Accounting Method Shows FHA’s Mortgage Insurance Premium Could Save $4.4 Billion

A alternative accounting approach sheds light on the cost of the Federal Housing Administration single-family insurance program, showing that FHA’s mortgage insurance program could actually provide $4.4 billion in budgetary savings in fiscal year 2012.

The Congressional Budget Office, in using methodology based on the Federal Credit Reform Act of 1990, based the estimate on lifetime costs of FHA’s single-family mortgage insurance premium. According to the CBO findings, FHA has guaranteed more than 17% of new and refinanced single-family mortgages in the U.S.

A fair-value accounting approach, however, still shows FHA’s mortgage guarantees exposing taxpayers to “potentially significant losses,” writes a CBO representative. That estimate still shows the cost of loan guarantees to the federal government in 2012 to be $3.5 billion. That figure is based on an estimated $233 billion in loan guarantees.

While the accounting methods share many considerations, a primary difference is that the fair-value method essentially incorporates a premium for market risk. The two approaches lead to very different results of the program on the federal budget. Adjusting for the cost of risk would be to change the subsidy rate for FHA’s guarantee program from -1.9% under the FCRA guidelines to 1.5% under a fair-value estimate, the CBO writes.

View the CBO report.

Written by Elizabeth Ecker

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