Debt Grows at Federal Housing Administration : First GAO Audit of Agency in 15 Years Finds Current Deficit of $2.9 Billion

The Federal Housing Administration--crushed by the combined impact of mounting home mortgage defaults in the Southwest, massive defaults by a handful of mortgage co-insurance companies and a portfolio of soured hospital loans--lost $4.2 billion last year and has a deficit of $2.9 billion, the General Accounting Office said Wednesday.

Raising the specter of another multibillion-dollar taxpayer bailout on the heels of the savings and loan crisis, Comptroller General Charles A. Bowsher told a subcommittee of the Senate Banking, Housing and Urban Affairs Committee that the ultimate cost to taxpayers could run to $4 billion or $5 billion in the next few years--or even more if ongoing investigations reveal further problems.

Outlining the first full-dress audit of the perennially troubled FHA in 15 years, Bowsher presented a picture of lax management, chaotic bookkeeping and inadequate monitoring of lending programs delegated to the private sector. But he said that the GAO has been unable so far to assemble evidence of deliberate wrongdoing, despite repeated invitations to do so by Sen. Alan Cranston (D-Calif.), chairman of the subcommittee, and by Sen. Donald W. Riegle Jr. (D-Mich.), who chairs the full committee.

“Numerous investigations of alleged fraud, embezzlement and other illegal acts are currently under way,” Bowsher told the senators, but the agency’s books were so fouled up after years of neglect that “it is not possible to determine the extent of losses that could ultimately be sustained . . . as a result of these alleged improprieties.”

But even if the deficit reported Wednesday is not swollen by losses uncovered later on, Bowsher warned, the government will have to appropriate “$4 billion to $5 billion” to make up FHA’s depleted mortgage funds. He added: “It could be more.”

The FHA, a Depression-era invention to broaden citizen access to home ownership and to underwrite low-income rental housing, was transferred to Housing and Urban Development when that department was created in 1965.

The FHA was last subjected to a full-scale GAO audit in 1974. Its bookkeeping is said to have deteriorated further because of widespread HUD staff cuts during President Reagan’s first term. The 1988 audit, conducted jointly by GAO and the accounting firm of Price Waterhouse, marks the first time in the era of huge federal deficits that the agency has been measured by the hard-nosed standards of business accounting.

The Bush Administration made no effort to minimize the problems presented Wednesday by Bowsher and the subcommittee. Instead, Federal Housing Commissioner C. Austin Fitts, FHA’s top official, freely admitted that the agency has been mismanaged and is in need of managerial, staffing and program reforms that she insisted are already being put into effect by Housing Secretary Jack Kemp.

Fitts stressed that the FHA problem is nowhere near as serious as the savings and loan scandal, either in scale or in seriousness of risk--a distinction that Cranston conceded. In contrast to the thrift crisis, which will cost tens of billions for years to come, the default risks are limited to programs over which the government has control, for the most part, she pointed out.

Responding to questions, Bowsher added that in his view the home loan defaults in the troubled oil states of the Southwest probably have peaked and are slowly declining. “I don’t think we’re in a free fall,” Bowsher said. “What we have here is a program in trouble.” Both he and Fitts cautioned, however, to murmurs of senatorial agreement, that the trouble has to be addressed immediately.

In the GAO-Price Waterhouse analysis, the biggest losses occurred in FHA’s key programs. The largest, the Mutual Mortgage Insurance Fund, which insures mortgages on single-family homes, suffered $1.2 billion in defaults.

Most of the defaults came from mortgage endorsements in 1986 and 1987, primarily in the economically depressed Oil Patch states of the Southwest, Rocky Mountains and Alaska. In addition, net losses from sales of foreclosed property in those areas were also higher than usual.