ome ownership, like apple pie and baseball, is the stuff of American dreams. Making those dreams a reality for millions of Americans is the Federal Housing Administration, established by Congress in 1934 to create a stable mortgage market during the Great Depression. While times have changed, FHA remains a stabilizing force in the economy and is seen as a key contributor to America's soaring home ownership rates, which topped 66.8 percent last fall. Since its creation 65 years ago, FHA has insured more than 26 million mortgages, many of those for low-income buyers who could not qualify for conventional loans.

"[FHA's] mission today is as important as it has always been," says Brian Schapelle, senior staff vice president at the Mortgage Bankers Association. Without FHA's government-backed loans, many low-income home buyers and those living in areas underserved by private lenders would not be able to afford their own homes.

The scope of FHA's business is substantial. In 1997, 30 percent of insured mortgages were covered by FHA mortgage insurance. The same year, FHA-insured single-family mortgages--the largest component of the agency's operations--were valued at $361 billion. What's more, FHA costs taxpayers nothing--its operations are self-funded through insurance premiums and other income.

Home ownership isn't just good for homeowners. HUD data shows neighborhoods with a high level of owner-occupied housing have lower crime rates, higher citizen participation in community affairs, better schools and better overall economic conditions than neighborhoods with low home ownership rates. FHA plays a critical role in increasing affordable housing and home ownership, two of HUD's primary goals.

To help achieve those goals, FHA insures private lenders against losses on mortgages for single-family and multifamily homes, condominium units and apartments for middle- and low-income residents. It also insures a range of other loans, such as:

• Home equity conversion mortgages, also known as "reverse mortgages," which allow cash-poor elderly homeowners to convert home equity into monthly income;
• Rehabilitation mortgages and property improvement loans that encourage neighborhood revitalization; and
• Loans for construction of apartments, health care facilities, nursing homes and housing for the disabled.

Under FHA's loan programs, private lenders make and process FHA-backed loans following federal underwriting guidelines. FHA guarantees the entire value of the loan in the event that a borrower defaults. Lenders then bundle the loans into large securities, which are sold to investors. The securities are backed by the Government National Mortgage Association, or Ginnie Mae, a government-owned corporation within HUD, which guarantees payments to investors.

FHA's operations must be viewed within the context of dramatic personnel cuts and restructuring now under way at HUD. In 1997, to transform the department from what he referred to as "the poster child for inept government," HUD Secretary Andrew Cuomo announced a plan to consolidate 300 HUD programs into 71 and cut 3,000 of 10,500 staff positions at the agency. The reform plan, known as HUD 2020, was roundly criticized by the General Accounting Office and HUD's inspector general, Susan Gaffney, who said the plan placed the department in "serious jeopardy," because it was built on an unsupported premise that HUD could function adequately with a smaller staff.

Under HUD 2020, FHA staff will be cut by 44 percent, from the 1996 level of 5,100 positions to 2,900. The agency's operations, which are divided between multifamily and single-family housing programs, are to be restructured. On the single-family side, FHA is consolidating 81 field offices into four home ownership offices. On the multifamily side, FHA is to consolidate 51 field offices into 18 program hubs and 33 program centers to improve administration and oversight.

To manage the workload in the face of job cuts and restructuring, FHA will have to rely more on contractors. But FHA will need to improve on its poor track record in contract management if it is to succeed.

In a May 1997 study of FHA contracting, the National Academy of Public Administration (NAPA) concluded that FHA procurements took too long, oversight was poor, and the agency often used contracting techniques that, while permissible, limited competition, making the agency vulnerable to complaints of favoritism. Training and education of FHA's acquisition staff need to be strengthened, NAPA concluded, noting that "weaknesses were shared by both program and procurement personnel" and "multiple organizations will have to work together to solve them."

Last March, GAO reported (RCED-98-65) that FHA does a poor job of overseeing property management contractors responsible for safeguarding foreclosed FHA-owned properties. When auditors visited real estate sites that were supposed to be managed by contractors, they found vandalism, maintenance problems and safety hazards, which reduced property values and increased FHA's costs of holding onto the properties.

Early in 1998, HUD appointed a chief procurement officer and established a contract review board to oversee FHA's contracting efforts. GAO auditors view the actions as positive steps but question whether they are enough to "lead to a change in HUD's culture, so that acquisition planning and effective oversight of contractors will be viewed by both management and staff as being intrinsic to HUD's ability to carry out its mission successfully," GAO's Stanley Czerwinski told a panel of the House Government Reform and Oversight Committee last June.

Plugging Up Labor Gaps

Improving human resources management will be critical to FHA's future. GAO concluded in a March 1998 report (RCED-98-86) that FHA's planned staffing levels were not based on a systematic analysis of the agency's workload. This, GAO said, makes it uncertain whether HUD's single-family program operation will have the capacity to carry out its responsibilities.

Irene Facha, FHA senior litigation attorney and a regional vice president of the American Federation of Government Employees' HUD Council of Locals 222, shares GAO's concerns. "The managers in headquarters are deciding how to slice up the employee pie under a secretary who believes all our jobs can be contracted out and an upper echelon of management folks who are too dumb or too scared to say otherwise," she says.

About 86 percent of FHA's workforce is covered by collective bargaining agreements. FHA management worked closely with its unions in establishing the HUD 2020 reform plan, says Federal Housing Commissioner William Apgar. "We couldn't have done 2020 reform without the unions as our partner," Apgar says. The union and HUD touted the agreement as the first of its kind between a federal agency and a labor union to work together to reduce the size of an agency.

Labor-management cooperation notwithstanding, FHA staffing does not match the workload, either in terms of skills or numbers. This mismatch exists at a time when FHA's long-term housing program budget is expected to grow, along with its multifamily insured portfolio and single-family insured portfolio, GAO noted in March. FHA is proposing carrying out single-family housing activities with a staff of 764, down from a current force of 1,054. Multifamily staff reductions have not yet been calculated, but the current staff now stands at 1,842. The agency plans to manage the cuts through restructuring, consolidating administrative functions and privatizing debt collection and property disposition.

Apgar says the new FHA structure will solve some of the agency's personnel problems. "We had the wrong people doing the wrong things; we had the organization aligned improperly. But we have turned that all around with the creation of the assessment and enforcement center, the creation of single-purpose accounting centers and financial management centers."

Staffing problems were one of three material weaknesses auditors from KPMG Peat Marwick noted in the firm's audit of FHA's 1997 financial statements. While FHA received an unqualified audit opinion, indicating its financial reporting is sound, KPMG reported that inappropriate staffing, insufficient attention to preventing mortgage defaults, and inadequate accounting and finance systems all hinder FHA's ability to record, process, summarize and report financial data accurately.

In February 1997, GAO reported that HUD field directors also are not completely comfortable with the accuracy of data (RCED-97-34). On the single-family housing side, 25 percent of managers rated data accuracy fair or poor. On the multifamily housing front, 68 percent of those surveyed rated accuracy as fair or poor. Clinton administration officials agree that FHA managers do not always receive the financial information they need.

Cleaning Up Finances

HUD Chief Financial Officer Richard Keevey says improving financial systems is high on the agency's priority list. One major step the department has taken is the establishment of a standard general ledger. "We consider that to be a very significant improvement that will probably be noted very favorably in the next audit, but there are still several noncompliant systems in the FHA world that need to be corrected," Keevey says.

KPMG found in its 1997 audit that weaknesses in internal controls in FHA's single-family property acquisition, management and disposition functions reduced the agency's ability to monitor and report accurately on the Single-Family Property Division's activities; inreased the risk of loss to FHA on the sales of single-family properties; and hindered the agency from selling off foreclosed houses from its inventory. Correcting those weaknesses will be critical to reducing FHA's considerable losses on foreclosed properties. In 1997, private mortgage companies filed more than 76,000 claims totaling $6 billion with FHA on foreclosed properties. Better management systems could reduce both the number of foreclosures and the losses incurred on foreclosed properties.

Improvements to FHA's financial management systems are being achieved under HUD's departmentwide Financial Systems Integration (FSI) effort launched in 1991. HUD's plan initially was to replace about 100 management and financial information systems with nine new standard integrated systems. While the FSI project has made progress, systems have been over budget and behind schedule. HUD revised the FSI strategy in 1993, and again in 1997, each time creating cost increases and implementation delays. "The problems HUD has experienced in developing and deploying an integrated financial management system are a direct result of not managing information technology projects properly as investments," GAO reported in December (AIMD-99-25).

HUD has established new FSI management teams and increased training of project management staff, but those actions "do not address and cannot correct the root cause of the problems--the lack of a data-driven management process to properly oversee and control information technology investments, such as FSI," GAO noted.

The link between FHA information technology systems and HUD systems is inseparable. Shortcomings at the department level hinder FHA and vice versa.

One of HUD 2020's main goals is to replace computerized information systems that aren't able to communicate with one another, an area where FHA has made "major strides," Keevey says. In fact, new information technology, financial systems consolidation and restructuring have allowed FHA to reduce loan processing time from around five weeks to several days.

Facha, however, says that "most of the systems touted by the Secretary as the solution to fewer staff don't work or are not as useful in the long run as originally hoped." She cites the multifamily housing division's Real Estate Management System as an example. The system, designed to keep track of FHA's inventory of multifamily properties, suffers from demand overload. "Given the small number of staff left in multifamily housing, this meant dozens of rent increase requests and change orders were put on hold and each employee's frustration level was maximized trying to input data into a system that was consistently shutting them out," she says.

Information technology managers at FHA have been working to resolve outstanding year 2000 computer conversion problems. Although GAO and the IG both have criticized HUD's year 2000 efforts as belated, Keevey says FHA is "well ahead of schedule." He expected all systems would be Y2K compliant by Jan. 31, 1999. FHA's success in resolving Y2K problems has come at the expense of other FHA technology efforts, however. In its December report, GAO noted that one of FHA's major technology initiatives, the FHA Mortgage Insurance System, which will integrate 35 separate systems, did not meet its initial deployment date of December 1998, in part because of the Y2K effort.

Laying a Foundation

Like all federal agencies, FHA is working to improve management through strategic planning. In addition to HUD's annual performance plan, required under the 1993 Government Performance and Results Act, which includes some FHA-specific goals, FHA has a business plan to improve operations and measure performance.

FHA aims to "increase homeownership opportunities through a variety of tools such as expanding access to mortgage credit," as expressed in the HUD plan. FHA's business plan includes field goals, such as increasing the percentage of FHA-insured mortgages issued to first-time homebuyers.

FHA managers say about 85 percent of the agency's activities have outcome measures associated with them. Nonetheless, administration officials say FHA does not have sufficient benchmark data, nor has it developed quantitative measures by which progress toward results can be tracked. Even the best performance plan relies on accurate data--something FHA can't count on until HUD's financial management systems are put in order.

FHA

Federal Housing

Administration

Parent department

Housing and Urban

Development

Created

1934

Mission

"To expand home ownership to as many Americans
as possible, on an actuarially sound basis, and to provide a consistent, stabilizing
force in the home financing market."

Top official

William Apgar

Number of employees 3,359

Operating budget

1994: $455 million

1998: $560 million

GPP report card

Return to GPP home

Management Grades