Housing Policy

Forget Savings, Federal Mortgage Guarantees Now Expected to Cost Billions

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Like so many federal schemes, The Federal Housing Administration's (FHA's) guarantee program for single-family mortgages was supposed to be not just good for Americans, but a money saver for the government—guaranteed! The Department of Housing and Urban Development touts it as "an important tool through which the Federal Government expands homeownership opportunities for first time homebuyers and other borrowers who would not otherwise qualify for conventional mortgages on affordable terms." It was also forecast to save the federal budget $63.0 billion, the Congressial Budget Office (CBO) reminds us.

In fact, though, the CBO announced this week, the mortgage program is awash in billions of dollars of red ink.

CBO's estimate that the guarantees made during the 1992–2013 period will cost $2.2 billion is slightly higher than the estimate of $0.1 billion in costs that can be inferred from the subsidy rates and loan volumes reported by the Office of Management and Budget (OMB), but it is quite different from the $63.0 billion in budgetary savings implied by the original estimates for those guarantees recorded in the federal budget.

The turnaround in financial fortunes is attributed to the housing slump of the late 2000s.

Official government accounting standards (the same standards that now result in losses for the 1992-2013 loans) predict a small budgetary savings from mortgage guarantees made by the FHA in 2014 and 2015. "However," the CBO cautions, "under a more comprehensive fair-value approach to estimating the cost of loan guarantees, FHA's 2014 and 2015 guarantees are projected to have small costs instead of savings." Those "small costs" add up to another $2 billion.

That might be a problem since, at the end of 2013, the FHA's capital reserve account was zero. It's relying on savings in 2014 and 2015 to top off the account.