Forget Savings, Federal Mortgage Guarantees Now Expected to Cost Billions

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.