FHA single-family mortgage guarantee program squeezes taxpayers

Program is no longer saving money as borrower defaults increase

The Federal Housing Administration's single-family mortgage guarantee program moved dramatically from having a net savings to costing taxpayers money as higher-than-expected borrower defaults hit the firm.

The FHA single-family mortgage guarantees made between 1992 and 2012 now have an expected federal budgetary cost of about $15 billion even though initial cost estimates for those loans estimate $45 billion in savings.

This represents a taxpayer cost of $60 billion since the firm is also expecting lower-than-expected recoveries on the houses of defaulted borrowers that have been sold – especially for loans made during the 2004-2009 period, the Congressional Budget Office said in a new report. 

The federal budgetary impact of the FHA’s single-family mortgage guarantee business varies greatly when compared to past years.

For instance, the change from having an expected savings to a cost mostly stems from guarantees made over the 2001 to 2009 period, with those made in those years now estimated to come with greater costs rather than small savings, CBO analysts Chad Chirico and Susanne Mehlman said.

However, mortgage guarantees made in 2010 through 2012 are currently estimated to produce savings for the federal government, although those guarantees have only a few years of performance thus far.

For guarantees made over the past three years, FHA has collected larger fees and imposed stricter criteria for determining which mortgage applications are approved.

Under the Federal Credit Reform Act of 1990 (FCRA), the budgetary impact of a federal loan or loan guarantee is not captured with the associated cash flow in each year, but by the expected present value — in the year the loan is disbursed — of all the cash flows over the life of a loan.

Under the FCRA, expected lifetime costs equal the present value of expected future cash flows discounted using Treasury borrowing rates, CBO analysts pointed out.

However, an alternative approach is used to account for federal credit programs called fair-value estimating, which adds a premium to the Treasury rate to capture the additional amount investors require to bear the risk associated with mortgage guarantee programs.

Interestingly enough, federal credit programs have larger estimated costs — or smaller estimated savings — under the fair-value approach than under FCRA accounting, CBO noted.

In 2011, FHA’s single-family mortgage guarantee program was estimated to produce budget savings of $4.4 billion for mortgages guaranteed in 2012 on an FCRA basis, but a budgetary cost of $3.5 billion on a fair-value basis. 

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