Responding to a request by House Budget Committee Chairman Paul Ryan, the Congressional Budget Office (CBO) analyzed the accounting method of the Federal Housing Administration's (FHA's) single-family mortgage insurance program on a fair-value basis and found significant differences over the current accounting method.


The current method of accounting used by the FHA is in according to the Federal Credit Reform Act of 1990 (FCRA).  Under this method, the CBO had estimated that the FHA insurance program would generate a savings of $4.4 billion for fiscal year 2012.  However, when analyzed under the fair-value accounting method, the figure changes to $3.5 billion in costs for the year.

According to the CBO the stark difference in outcomes of the two methods is due to the fact that the FCRA method omits the costs of market risk and treats essential administrative costs (such as costs for servicing or collecting) separately.  In the report, the CBO states two primary reasons for how the costs of federal loans and loan guarantees do not fully reflect the actual costs of the programs:

  • By using Treasury rates for discounting, FCRA accounting implicitly treats market risk—a type of risk that is reflected in market prices because investors require compensation to bear it—as having no cost to the government. (FCRA procedures do, however, incorporate the expected cost of defaults on federal loans or loan guarantees.)
  • Subsidy rates computed under FCRA exclude the administrative costs of federal credit programs—even costs that are essential for preserving the value of the government’s claim to future repayments, such as costs for servicing and collecting on loans. Such administrative costs are accounted for separately in the budget on a cash basis each year as they are incurred.

Conversely, the fair-value estimates more fully incorporates the costs to the government of the risk inherent in its credit transactions.  In this approach, the value of assets or liabilities  is estimated in a way that corresponds to or approximates market prices.  The fair value of an asset is determined by estimated the price that would be received if it were sold in an orderly transaction.  The fair value of a liability is based upon the price that would be necessary to induce a market participant to assume the liability.

The primarily argument supporting the FCRA method of accounting is that the market risk is less for the federal government because the government is able to borrow at Treasury rates.  The CBO notes, however, that when the government finances a risky loan or loan guarantee by selling a safe Treasury security, it is effectively shifting risk to the public.