Department of f-lousing and Urban Development OLLER GENERAL STATES COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON. D.C. 20548 B- 114860 To the President of the Senate and the Speaker of the House of Representatives This is out report on examination of financial’state- ments pertaining to insurance operations of the Federal Housing Administration, Department of Housing and Urban Development, for the fiscal year ended June 30, 1970. Cur examination was made pursuant to the Government Corpo- ration Control Act (31 U.S.C. 841). Copies of this report are being sent to the Director, Office of Management and Budget; the Secretary of the Treasury: the Secretary of Housing and Urban Development; and the Assistant Secretary-Commissioner, Federal Housing Admini stration, Comptroller General of the United States ~~5i&3/70057~ 50 -fH ANNIVERSARY 1921- 1971 COMPTROLLERGENERAL'3 EXAMINATION OF FINANCIAL STATEMENTS REPORT TO THE CONCFlESS PERTAINING TO INSURANCE OPERATIONS OF THE FEDERAL HOUSING ADMINISTRATION FISCAL YEAR 1970 Department of Housing and Urban Development B-114860 DIGEST -_---- WHY THE EXAMINATION WRS M4DE The Government Corporation Control Act requires the General Accounting Office (GAO) to examine the financial statements pertaining to the insurance operations of the Federal Housing Administration (FHA) and tc report the results of its examination to the Congress. This year's ex- amination, as heretofore, was made in accordance with generally accepted auditing standards and included tests of the accounting records and other procedures considered necessary. FINDINGS AND CONCLUSIONS I In the opinion of GAO, the financial statements of FHA pertaining to its insurance operations present fairly its financial position at June 30, 1970, and the results of its operations and source and application of its funds for the fiscal year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year and with applicable Federal laws. RECOMMENDATIONSOR SUGGESTIONS GAO is making no recommendations or suggestions. AGENCY ACTIONS AND UNRESOLVEDISSUES None. MATTERS FOR CONSIDERATION BY THE CONGRESS The report contains no recommendations or suggestions requiring action by the Congress. It is submitted to the Congress, as required by the Government Corporation Control Act, to show the results of GAO's annual examination of FHA's financial statements pertaining to its insurance operations and to make known to the Congress other information deemed necessary to keep it informed of the operations and financial condition of FHA. Tear Sheet Contents Page DIGEST 1 CHAPTER 1 INTRODUCTION 2 2 COMMENTS ON FINANCIAL STATEMENTS 5 P Reserves Total reserves ; Reserve requirements 6 Mutual Mortgage Insurance Fund 9 General Insurance Fund 11 Cooperative Management Housing Insurance Fund 12 Special Risk Insurance Fund 14 Significant changes in balances from the prior year 16 Assets 16 Accounts receivable 16 Accrued assets 16 Investments in U,S. Government securities 15 Acquired property--at cost plus net expenses tcJ date 17 De&halted mortgage notes--at cost plus net expenses to date 17 Allowances for estimated future losses 18 Liabilities 20 &counts payable 20 Debenture obligations--deben- tures issued and outstanding 20 Income 20 Total income 20 Expense 21 Loss on acquired security 21 3 SCOPEOF EXAMINATION 23 4 OPINION OF FINANCIAL STATEMENTS 24 Page FINANCIAL STATEMENTS Schedule 1 Combined comparative balance sheet as of June 30, 1970 and 1969 27 2 Combined comparative statement of income and expense and changes in insurance reserves and borrowings for the fiscal years ended June 30, 1970 and 1969 29 3 Combined balance sheet, analysis by fund, as of June 30, 1970 31 4 Combined statement of income and expense and changes in insurance reserves and bor- rowings, analysis by fund, for the fiscal year ended June 30, 1970 32 5 Combined statement of source and application of funds for the fiscal year ended June 30, 1970 33 Notes to combined balance sheets June 30, 1970 and 1969 35 APPENDIX I Principal officials of the Department of Housing and Urban Development and Federal Housing Administration concerned with the activities discussed in this report 39 ABBREVIATIONS CMHIF Cooperative Management Mousing Insurance Fund Federal Housing Administration GAO General Accounting Qffjce GIF General Insurance Fund HUD Department of Housing and Urban Development MHIF Mutual Mortgage Insurance Fund SRIF Special Risk Insurance Fund COMPTROLLERGENZR&'S EXAMINATION OF FINANCIAL STATEMENTS hEPOf?!iYTc: !lX?i CONGK?%' PERTAINING TO INSURANCE OPERATIONS OF THE FEDERAL HOUSING ADMINISTRATION FISCAL YEA.9 1970 Department of Housing and Urban Development B-114860 -DIGEST - -_ -- - - WHY THE EXAMINATION WAS MADE The Government Corporation Control Act requires the General Accounting Office (GAO) to examine the financial statements pertaining to the insurance operations of the Federal Housing Administration (FHA) and to report the results of its examination to the Congress. This year's ex- amination, as heretofore, was made in accordance with generally accepted auditing standards and included tests of the accounting records and other procedures considered necessary. FINDINGS AND CONCLUSIONS In the opinion of GAO, the financial statements of FHA pertaining to its insurance operations present fairly its financial position at June 30, 1970, and the results of its operations and source and application of its funds for the fiscal year then ended, in ccnformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year and with applicable Federal laws. RECOMMENDATIONSOR SUGGESTIONS GAO is making no recommendations or suggestions. AGENCY ACTIONS iUi7 UNRESOLVEDISSUES ' ~%?S FOR CONSIDZRATION - BY THE CONGRESS The report contains no recommendations or suggestions requiring action by the Congress. It is submitted to the Congress, as required by the Government Corporation Control Act, to show the results of GAO's annual examination of FHA's financial statements pertaining to its insurance operations and to make known to the Congress other information deemed necessary to keep it informed of the operations and financial condition of FHA. CHAPTER1 INTRODUCTION ET-IA, created by the President on June 30, 1934, under authority of the National. Housing Act 12 U.S,C, 1701 et seq., is a noncorporate business-type agency made subject to the Government Corporation Control Act by the Housing Act of 1948. The principal purposes of FHA are to improve home- financing practices, to act as a stabilizing influence in the mortgage field, to encourage improvements in housing standards and conditions, to facilitate home ownership, to aid in the elimination of slums and blighted conditions, and to prevent the deterioration of residential properties. F'HA is headed by the Assistant Secretary-Commissioner, Department of Housing and Urban Development (HUD), F'HA; who is appointed by the Secretary of Housing and Urban Develop- ment D At June 30, 1970, F'HA had 7,995 full--time employees of which 1,550 were in the central office and 6,445 were employed in F'HA field offices throughout the United States and Puerto Rico. Prior to July 1, 1970, F'HA's 121 field offices, in- cluding 76 insuring offices, were located in six F'HA regions throughout the United States. Effective July 1, 1970, the regional structure was realigned by HUD and the F'HA regions were abolished. In the realignment, 10 HUD regions were established and the F'HA field and insuring offices were in- corporated into the HUD regions. The insuring offices are responsible for writing all forms of F'HA insurance required in their respective jurisdictions, except the New York State insuring offices where the writing of insurance on multi- family property is centralized in one office. FHA administers mortgage insurance programs under which lending institutions (mortgagees) are insured against loss in financing first mortgages on various types of housing and on loans which finance property alterations, repairs, and/or improvements, The Housing and Urban Development Act of 1968 amended and liberalized the existing insurance pro- grams and authorized additional. programs which permitted FHA to insure: 2 1, Loans to homeowners to finance the purchase of fee simple title to the property on which their homes were located in those cases where the homeowners had onl.y a Peas&old interest in the land, 2. Supplementa% loans to finance 90 percent of the estimated value of improvements and additions to multifamily properties and nursing homes carrying N-IA-insured mortgages, 3. Supplementary loans to housing cooperatives to fi- nance the cost of rehabilitating or modernizing wartime housing purchased from the Federal Govern- ment and the properties are partly covered by unin- sured mortgages which are more than 20 years old. Most of the insurance written by F'HA covers mortgages on small homes (one to four families) and on multifamily housing properties. From inception in 1934 to June 30, 1970, FRA had written about $142 billion of insurance, of which about $69 billion was in force at the latter date. The mortgage insurance function gives rise to insurance claims by mortgagees who, because of mortgage defaults, have acquired the properties pledged to secure the F'HA- insured mortgages. In the settlement of claims, title to the properties is conveyed to FHA. This action gives rise to other ERA functions, the maintenance and sale of acquired properties. A summary of FH.A"s property activity for fis- cal years 1970 and 1949 follows. Fiscal year 1970 - 1969 Small Multifamily Small Multifamily homes properties- homes properties Number on hand at begin- ning of fiscal. year 23,318 --588 26,515 530 Sales 25,200 64 33,230 47 Acquisitions 26,693 47 - 30,033 -45 Increase or reduction(-) in the number on hand 1,493 32 -3,197 - -2 Number on hand at end of fiscal year 24,811 571 588 -.- I_ - 23,318 == 3 IIZHA also administers a number of programs that do not involve mortgage insurance, and therefore lFE?Adoes not corn- mingle the financial results of these operations with the results of its mortgage insurance activities, Separate financial statements covering the nonmortgage insurance pro- grams are presented by IS-IA but are not included in this re- port because it is limited to l?B.A."s insurance operations, 4 CHAPTER2 co NTS ON FINANCIAL STATEMENTS RESERVES Total reserves FHA insurance programs are conducted under four insur- ance funds authorized by the National Housing Act. The funds are the Mutual Mortgage Insurance Fund (MMIF), the General Insurance Fund (GIF), the Cooperative Management Housing Insurance Fund (CMHIF), and the Special Risk Insur- ance Fund (SRIF). The insurance funds are credited with fees, premiums, and investment income and are charged with debenture inter- est o administrative expenses, and insurance losses. Pro- vision is made for estimated future losses on acquired prop- erties, mortgage notes, and notes for property improvement loans. The accumulated differences between the income of the funds and expenses, losses, and provision for estimated future losses are considered to be the insurance reserves available to cover future insurance losses and administra- tive expenses. The financial position of each fund at June 30, 1970, is shown on the combined balance sheet (sch. 3). At June 30, 1970, the total insurance reserves amounted to $1,571.3 million. An analysis of the respective insur- ance reserve balances and the sources of these balances follows. Total Property insurance Small Multifamily improvement reserves homes -- properties loans -----(millions) MMIF $1,340.2 $1,340.2 $ - $ - GIF 208.5 35.7 59.4 113.4 CMHIF 25.7 25.7 SRIF -3.1 _-.--a?2 0.2 $1,571.3 --__- $1272.6 ---- $85,3 __-_ $113.4 -_- Reserve requirements FHA estimated the reserves required to settle insur- ance claims that might be presented by insured mortgagees and lenders under the $69 billion insurance in force on June 30, 1970, on the basis of actuarial studies of the risks underwritten. An estimate of the reserve require- ments is made annually. Estimated reserve requirements are affected princi- pally by the volume of new mortgage loans that are insured and by decreases in the amount of insurance in force. An increase in the volume of new mortgage loan insurance in- creases the estimated reserve requirements because the in- sured mortgage loan balances are at their highest level for new loans, As the mortgage loans age and balances are re- duced, the reserve requirements decrease. Thus the longer the insurance is in force, the lower the requirements be- come. FHA considers that a noteworthy difference exists in the bases on which life insurance and other insurance com- panies establish their insurance reserve requirements and on which FHA establishes its insurance funds' estimated reserve requirements, Insurance companies generally consider re- serve requirements for the purpose of determining not only their solvency but also the amount of surplus funds that may be available for distribution to policyholders or stock- holders. In the case of life insurance companies9 mortality ex- perience has been well established and the expected mortal- ity- -one of the major elements in the valuation of reserve requirements --can be predicted reasonably well, Conse- quent ly 9 the reserve requirements of life insurance compa- nies can be determined with a fair degree of accuracy. - FHA considers that its estimated regerves are to pro- vide for future losses and related expenses which will be, in large part, contingent upon adverse economic conditions which are not readily predictable. Therefore FHA has es- tablished its reserve requirements on what it considers to be the most conservative basis--that is, that range of 6 probability of future losses and related expenses that might be incurred if an economic reversal wers to-develop immedi- ately. Thus the FHA insurance funds' estimated reserve require- ments are designed as a measure of the losses and expenses that may result from such a contingency and not as a measure of solvency of the funds according to its accepted meaning in the underwriting of conventional insurance risks, FJIIAconsiders that f9a balance status'" for .a fund exists when its insurance reserves --accumulated retained earnings-- are equal to, or greater than, the estimated reserve require- ments and that, when a balance status is attained, the fund has sufficient resources to meet such future insurance losses and related expenses as might be expected within the range of probability. At June 30, 1970, R-IA's estimated insurance funds' re- serve requirements amounted to $2,275.5 million. At the same date, FIG's total insurance reserves, as shown on the combined balance sheets (schs. 1 and 31, amounted to $1,571.3 million, which resulted in a total estimated de- ficiency of $704.2 million in the insurance reserves for meeting estimated reserve requirements. The following tabulation shows the estimated reserve requirements, the insurance reserves, and the estimated re- serve deficiencies at June 30 for each of the past 5 years. Estimated Estimated Fiscal reserve Insurance reserve requirements reserves deficiencies 1966 $1,709.5 $1,139.6a $569.9 1967 bs750.0 1,176.6 573.4 1968 1,875.4 1,260.3 615.1 1969 2eO41.2 19394.3 646.9 1970 29275.5 lp571.3 704.2 "Includes $10 million borrowed from the U.S. Treasury. At June 30, 1970, the amount borrowed--$10 million--was available for payment of insurance clafms but is not shown as part of the insurance reserves in the combined balance sheets (schs. 1 and 3) and is not included in the insurance re- serve amount of $1,571 million. deficiencies to a combination of factors, such as Cl> the increased estimated reserve requirements because of new in- surance written and the large proportion of mortgages hav- ing long maturities and high Loan-value ratios (higher risk mortgages) and (2) actuarially estimated increases in in- surance losses, The adequacy of the insurance reserves of $1,571 mil- lion is directly affected by economic conditions, and the question of whether these reserves will.1 be adequate during periods of severe adverse economic conditions is currently not determinable. Comments on the insurance reserves of the four funds follow. 8 klutual bbrtgage Insurance Fund MMIF was established under authority of section 202 of the National Housing Act. Under this fund only mortgages which finance the purchase of small homes are insured. At June 30, 1970, the total reserve of MMIF, as shown on the combined balance sheet (sch. 31, amounted to $1,340 million and consisted of a statutory reserve of $116 million and an insurance reserve of $1,224 million, The MMIF reserve of $1,340 million is insluded in the total reserves of $1,571 million shown on the combined balance sheets. The FHA records showed that there were no insurance claims by mortgagees applicable to the MblIF reserve pending at June 30, 1970. Section 205 of the act authorized the establishment of a General Surplus Ascount and a Participating Reserve Ac- count1 in MMIF and authorized the Assistant Sesretary- Commissioner, to allocate the income or loss from operations in any semiannual period to either or both accounts. The act also authorizes the Assistant Secretary-Commissioner to distribute a share of the Participating Reserve Account to mortgagors after the mortgage loans insured by MMIF have been paid; however9 the mortgagors do not have any vested rights in the ascount. The act also requires that the allocation of the income or loss and the distributions from the Participating Reserve Account be made in such manner and amount as to be in accord with sound actuarial and accounting practices. Both the General Surplus Account and the Participating Reserve Account are available to meet Sasses arising from the MMIF insurance in force. The need to build up the Gen- eral Surplus Account evidenced primarily by the excess of the estimated reserve requirement over the insurance reserves prompted the Assistant Secretary-Commissioner to allocate all net income for the semiannual period ended June 30, 1970, 1Shown in the MMIF section of the combined balance sheet-- schedule 3, page 31 --as insurance reserve and statutory re- serves respectively. to the General Surplus Account. Low levels of net income from MMIF operations in the preceding 16 semiannual periods led to the allocation of all net income to the General Sur- plus Account, Distributions to mortgagors from the Partici- pating Reserve Account in fiscal year 1970 were $3.7 million compared with $4,5 million distributed during fiscal year 1969. For each year since 1959, the MYIF estimated reserve re- quirement has exceeded the total NMIF reserves for the fund. The estimated reserve deficiency of $73,9 million at June30, 1970, is part of the $704,2 million estimated reserve de- ficiency discussed in the preceding section of this report. The following tabulation shows the available reserves% the estimated reserve requirement, and the estimated reserve de- ficiency at June 30 for each of the past 5 years, Partici- Estimated General pating reserve Estimated Fiscal surplus reserve Total sequire- reserve year account account reserves men% deficiency (millions) 1966 $ 736.6 $132.7 $ 869.3 SlJ70.5 $301.2 1967 81003 128.4 938.7 1~211.9 273.2 1968 918.6 12401 1,042.7 lo297.1 254.4 1969 19057.0 119.6 1,176,6 1,368,2 191.6 1970 1,224.2 116.0 1,340.2 1,414.1 73,9 General Insurance Fund GIF was established on Augus% 10, 1965, under autharity of section 519 of the National Mousing Act. Under this fund mortgages and notes are insured Twhich finance the purchase, construction, and/or improvement of small homes, multifamily prw=tY, nonresidential property, and commercial or farm s%ru.ctures (I The insurance reserv-e of GIF, totaling $208.5 million (sch. 3) is included in the total reserves of $1,571 million shown on the June 30, 1970, Fsmbined bal- ance sheets o The FHA records showed that claims pending against the $208,5 million GIF reserve but not accepted by FHA at June 30, 1970, amounted %Q $21.4 million. Therefore the GIF reserve at June 30, 1970, was sufficient to meet insurance claims pending accep%ance. The estimated reserve requirement has exceeded the in- suranze reserve since inception of the fund in August 1965, 'The estimated reserve deficiency of $490.8 million at June 30, 1970, is part of the total $704.2 million estimated reserve deficiency discussed in a preceding section of this report. The following tabulation shows the esltimated reserve requirement, the insurance reserve, and the estimated reserve deficiency at June 30 for each of the past 5 years, Estimated Estimated Fiscal reserve Insurance reserve year requirement - reserve deficiency -+millions) 1966 $526.3 $262.0a $264.3 1967 515.5 223.3 292.2 1968 556.0 204,B 351,9 1969 631.3 195.5 435.8 1970 699.3 202.5 490.8 "Includes $10 million borrcwed from the U.S. Treasury. At June 30, 1970, the amount borrowed--$10 million--was avail- able for payment of insurance claims but is not shown as part of the insurance reserves in the combined balance sheets (s&s. 1 ad 3) and is no% included in the insurance reserve amount of $208.5 million. Cooperative Management Housingsurance Fund CMHIF was established on August 10, 1965, under author- ity of section 213 of the National Housfng Act. Under CMHIF mortgages are insured which finance the purchase, construction, and/or rehabilitation of multifamily coopera- tive housing property, Also insured are supplementary loans which finance improvements and/or repairs of multi-= family cooperative housing property or provide funds for necessary community facilities. Tne insurance reserves of CH!tIIF, which total $25.7 million, are included in the total reserves of $1,571 million shown on the combined balance sheets (schs. 1 and 3), The F'HA records showed that there were no insurance claims by mortgagees applicable to CMHIF reserve pending at June 30, 1970. Section 223(l) of the act authorized the establishment of a General Surplus Account and a Participating Reserve Account1 in CMHIF and authorized the Assistant Secretary- Commissioner to allocate the income or loss from operations in any semiannual period to either or both accounts, The act also authorizes the Assistant Secretary-Commissioner to distribute a share of the Participating Reserve Account to mortgagors after the mortgages insured by CMHIF have been paid; however, the mortgagors do not have any vested rights in the account. The act also requires that the allocation of the income or loss and the distribution from the Participating Reserve Account be made in such manner and amount as to be in ac- cord with sound actuarial and accounting practices. Both the General Surplus Account and the Participating Reserve Account are available to meet losses arising from the CMHIF insurance in force, CKHIF realized income of $6.1 million from operations in fiscal year 1970, of which j $2.6 million was allocated to the General Surplus Account and $3,5 million was allocated to the Participating Reserve Account. 1Shown in the CMHIF section of the combined balance sheet-- schedule 3, page 31-- as insurance reserve and statutory reserve, respectively. documentation authorizing the allocation states that it is contemplated to continue the buildup of the General Surplus Account to approximate the reserve requirement and, at the same time, make some of the reserve in the Participat- ing Reserve Account available for distribution to mortgagors. At June 30, 1970, the CHHIF insurance reserves exceeded the estimated reserve requirement by $6.6 million. The fol- lowing tabulation shows the available reserves, the estimated reserve requirement, and the estimated reserve deficiency or excess at June 30 for each of the past 5 years. Partici- Estimated Estimated pating General Total reserve reserve Fiscal reserve surplus re- require- deficiency year account account serves ment ,,(excess(-)> (millions) 1966 $ - $ 8.2 $ 8.2 $12.7 $4.5 1967 - 14.6 14,Q 22.6 8.0 1968 13.5 13.5 22.3 8,8 1969 2.5 20.4 22,9 21,l -1.8 1970 4.1 21.6 25.7 19.1 -6.6 13 Special Risk ---- Insurance Fund SRIF was established by FHA on August 1, 1968, under authority of section 238(b) of the National Housing Act, as amended. This section provided that SRIF be funded with a $5 million advance from GIF and that the advance be repaid at such times and at such rates of interest as the Secretary, HUD, deems appropriate. The Housing and Urban Development Act of 1969 (Pub. L. 91-152) authorized the Secretary to fund SRIF with advances from GIF in amounts that the Secre- tary may determine necessary up to a total sum of $20 mil- lion. At June 30, 1970, $15 million had been advanced by GIF. SRLF is used to pay the claims of insured mortgagees and lenders that resulted from defaulted mortgages which financed (1.3 homes purchased by low-income families that had been assisted with their mortgage payments by FHA, (2) homes purchased by low- and moderate-income families that, because of credit histories or irregular income patterns, could not qualify for mortgage insurance under other F'HA insurance programsg and (3) repair, rehabilitation, construction, or purchase of property located in older, declining urban areas in which conditions were such that the ?%.A eligibility re- quirements for mortgage insurance could not be satisfied. At June 30, 1970, the SRIF reserve had a deficit of $3.1 million. Appropriations to cover losses sustained by the fund 'were authorized by section 238(b) of the act; how- ever, the Congress had not appropriated funds for this pur- pose. Consequently, the operations of SRIF had been fi- nanced principally by advances from GIF. The following tabulation shows the estimated reserve requirement, the \ deficit in the insurance reserve, and the estimated reserve deficiency at June 30, 1970, and at June 30, 1969, the close of the fiscal year in which SRPF was established, Estimated Estimated reserve Insurance reserve Fiscuear -- .._-- -rsuirement reserve deficiency -- --.----"---(millions) 1969 $ 20.6 s-0.7 $ 21.3 1970 143.0 -3,l 146.1 The FHA records showed that there were no insurance claims by mortgagees applicable to the SREF reserve pending at June 30, 1970. SIGNIFICANT CHANGESIN BALANCES FROMPRIOR YEAR Assets Accounts receivable The total accounts receivable, as shown in the combined balance sheets (schs. 1 and 31, amounted to $68.5 million at June 30, 1970, an increase of $41.5 million from the total accounts receivable of $27 million at June 30, 1969. The increase of $41.5 million was comprised of (1) $26.3 million due from purchasers of mortgages and assigned mortgage notes which FHA sold in June 1970, (2) an increase of $10 million in the amount advanced by GIF to SRIF, and (3) a net increase of $5.2 million in other receivable ac- counts, Accrued assets The total accrued assets, as shown in the combined balance sheets (schs. 1 and 31, amounted to $156.6 million at June 30, 1970, an increase of $18.7 million from the amount of $137.9 million at June 30, 1969. The increase of $18.7 million was comprised principally of (1) an increase of $11 million in accrued premiums which occurred as a result of FHA having 220,533 more small home mortgages insured at June 30, 1970, than it had at June 30, 1969, and (2) an increase of $7 million in accrued interest on U.S. Government securities attributable to the increase in securities held by FHA at June 30, 1970, from that held at the close of the prior fiscal year. Investments ---.-- in U.S. - Government securities The investments in U.S. Government securities at amor- tizedcost,as shown in the combined balance sheets (schs. 1 and 31, amounted to $1,047 million at June 30, 1970, an increase of $124 million from the prior year's investment of $923 million, The increase was attributable mainly to the increase in holdings by MMIF which was authorized, by section 206 of the National Housing Act, to invest moneys not needed for current operations in U.S. Government secu- rities D The moneys came from revenue-producing-fund activ- ities. The increase ininvestmentsin U.S. Government secu- rities in fiscal year 1969 amounted to $163.7 million and also resulted mainly from the increased holdings by MMIF. Acquired property--at cost D~US net exnenses to date The amount of $600,8 million for acquired property, as shown in the combined balance sheets (schs. 1 and 3), was $22.4 million more than at the close of the prior year. A comparison of changes in the acquired property inventories during fiscal years 1970 and 1969 follows, Fiscal year 1970 1969 (millions) Acquired property inventory at beginning of fiscal year $578.4 $605.8 Sales 437.0 530.6 Acquisitions 459.4 503.2 Increase or decrease(-) in inventory 22.4 -27.4 Acquired property inventory at end of fiscal year %!3??.8 %7S& Defaulted mortgage notes--at -.-- cost plus net expenses to date The amount of $407.9 million for defaulted mortgage notes, as shown in the combined balance sheets (schs. 1 and 31, was $43.7 million less than the amount at the close of the prior year. A comparison of the changes in the amount of mortgage notes on hand during fiscal years 1970 and 1969 follows. 17 Defaulted mortgage notes--at cost plus net expenses--on hand at beginning of fiscal year $451.6 $451,,,2 Sales 54.2 51,6 ACqLEisitions _ :0.5* 49$0 .--__1 Reduction in mortgage notes on hand 43.7 2@$ Defaulted mortgage notes--at cost plus net expenses--on hand at end of fiscal year 5gu $451* _-___6 Allowaqces for estimated future --I___ losses The valuation reserves-- allowan~ces for estimated fu- ture losses --provided by F"HAat June 30, 1970, for mortgage notes and contracts for deed and for acquired security or collateral amounted to $348.9 million, an increase of $12,2 millionfromthe amount at June 30, 1969, of $336,8 mil- lion (see schs, P and 3). The increase of $l2,1 million in the valuation re- serves --shown in schedules 2 and 4 under the caption "In- crease(-) or decrease in valuation allowances"'--consisted of the adjustments necessary to value the acquired proper- ties and mortgage notes held by the four funds at June 30, 1978, at market prices and at amounts considered to be collectible. The valuation allowances for BMIF and SREF 4 were increased by $10,4 million and $4.3 million, respec- tively. The valuation allowances for @IF and CMHF were each reduced by $1.3 million. The valuation allowances were based on consideration of (1) actual losses experienced on the sale of small home properties in fiscal year 1970, (2) losses anticipated to be incurred in the sales of multifamily properties on the basis of estimated sa.les prices, and (3) predetermined loss rates on certain other property. At June 30, 1969, the valuation reserves were reduced by $17 million as shown in the statement of income and expense (sch. 2). 19 Liabilities Accounts payable The amount of $66-3 million for accounts paTT?ble, as shown in the combined balance sheets (schs, 1 and 3), was $22.3 million more than at the close of the prior year, The increase of $22.3 million was comprised of (1) an increase of $11,5 million in the amounts due to mortgagees for securities (properties) acquired in the settlement of mortgage insurance claims and sundry amounts due vendors by MMIF, GIF, and SRIF, (2) an increase of $10 million in ac- counts payable as a result of the increase in the liability of SRIF to GIF, and (3) a net increase of $0,8 million in the other payable accounts. Debenture oblinations-- .-debentures issued and outstanding Debentures issued and outstanding at June 30, 1970, as shown in the combined balance sheets (schs. 1 and 31, amounted to $516.9 million compared with $576-9 million at June 30, 1969, a decrease of $60 million. During fiscal year 1970, debentures amounting to $25.8 million were issued in payment of insurance claims presented by insured multifamily property mortgagees because of defaults in mortgage payments by mortgagors, and deben- tures aggregating $85,8 million were redeemed. Income Total income The total income of $426.7 million for fiscal year 1970, ; as shown in the statements of income and expense (schs. 2 and 4), was the combined income of the four insurance funds, and was $46.4 million more than the combined income of $380.3 million in the preceding fiscal year. Each of the four insurance funds had more income in fiscal year 1970 than in fiscal year 1969. The increases were MMIF, $24.8 mil- lion; GIF, $8 million; CMHIF, $0.3 million; and SWIF, $13.3 million. The increase of $24.8 million in the income of MMIF re- sulted principally from increases in revenues derived from insurance premiums and interest earned on U,S. Government securities, Insurance premiums increased by $10.2 million as a result of insuring an additional 268,962 mortgages and interest earned increased by $13.9 million as a result of increased investments. Sundry increases and a decrease in the remaining income accounts netted to an increase of $0.7 million. The increase of $8 million in the income of GIF resulted from increases in revenue from (1) fees, SE,3 million, (2) insurance premiums, $4.7 million, and (3) profit on the sale of mortgages, $2 million, The increase in fees and insurance premiums came from the addition of insurance on 65,149 mort- gages to the insurance in force. The $0,3 million increase in the income of CMHIF resulted from an increase in interest earned on the additional $3 mil- lion investment in U.S, Government securities, offset by de- creases in fees and other interest earnings, The $13.3 million increase in the total income of SRIF resulted principally from (1) increases in revenue from fees and insurance premiums of $7,7 million and $5,7 million, re- spectively, and (2) a net decrease of $0.1 million in the remaining income accounts, The increase in fees and in- surancepremiumsresulted from the addition of insurance on 84,608 mortgages to the insurance in force. Expense Loss on acquired--- security 2 The loss sustained on acquired security in fiscal year 1970, as shown in the statements of income and expense (schs, 2 and 4), amounted to $73.9 million, a decrease of $31.8 rni.1, lion from the loss of $105.7 million sustained in the prior fiscal year. Of the $31.8 million decrease (1) $15.2 million was attributable to the reduction in the number of small homes sold--from 33,230 in fiscal year 1969 to 25,200 in fiscal year 1970-- and (2) $16.6 million was attributable to an 21 increase in the number of multifamily properties sold--from 47 in fiscal year 1969 to 64 in fiscal year 1970. The av- erage loss on a small home sold in fiscal year IL969 was $3,054 and in fiscal year 1970 was $3,424. ?kktifamihy properties were sold at a profit in fiscal year 1.970--the average profit on a property amounted to $%93,k43---whereas multifamily properties were sold at a loss in fiscal year J_969--the average Pass amounted to $90,423. i 22 SCOPE OF' EXAMINATION We have examined FHAPs financial statements pertaining to its insurance operations for the fiscal year ended June 30, 1970. Our examination was made in accordance with generally accepted auditing standards and included such tests of the accounting records and such auditing procedures as we considered necessary in the circumstances. We reviewed the HUB internal auditors! examination of the accounting records pertaining to the insurance opera- tions. We found that the internal auditors had not done a sufficient amount of audit work on the balance sheet and income and expense accounts to have enabled us to reduce our tests on the insurance accounting records, We were able, however, to use certain other audit work performed by the internal auditors. 23 OPINION OF FINANCIAL STATEMENTS The financial statements, schedules 1 through 5, are the statements of FTIA pertaining to its insurance operations. Schedule 5 is based on the combined statement of source and application of funds submitted by the agency to the Trea- sury Department. In our opinion, the accompanying financial statements (schs. 1 through 5) present fairly the financial position of FHA at June 30, 1970, and the results of its operations and source and application of its funds for the fiscal year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year and with applicable Federal laws. 25 FEDERAL IlOUSING ADWENISFRBPION caoXNED COi%XNdTIVE BALANCE SHTFP As OP JUNE 30, 1970 aND 1969 ASSETS CAS AND FUND BALANCES: C.ab on hand and in t.rmsit $ e”f9;.3f+.~ $ 8.:35.079.e6 .- ..,3.7:t.71 Fud brlancoo with u. s. lba5u-Y 7 9. 4*5g3.592.W 63.blb.35 nl.sbo.oa4.05 .&304.395.14 1.099.~&.48 2cb30.387.86 I .00?.?33.09 ln,bZ.*oG7 ll6.%3.7:3.EZ 11.6oe.355.95 -- 7.‘56.3cs.lC 14.03;.53 .6 2” ‘ L-5..ZL~.I~ 1$$.693.U.egL 13;.9:2.::3.2Z 8. s. G.zmrnslant sacurities at smrtizsd cost fthrket value $1,015.Wh1.443.42 at Jura 33. 1970. and $fi&176.619.54 at June 30. IT691 (note 1) l.W.721,7b5.3S 92j.490.2Y.12 St+ck ,,, rental .r.d cooprative hmming cmp,rations: 209.222 shama at Jvm 30. 1970. .nd 220.858 sharss at Jum 30. 1%9-at cost 235.E23.FO r-2 . . .-1 . . ..Y u =3 . -.., up 725 1c2.12 236.bO9.263.27 243.6:&:61.2: a33.719.30 -16.~: .o-;.c 220.677.5 44. 2-2 22 ,?%.-,?.Z~ 6OO.W.32b.82 ‘V.903.239.67 44.OlC.L35.2~ 1.052.792.019.76 1.076.941.357.53 %643,7b9.60 39.372.W.7b 8’5&3& MJ10,148~270.16 1,036,6.92.989.9e ~W.‘~I~.OC 3rJ.r5.e)s.:c 677.35O.W.lb :16,rr=6,151. -- 260.b67.92 _C 258.732.00 1.675.92 67X 152.630.05 716.4=6.15:.? 10.020. I?b.W -.J.&O.4Y..O6 4.459.??9.93 3.w6.055.24 L~-c.-o SCHEDULE 1 LIABILITIES 8 5.372.241.02 9 5.172.758.79 6,859.593.39 5.672.891.73 9.617.365.Y, 6.1M,45P.5l 26.931.220.82 19.0~:.3~.43 3.062.9g6.40 3.553.080.80 15.0n.03c.00 .c::.o:*.x 66.81r2.416.8 44,53:.580 24 ACCOCCRDES, LrAElrLITIEs: htemst on debsntms : Gawrmont qencias i.l47,#Jh9e 1,1Bc,60~51 Gther 8.839.274.40 10.20-'.Y i. 0 83.572.63 9s.775.90 203.139.74 25:,528.39 14.619.924.95 14,6::.724.3? 3.824,352.53 2.5S.017.52 - 401.16 250.843.09 156.36C.95 2.417.322.87 ,.7‘:,197.52 2x.479-6 ?9,45'.01:.01 ** - ,97.379.300.97 515.75E.72 1.1-i . . 3 : . "5 ‘ .0’3!,1 3.!4 70.395.750.00 73.???.933.00 446.465.033.00 _ ': 9.57'.253.')" 516.@52.650.03 :76,P%-,1::.33 * - 910.100.00 9c.3 ?.03 910.100.03 cr _. py c.00 .?0.300.00 27.000.00 2,446.250.33 5,1;i,w:.cc _ 2.446~50.03 .2CC.C3"."? 520.229.3OO.oo SY2,lo;. 03.30 4,265,1QLl9 4,665.X1.63 _ 10.537.467.22 9,x-.lh7.77 14.792.631.&3 1?.6c:,539.$! 685.133.8~ 72O.W.2?3.3;! RESERVES AND BORROWINGS FROW U.S. TR'EASURY l20.105.199.ll 1zz.137.025.65 1.~51.185.739.74 1.275.2:7.397.?6 J&m ~9Jb,3"'."!?.5L 10.03c.000.00 ,0.0c*.05:.03 ~61.:?!.539.5a l.w+.?c.~13.51 $2.!66."7- b:.:;4,7tc.697 ?q 27 SCHEDULE 2 BBDERAL NOUSING AON~~ISTRATIO~ 6 49.os3.790.45 $ 40.230,@83.3b 324.052.685.66 303.412.803.44 49*“_9~;.~ 35.600.66?.51 . . 1,467.63 1,097.P M?.5’W.b7 w.3a9.3b 21.739.13 887.365.69 90.467.91, 35a.cw.15 -317.w.52 !.%?,706.75 94.a71.31 21.517.92 426.692.923.45 120.477.322.74 450.003.00 21,7?9,639.7? 73,941.012:23 10.823.u6.01 a.es7.72s.i8 1.908.145.51 6.905.651.15 2,64,3.675.00 2.669.233.03 ;y.g.50 33.97b.W . c . 211.231.92 232,y15,55:.71 --2 , 6.9 .!O :26.529.5$6.2 -13.422.501.00 14.766.21r8.00 1.524.FYJ.00 2.252.000.W -259.792.03 -12.1:4,?:9.00 17.C19.243.33 122.13/,025.65 U4.117.637.6D -247‘576.81 - e 3.;~;'$6;= 2.512.874.'34 , ,(. Jb.w.486.7p l2o,l~,l59.77 1.272.223.?87.86 1.134.1a4.57a.41 24S,101.81 4.%5,16o.oob 178.714,250.0?= 141.034,959.45~ 4136.493.76 4.13&.493.?4 1,451.185,739.74 , 2 2.X 3.387.Pb 1o.wo,wo.oo 10,w0.000.00 - 10.000.000.09 10.000.000.00 Q&l&?y,5?~.El s 1,434,~40.b!‘I.51 29 .. 506.28 L-L 13.947.596.32 4.w.wl.DO -5!la?lma SCHEDULE3 8 s.m.-1.w 4 - 0 - 0 - 8 - 8 S.J72.24!.W 6.858.593.39 - 6.859.591.39 %61?.%5.% 5.373.Ib3.91 3.120.3?6.63 6.03 1.123.818.m 26.9JG20.82 15.532.735.36 9.673.W.61 5.W.W 1.669;wS.eS 3.cbZ.P~.‘rO J.W*99c.“(i 15.0M).010.00 ‘5’““.$6”.~ &4,.9i% -l.lP.%J.# 4m:1o . .. 4.457.76;93 31 .,,,422,53*.w 1.524.9%00 -259.7q2.00 .,2.,56.‘59 w 8 - 32 SCHEDVLE5 1Z.3JJ.615.15 45o,oo,.bo 21.779.633.77 5.X7.5’) 154.750.00 2;,;17:0: 379 -&p6.767.% 69R393.17 6oO.W J6.239.876.1,. 699.395.u - _ 2. 8%R79,16 856.736.22 16.727.55O.a -2idz&a ~‘0.391.42bgt ;L137.340.30 10.354.424.pl 33 64.175.56 -18.991.66 b.0, 10.28 Total ,muns 426.6Yi.9:8.4~ ~472.995.0~ B7.843.429.62 m m.WZ.95 1.6Y.591.99 sc4.m 5.761.955.W 5.761.953.00 111.053.729.Ob 4j,405,6M.W 67,380.5~9.06 252.550.w 5.289.596.95 679.361.00 WW9n.W 5J58.49 . L2.YnO.W 12.9w.00 6.445.25 - - - W.P97.?32.41 zZL~4o.zr7.4~ )61,871.57~ a 1.885.6bB.27 24 7.516.8L . . -241.576.aI - 021.~39.4~.D~ y46.?!3.252.52 ~.oo:.oo n y.e64.e9wl 2S.W7.W.0~ . 25,6~k5~.00 203.400.00 238.9YS50.00 229.26!,550.05 1.171.0D0.W 4.5OD.030.W 2q:.W.bb . m.v39.64 . 265.032LQ@!! 229.261.55O.OQ 27.OM.689.h 4.703.4Ocl.00 )~.D%nl.~ ) ~4~b.RW.52 (2&784.h91.64 (~o,:"D.R9'.q 34 NOTESTO COMBINEDBALkNCE SHEEX JUNE 30,197OANDl%9 1. Investments include debentures of FHA Insurance Funds in the amount of $69,794,650.00 at June 30, 1970, end $72,933,200.00 at June 30, 1969, purchased as an investment by the Mutual Mortgage Insurance Fund. 2. The following items are not recorded in the assets: a. Properties and notes tendered by mortgagees but not accepted by FHA in the amount of $21,359,400.18 at June 30, 1970, and $15,172,208.44 at June 30, 1969. b. Accrued interest receivable--collection doubtful--on defaulted Title I notes at June 30, 1970 and 1969. On Notes with principal balances $9,569,371.92 $ll,442,407.22 Principal balance paid-interest due 1,163,612.17 769,36o.82 Total .$10,732,984.9 $12,211,768.04 3. The following items are not recorded. in the liabilities: a. Unfilled orders in the amount of $1,512,823.98 ($315,683.62 furniture and equipment and $1',197,140.36 operating expenses) et June 30, 1970; $1,363,774.16 ($293,?41.49 furniture end equipment and $1,40,432.67 operating expenses) at June 30. l%S. b. Unfilled orders and incomleted portion of contracts for property repairs in the amount of $9,936,504.91 at June 30, 1970, and $6,760,088.10 for incompleted portion of contracts for property repairs at June 30, 1969. c. Contingent liability with respect to pending lawsuits in the amount of $290,850.94 at June 30, 1970, end $6U,861.98 at June 30, 1969. d. Pending claims on properties and notes tendered by mortgagees but not accepted by FW\ in the amount of $21,359,400.X3 at June 30, 1970, and $15,172,208.44 at June 309 1%9. e. Certificates of claim relating to properties and notes tendered by mortgagees but not. accepted by FHA in the amount of $193,571.15 at June 30, 190, and $220,419.75 at June 30, 1%9. P. Certificates of claim relating to acquired security on hand of $14,937,084.% at June 30, 1970, sod $15,871,ll3.31 at June 30, 1969. 4. The amount shown as "Borrowings from U. S. Treasury" represents $25,COO,ooO.00 advanced to the General Insurance Fund less $15,000,ooO.00 repaid to date on authorized Treasury note of $50,OGO,ooO.00. 5. Residual of Reserves is equity of the Government upon the liquidation of all claims and settlement of contractual obligations. 6. The maximum liability for outstanding FHA insurance contracts in force at June 30, 190 and 1%9 was: Mortgage Insurance Programs $67,202,162,ll5 $61,671,654,221 Modernization and Improve- ment Pronrams (Title I. section 2) . ' 392,128,685 393,539,701 Total $67,594,2go,800 $62$65,193,922 7. The liabilities shown for the "Deposits held for Mrtgagors and lessees" is net of escrow advances by FHA in the amount of $415,591.41 at June 30, 1970, and $635,938.75at June 30, 1969. FHA in special. circumstances would be indemnified against loss on certain insured mortgages and assigned mortgage notes UP to $952.674.35 at June 30. 1970 and $1,133,101.74 at June 30, 1969. 35 APPENDIX 37 APPENDIX I PRINCIPAL OFFICIALS OF THE DEPARTMENTOF HOUSINGAND URBANDEVELOPMEXT AND FEDERAL HOUSINGADMINISTRATION CONCERNED WlTH THE ACTIVITIES DISCUSSEDIN THIS REPORT Tenure of office From To - SECRETARY: George W. Romney Jan. 1969 Present ASSISTANT SECRETARY-COMMISSIONER: Eugene A. Gulledge Oct. 1969 Present William B. Ross (acting) Mar. 1969 Oct. 1969 ASSISTANT COMMISSIONERFOR ADMIN- ISTRATION: Horace B. Bazan Jan. 1956 Present ASSTSTANTCOMMISSIONER- COMPTROLLER: Woodward Kingman (acting) Apr. 1970 Present Lester H. Thompson June 1961 Apr. 1970 U.S. GAO Wash., D.C. 39
Examination of Financial Statements Pertaining to Insurance Operations of the Federal Housing Administration, Fiscal Year 1970
Published by the Government Accountability Office on 1971-05-07.
Below is a raw (and likely hideous) rendition of the original report. (PDF)