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Fair-Value Estimates of the Cost of Federal Credit Programs in 2013 1 (June 2012)

handle is hein.congrec/cbo10787 and id is 1 raw text is: JUNE 2012 Fair-Value Estimates of the Cost of Federal Credit Programs in 2013 The federal government supports some private activities by providing credit assistance to individuals and busi- nesses. Some of that assistance is in the form of direct loans, and some, in the form of guarantees of loans made by private financial institutions. Although about a hundred federal programs provide such assistance, just a few programs provide more than three-quarters of it: specifically, the programs offering student loans, single- family mortgage guarantees, and direct loans and loan guarantees for small businesses. In this report, the Congressional Budget Office (CBO) provides an illustrative analysis of the federal govern- ment's costs for credit programs following two approaches: The procedures currently used in the federal budget as prescribed by the Federal Credit Reform Act of 1990 (FCRA)' and An alternative approach in which cost is based on an estimate of the market value of the federal govern- ment's obligations-termed a fair-value approach. To facilitate the computation of the estimates for this analysis, CBO used its own projections of the volume of loans and cash flows for some programs and projections by the Office of Management and Budget (OMB) and other federal agencies for others. In particular, CBO used its own estimates for the Department of Education's student loan programs and the Federal Housing Administration's (FHA's) single-family mortgage 1. Section 504(d) of FCRA, 2 U.S.C. § 661c (d) (2006). guarantee program, because those estimates are a routine part of its baseline budget projections. However, because CBO does not ordinarily project the detailed cash flows required to estimate the costs for most of the other, smaller federal credit programs, CBO relied on other federal agencies' projections of those cash flows for the purpose of comparing the two methods of accounting. Consequently, in the aggregate, the lending levels and costs described here are illustrative-and differ from those underlying CBO's baseline estimates or its analysis of the President's budget-but they provide a good basis for comparing the overall budgetary impact of the two ways of accounting for the costs of credit programs. Using FCRA procedures, CBO estimates that new loans and loan guarantees issued in 2013, in the amount of $635 billion assumed for this analysis, would generate budgetary savings of $45 billion over their lifetime- thereby reducing the budget deficit. In contrast, using a fair-value approach, CBO estimates that those loans and guarantees would have a lifetime cost of $11 billion thereby adding to the deficit. Much of the difference between those two amounts derives from the valuation of student loans: Under FCRA procedures, those loans generate very large budgetary savings per dollar lent compared with other federal credit assistance; under the fair-value approach, most of those savings disappear. Costs for all credit programs would be higher under the fair-value approach because it accounts more fully than FCRA procedures do for the cost of the risk the govern- ment takes on when issuing loans or loan guarantees. In particular, the fair-value approach accounts for the cost of market risk, and FCRA procedures do not. Market risk is Note: Numbers in the text and tables may not add up to totals because of rounding.

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