowed more borrowers to qualify for FHA-insured mortgages.8
The Housing and Economic Recovery Act (HERA, P.L. 110-289) established new permanent
statutory limits of 115% of area median home prices, with a floor of $271,050 and a high-cost
area ceiling of $625,500. These limits were generally higher than the pre-ESA limits, but lower in
many cases than the temporary limits established by ESA. However, the American Recovery and
4 See Chapter 4, Section F of HUD Housing Handbook 4155.1 at http://portal.hud.gov/hudportal/documents/huddoc?
id=4155-1_4_secF.pdf.
5 U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-29, September 3, 2010,
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf.
6 The FHA maximum mortgage amounts are codified at 12 U.S.C. §1709(b)(2). The statute allows for special higher
limits for Alaska, Hawaii, Guam, and the Virgin Islands. To look up the maximum mortgage amount for a specific area,
see HUD’s website at https://entp.hud.gov/idapp/html/hicostlook.cfm.
7 Immediately prior to ESA’s enactment, the limits had been set at 95% of area median house prices, with a ceiling of
$362,790 and a floor of $200,160 for a one-unit home. See U.S. Department of Housing and Urban Development,
Mortgagee Letter 2008-02, January 18, 2008, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/
administration/hudclips/letters/mortgagee/2008ml.
8 ESA also raised the limit on the size of mortgages that Fannie Mae and Freddie Mac can purchase, known as the
conforming loan limit, in high-cost areas.
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FHA-Insured Home Loans: An Overview
Reinvestment Act of 2009 (ARRA, P.L. 111-5) amended the maximum mortgage amounts for
calendar year 2009, setting them at the higher of (1) the 2008 limits set in ESA, or (2) the original
2009 limits set in HERA. Since the floor is the same under both ESA and HERA, the floor is set
at $271,050 under ARRA. Since the high-cost area limit is higher under HERA, the high-cost area
limit is set at $729,750 under ARRA.9 Since ESA set the limits for all other areas at 125% of
2007 area median home prices while HERA set the limits at 115% of more current area median
home prices, which of these limits is higher will vary by area.10
The ARRA limits that set the maximum mortgage amount at the higher of the ESA or HERA
limits have been extended several times, most recently by the Consolidated and Further
Continuing Appropriations Act, 2012 (P.L. 112-55), which was enacted after the last extension
had expired at the end of FY2011 and the limits briefly fell to their HERA levels. P.L. 112-55
extends the ARRA limits until December 31, 2013. Unless Congress acts to extend the ARRA
limits beyond December 31, 2013, the maximum mortgage amounts will revert to their HERA
levels at that time, with the ceiling in high-cost areas falling to $625,500 for a one-unit home, and
the maximum mortgage amounts falling in some areas between the floor and the ceiling as well.
The FHA loan limits in effect until December 31, 2013, are summarized in Table 1.
9 The statutory ceilings and floors are set as a percentage of the Freddie Mac conforming loan limit, not as dollar
amounts. Currently, the floor is set at 65% of the conforming loan limit and the ceiling is set at 175% of the conforming
loan limit. The Freddie Mac conforming loan limit is currently $417,000, so the floor is $271,050 (65% of $417,000),
and the ceiling is $729,750 (175% of $417,000). Prior to the Economic Stimulus Act of 2008 (ESA), the floor was set
at 48% of the Freddie Mac conforming loan limit, and the ceiling was set at 87% of the conforming loan limit.
Congress can change the ceilings and floors either by 1) changing the percentages of the Freddie Mac conforming loan
limit that constitute the ceiling and the floor, or 2) changing the Freddie Mac conforming loan limit itself.
10 FHA calculates area-by-area limits each year based on the prior year’s area median home price data, so the actual
limit in a given area can change from year to year. The ESA limits are 125% of 2007 area median home prices. The
original HERA limits were 115% of 2008 area median home prices, while current HERA limits would be 115% of the
most recent area median home price data available. FHA has followed a policy of not allowing HERA limits to fall
relative to the original HERA limits, so if current HERA limits (based on more recent area median home prices) are
lower than the original HERA limits (based on 2008 area median home prices), FHA uses the original HERA limits for
the purposes of calculating the maximum mortgage amount in that area. For the maximum mortgage amounts in each
area for calendar year 2013, see FHA Mortgagee Letter 12-26, “Federal Housing Administration Maximum Loan
Limits, Effective Period: January 1, 2013 through December 31, 2013,” http://portal.hud.gov/hudportal/documents/
huddoc?id=12-26ml.pdf.
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FHA-Insured Home Loans: An Overview
Table 1. FHA Maximum Mortgage Amounts, through December 31, 2013
High-Cost
Low-Cost
Areaa
Areab
Property
(Upper
(Lower
Size
Limit)
All Other Areas
Limit)
1-family
$729,750
The higher of 125% of the 2007 area median home price or
$271,050
115% of 2008 or later area median home prices
2-family
$934,200
The higher of 125% of the 2007 area median home price or
$347,000
115% of 2008 or later area median home prices
3-family
$1,129,250
The higher of 125% of the 2007 area median home price or
$419,425
115% of 2008 or later area median home prices
4-family
$1,403,400
The higher of 125% of the 2007 area median home price or
$521,250
115% of 2008 or later area median home prices
Source: P.L. 112-55, FHA Mortgagee Letter 11-39, and FHA Mortgagee Letter 12-26
Note: FHA mortgage limits by state, county, and MSA are available at https://entp.hud.gov/idapp/html/
hicostlook.cfm.
a. Areas where the higher of 125% of the 2007 area median home price or 115% of 2008 or later area median
home prices exceeds 175% of the Freddie Mac limit. The National Housing Act provides that mortgage
limits for loans in Alaska, Guam, Hawaii, and the Virgin Islands may be adjusted up to 150% of the statutory
ceiling.
b. Areas where the higher of 125% of the 2007 area median home price or 115% of the 2008 area median
home price is lower than 65% of the Freddie Mac limit.
Loan Term
FHA-insured mortgages may be obtained with loan terms of up to 30 years.
Downpayment
FHA requires a lower downpayment than most other types of mortgages. Under changes made by
the Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289), borrowers are required
to contribute at least 3.5% in cash or its equivalent to the cost of acquiring a property with an
FHA-insured mortgage. (Prior law had required borrowers to contribute at least 3% in cash or its
equivalent.) Amounts borrowed from a family member are considered as cash for this purpose.
Prohibited sources of the required funds are the seller or any entity that financially benefits from
the transaction, or any third party that is directly or indirectly reimbursed by the seller or by
anyone that would financially benefit from the transaction.11 HUD has interpreted the 3.5% cash
contribution as a downpayment requirement and has specified that contributions toward closing
costs cannot be counted toward it.12
11 For more information on seller-funded downpayment assistance programs and FHA, see CRS Report RS22934,
Treatment of Seller-Funded Downpayment Assistance in FHA-Insured Home Loans, by Bruce E. Foote.
12 U.S. Department of Housing and Urban Development, Mortgagee Letter 2008-23, September 25, 2008,
http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_19737.pdf.
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FHA-Insured Home Loans: An Overview
FHA guidelines put in place beginning on October 4, 2010 require a 10% downpayment from
borrowers with credit scores between 500 and 579, while borrowers with credit scores of 580 or
above are still required to make a downpayment of at least 3.5%. FHA no longer insures loans
made to borrowers with credit scores below 500.13
Owner Occupancy
Generally, for loans closed on or after December 15, 1989, borrowers must intend to occupy the
property as a principal residence. Property that has been acquired by FHA as a result of default or
foreclosure may be sold to owner-occupants or investors, and in some cases the borrowers may
obtain FHA-insured loans.
Eligible Loan Purposes
FHA-insured loans may be used to purchase one-family detached homes, townhomes, rowhouses,
two- to four-family buildings, manufactured homes and lots, and condominiums in developments
approved by FHA.14 FHA-insured loans may also be obtained to build a home; to repair, alter, or
improve a home; to refinance an existing home loan; to simultaneously purchase and improve a
home; or to install a solar heating and cooling system or other weatherization improvements.
Mortgage Insurance Fees
Borrowers of FHA-insured loans pay an up-front mortgage insurance premium (MIP) and annual
mortgage insurance premiums. These premiums are set as a percentage of the loan amount. The
maximum amounts that FHA is allowed to charge for the annual and the upfront premiums are set
in statute. However, since these are maximum amounts, HUD has the discretion to set the
premiums at lower levels.
Annual Mortgage Insurance Premiums
In August 2010, President Obama signed P.L. 111-229, which raised the maximum annual
mortgage insurance premium that FHA can charge. The amount of the maximum annual premium
varies based on the loan’s initial loan-to-value ratio: (1) if the loan-to-value ratio is 95% or
higher, the maximum annual premium is 1.55% of the loan balance; (2) if the loan-to-value ratio
is less than 95%, the maximum annual premium is 1.5% of the loan balance.15
FHA has increased the actual premiums it charges several times in recent years as a way to bring
more money into the FHA insurance fund.16 As of April 1, 2013, FHA is charging 1.35% of the
13 U.S. Department of Housing and Urban Development, Mortgagee Letter 2010-29, September 3, 2010,
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf.
14 Particular requirements that apply to FHA insurance of manufactured housing, condominium, and co-op loans are
described in FHA Mortgagee Letters, which are available at http://www.hud.gov/offices/adm/hudclips/letters/
mortgagee/.
15 These annual mortgage insurance premiums apply for mortgages with loan terms that exceed 15 years. Mortgages
with loan terms of 15 years or fewer are subject to lower annual mortgage insurance premiums.
16 Most of the changes to the mortgage insurance premiums in recent years have been made administratively by FHA,
(continued...)
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FHA-Insured Home Loans: An Overview
loan balance for mortgages where the loan-to-value ratio is above 95%, and 1.30% of the loan
balance for mortgages where the loan-to-value ratio is 95% or below.17 This premium applies to
most single-family mortgages.18
Since June 11, 2012, FHA has also charged a higher annual mortgage insurance premium on
loans with a principal balance that exceeds $625,500. Currently, for loans above this amount, the
annual mortgage insurance premium is 1.55% for mortgages with a loan-to-value ratio above
95%, and 1.50% for mortgages with a loan-to-value ratio of 95% or below. The maximum
mortgage amount that FHA would have been allowed to insure in high-cost areas would have
been $625,500 if the maximum mortgage amounts had remained at their HERA levels. However,
since previously higher maximum loan amounts were reinstated, the maximum mortgage amount
that FHA can insure in high-cost areas is $729,750. (See the “Maximum Mortgage” section for
more information on the recent history of the maximum mortgage amounts.)
Up-Front Mortgage Insurance Premiums
HERA increased the maximum up-front mortgage insurance premium that FHA is permitted to
charge to 3% from 2.5% of the mortgage amount for a borrower who has not received
homeownership counseling, and to 2.75% from 2% of the mortgage amount for a borrower who
has received homeownership counseling. Currently, FHA is not charging different up-front
premiums to borrowers who do and do not receive homeownership counseling.
As of April 9, 2012, HUD has set the up-front premium at 1.75% of the loan amount, whether or
not the borrower received homeownership counseling.19 This premium applies to most single-
family mortgages.20
Table 2 shows the annual and up-front mortgage insurance premiums that are currently in effect.
(...continued)
although the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78), enacted on December 23, 2011,
required FHA to increase the annual mortgage insurance premium it charges by 10 basis points (one-tenth of one
percentage point).
17 U.S. Department of Housing and Urban Development, Mortgagee Letter 13-04, “Revision of Federal Housing
Administration (FHA) Policies Concerning Cancellation of the Annual Mortgage Insurance Premium (MIP) and
Increase to the Annual MIP,” January 31, 2013, http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf.
FHA charges lower annual premiums for mortgages with terms of 15 years or less.
18 These premium changes do not apply to certain FHA programs, including Title I loans and Home Equity Conversion
Mortgages (HECMs). Furthermore, as of June 11, 2012, FHA decreased the annual mortgage insurance premium to
0.55% of the loan amount for streamline refinance transactions where the original loan was endorsed on or before May
31, 2009.
19 U.S. Department of Housing and Urban Development, Mortgagee Letter 12-4, “Single Family Mortgage Insurance:
Annual and Up-Front Mortgage Insurance Premiums – Changes,” March 6, 2012, http://portal.hud.gov/hudportal/
documents/huddoc?id=12-04ml.pdf.
20 The premium changes do not apply to certain FHA programs, including Title I loans and Home Equity Conversion
Mortgages (HECMs). Furthermore, as of June 11, 2012, FHA decreased the up-front mortgage insurance premium to
0.01% of the loan amount for streamline refinance transactions where the original loan was endorsed on or before May
31, 2009.
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Table 2. Annual and Up-Front Mortgage Insurance Premiums
As of April 1, 2013
Annual Premium
Up-Front Premium
Principal balance at or below $625,500
LTV <= 95%
1.30%
1.75%
LTV > 95%
1.35%
1.75%
Principal balance above $625,500
LTV <=95%
1.50%
1.75%
LTV > 95%
1.55%
1.75%
Source: FHA Mortgagee Letter 12-4 and FHA Mortgagee Letter 13-04.
Notes: These premiums apply to most FHA-insured single-family loans, with certain exceptions (such as certain
streamline refinance transactions and FHA-insured reverse mortgages). Lower annual premiums are charged for
mortgages with a loan term of 15 years or fewer.
Premium Refunds and Cancellations
In the past, if borrowers prepaid their loans, they may have been due refunds of part of the up-
front insurance premium that was not “earned” by FHA. The refund amount depended on when
the mortgage closed and declined as the loan matured. The Consolidated Appropriations Act 2005
(P.L. 108-447) amended the National Housing Act to provide that, for mortgages insured on or
after December 8, 2004, borrowers are not eligible for refunds of up-front mortgage insurance
premiums except when borrowers are refinancing existing FHA-insured loans with new FHA-
insured loans. After three years, the entire up-front insurance premium paid by borrowers who
refinance existing FHA-insured loans with new FHA-insured loans is considered “earned” by
FHA, and these borrowers are not eligible for any refunds.21
The annual mortgage insurance premiums are not refundable. Beginning with loans closed on or
after January 1, 2001, FHA had followed a policy of automatically cancelling the annual
mortgage insurance premium when, based on the initial amortization schedule, the loan balance
reached 78% of the initial property value.22 However, for loans insured on or after June 3, 2013,
FHA will continue to charge the annual mortgage insurance premium for the life of the loan for
most mortgages.23 This change is in response to concerns about the financial status of the FHA
insurance fund. FHA has stated that, since it continues to insure the entire remaining mortgage
amount for the life of the loan, and since premiums were cancelled on the basis of the loan
amortizing to a percentage of the initial property value rather than the current value of the home,
FHA has had to pay insurance claims on defaulted mortgages where the borrowers were no longer
paying annual mortgage insurance premiums.24
21 FHA Mortgagee Letter 05-03, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/
administration/hudclips/letters/mortgagee/2005ml.
22 See FHA Mortgagee Letter 00-38, available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/
administration/hudclips/letters/mortgagee/2000ml.
23 FHA Mortgagee Letter 13-04, available at http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf.
Borrowers whose FHA-insured mortgages have loan-to-value ratios of 90% or lower at origination will be able to stop
paying the annual mortgage insurance premiums after 11 years.
24 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial
(continued...)
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FHA-Insured Home Loans: An Overview
Interest Rates
The interest rate on FHA-insured loans is negotiated by the borrower, seller, and lender. The
borrower has the option of selecting a loan with an interest rate that is fixed for the life of the loan
or one on which the rate may be adjusted annually.
Defaults and Loss Mitigation
A mortgage is considered delinquent any time a payment is due and not paid. Once the borrower
is 30 days late in making a payment, the mortgage is considered to be in default. In general,
mortgage servicers may initiate foreclosure on an FHA-insured loan when three monthly
installments are due and unpaid, and they must initiate foreclosure when six monthly installments
are due and unpaid, except when prohibited by law.25 A program of loss mitigation strategies was
authorized by Congress in 1996 to minimize the number of FHA loans entering foreclosure,26 and
has since been revised and expanded to include additional loss mitigation options. The loss
mitigation strategies that servicers are instructed to pursue on FHA-insured loans are summarized
in Table 3.27
Additional loss mitigation options are available for certain populations of borrowers. By written
agreement with the lender, a borrower in military service may suspend the principal portion of
monthly payments and pay interest only for the period of military service, plus three months.28 On
resumption of payment, loan payments are adjusted so that the loan will be paid in full according
to the original amortization.29 In the past, FHA has also temporarily relaxed rules on the use of
partial claims and loan modifications in specific areas in response to certain presidentially-
declared major disasters, such as Hurricane Katrina.30
(...continued)
Status of the Mutual Mortgage Insurance Fund, p. 54, http://portal.hud.gov/hudportal/documents/huddoc?id=
FHAMMIF2012.pdf. FHA estimates that about 10% of the losses that FHA incurs on defaulted mortgages occur after
the annual mortgage insurance premiums have been cancelled.
25 24 C.F.R. 203.355. State law may prohibit the start of foreclosure proceedings within the time frame specified by
HUD. Also, military service of the borrower may delay foreclosure proceedings (24 C.F.R. 203.346).
26 The loss mitigation program replaced an assignment program; under the assignment program, servicers would assign
a defaulted loan to FHA, which would pay the claim to the lender and then attempt to help the borrower avoid
foreclosure directly. Under the loss mitigation program, servicers are given the responsibility of pursuing loss
mitigation options before completing a foreclosure. P.L. 104-99, the Balanced Budget Downpayment Act, I, terminated
the mortgage assignment program and authorized additional loss mitigation activities.
27 FHA Mortgagee Letters instruct FHA servicers on how to pursue loss mitigation strategies. For example, see
Mortgagee Letter 2000-05, “Loss Mitigation Program – Comprehensive Clarification of Policy and Notice of
Procedural Changes” and Mortgagee Letter 2012-22, “Revisions to FHA’s Loss Mitigation Home Retention Options.”
Additional aspects of FHA’s loss mitigation program are addressed in other Mortgagee Letters.
28 In addition, as amended by HERA, the Servicemembers Civil Relief Act, P.L. 108-189, provides that individuals
called into military service may apply to have any legal action against their homes stayed until nine months after the
release from military service, and foreclosure can be prevented until one year after release from military service.
29 24 C.F.R. 203.345 and 203.346.
30 See, for example, Mortgagee Letter 2005-46, December 1, 2005, available at http://portal.hud.gov/hudportal/HUD?
src=/program_offices/administration/hudclips/letters/mortgagee/2005ml.
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FHA-Insured Home Loans: An Overview
Table 3. Loss Mitigation Strategies
Possible Remedies for FHA Loans in Default
Special
Lender/servicer works out a repayment plan that may include partial or suspended payments for
forbearance
a specified period of time.
Loan
The original mortgage is modified to include the total unpaid amount due. Changes may be made
modification
to the term, interest rate, or type of loan.
Partial claim
FHA provides an interest-free loan to the borrower to pay the arrearage. The borrower must
repay FHA at the end of the original loan term or when the property is sold.
FHA-HAMP
The borrower’s monthly mortgage payments are reduced to 31% of monthly income using a
combination of a loan modification and a partial claim. The partial claim can be used to provide a
limited amount of principal forbearance, as well as to repay the arrearage.
Pre-foreclosure
Borrower sells the property and uses the proceeds to satisfy the mortgage debt. FHA pays a
sale
partial claim to the lender to make up the difference if the property is sold for less than the
mortgage amount.
Deed-in-lieu-of-
Borrower deeds the property to FHA and is released from the mortgage.
foreclosure
Sources: 24 C.F.R. 203, Subparts B and C; An Assessment of FHA’s Single-Family Mortgage Insurance Loss Mitigation
Program Final Report (Abt Associates, 2000); HUD Mortgagee Letter 2009-23
Notes: FHA announced a restructuring of its home retention loss mitigation options in November 2012. This
reorganization removed the partial claim as a standalone option, but allows FHA-HAMP to include a standalone
loan modification, a standalone partial claim, or a loan modification and a partial claim used in combination. For
more information, see FHA Mortgagee Letter 2012-22.
Program Funding
The FHA home mortgage insurance program is funded by the FHA Mutual Mortgage Insurance
Fund (MMIF), which has been sufficient to fund the program without appropriations from
Congress.31 Cash flows into the MMIF from insurance premiums, interest earnings, and proceeds
from the sale of foreclosed homes. Cash flows out of the MMIF to cover administrative costs and
claims on foreclosed mortgages.
FHA maintains both a Financing Account and a Capital Reserve Account within the MMIF. The
Financing Account includes enough funds to cover all expected future losses associated with the
MMIF’s entire portfolio of outstanding loans, based on current assumptions. The Capital Reserve
Account includes additional funds to cover unexpected losses. If there are changes in the
expected costs associated with the MMIF’s portfolio of outstanding loans, then FHA moves funds
between the Financing Account and the Capital Reserve Account as needed to ensure that there
are sufficient funds in the Financing Account to cover projected expenses. If FHA ever needs to
transfer more funds to the Financing Account than it has in the Capital Reserve Account, it can
receive funds from Treasury to make this transfer without congressional action. If this were to
occur, the funds that FHA received from Treasury would not be spent immediately, but would be
held in the Financing Account and used to pay insurance claims only after the remaining funds in
the Financing Account had been spent.
31 FHA does receive congressional appropriations for salaries and administrative contract expenses related to the
MMIF.
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Section 205 of the National Housing Act32 requires HUD to ensure that the MMIF maintains a
capital ratio of 2.0% at all times. The capital ratio measures the amount of funds that the MMI
Fund currently has on hand, plus the amounts that FHA expects to earn (such as through
premiums) or lose (such as through claims paid) on all of the mortgages that it currently insures.
It expresses this amount as a percentage of the total dollar volume of mortgages that FHA
currently insures. In other words, the capital ratio is a measure of how much FHA expects to have
remaining after all future cash flows on the loans that it currently insures have been realized,
assuming that FHA did not insure any more loans going forward.
The capital ratio has been below this mandated 2% level since FY2009, and has most recently
been found to be negative 1.44%.33 While a negative capital ratio does not mean that FHA is
currently out of money, it does suggest that the funds that FHA currently has on hand, combined
with the revenue it expects to earn on mortgages that it currently insures, will not be enough to
pay for the losses it expects to incur in the future on the loans that it currently insures.34
The decline of the capital ratio does not in itself trigger any special assistance from Treasury, but
it raises concerns that FHA is more likely to need such assistance in order to hold enough funds in
the Financing Account to cover expected future losses.35 FHA has taken a number of steps
designed to return the capital ratio to 2% or more, and it has indicated that it will continue to take
more steps to strengthen the insurance fund.36 The steps that it has already undertaken include
increasing the mortgage insurance premiums charged to borrowers; strengthening underwriting
requirements, such as by instituting higher downpayment requirements for borrowers with the
lowest credit scores; and increasing oversight of FHA-approved lenders.
For more information on the financial status of the MMI Fund, and steps that FHA and Congress
have taken to protect the insurance fund, see CRS Report R42875, The FHA Single-Family
Mortgage Insurance Program: Financial Status and Related Current Issues, by Katie Jones.
Program Activity
In FY2012, FHA insured about 1.2 million new single-family purchase and refinance mortgages
that together had an initial loan balance of $213 billion.37 At the end of FY2012, FHA was
32 12 U.S.C. §1711.
33 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial
Status of the Mutual Mortgage Insurance Fund, page 35, http://portal.hud.gov/hudportal/documents/huddoc?id=
FHAMMIF2012.pdf.
34 The calculation of the capital ratio does not take into account any mortgages that FHA may insure in the future. It is
possible that mortgages insured in the future, combined with policy changes made by FHA or by Congress, could bring
in enough additional revenue to pay for future losses on currently insured loans.
35 FHA has permanent and indefinite budget authority to pay for increased claim expenses, and could receive funds
from Treasury without congressional action. If FHA ever needed assistance from Treasury, it would be determined
through a re-estimate of expected claim expenses that is performed as part of the annual budget process. If FHA
anticipates needing assistance from Treasury, the amount that it anticipates needing would be included in the
President’s budget request.
36 For example, see the discussion of policy changes that FHA has made to date and changes that it plans to make in the
future beginning on page 52 of HUD’s Fiscal Year 2012 Annual Report to Congress on the Financial Status of the
FHA Mutual Mortgage Insurance Fund, November 16, 2012, p. 12, http://portal.hud.gov/hudportal/documents/huddoc?
id=F12MMIFundRepCong111612.pdf.
37 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial
(continued...)
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insuring a total of about 7.7 million single-family loans that together have an outstanding balance
of $1.1 trillion.38 From 1934 through FY2012, FHA has insured a total of over 40 million
home loans.39
Author Contact Information
Katie Jones
Analyst in Housing Policy
kmjones@crs.loc.gov, 7-4162
Acknowledgments
Bruce E. Foote, retired CRS Analyst in Housing Policy, was the original author of this report.
(...continued)
Status of the FHA Mutual Mortgage Insurance Fund, November 16, 2012, p. 12, http://portal.hud.gov/hudportal/
documents/huddoc?id=F12MMIFundRepCong111612.pdf.
38 U.S. Department of Housing and Urban Development, Monthly Report to the FHA Commissioner on FHA Business
Activity, September 2012,” p. 6, http://portal.hud.gov/hudportal/documents/huddoc?id=12sep.pdf. These totals do not
include Home Equity Conversion Mortgages (HECMs), which are reverse mortgages insured by FHA.
39 U.S. Department of Housing and Urban Development, Fiscal Year 2012 Annual Report to Congress on the Financial
Status of the FHA Mutual Mortgage Insurance Fund, November 16, 2012, p. 7, http://portal.hud.gov/hudportal/
documents/huddoc?id=F12MMIFundRepCong111612.pdf.
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