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Budgetary Estimates for the Single-Family Mortgage Guarantee Program of the Federal Housing Administration 1 (September 23, 2014)

handle is hein.congrec/cbo1885 and id is 1 raw text is: SEPTEMBER 2014 Budgetary Estimates for the Single-Family Mortgage Guarantee Program of the Federal Housing Administration Loan guarantees made in the Federal Housing Adminis- tration's (FHA's) guarantee program for single-family mortgages from 1992 to 2013 are now projected to generate small costs over their lifetimes rather than the significant savings that were recorded in the federal budget at the time the guarantees were made-a deterio- ration that stems largely from the sharp downturn in the housing market in the late 2000s.1 The Congressional Budget Office (CBO) has estimated the budgetary effect of those guarantees using information through April 2014 (when the agency published the projections it has used as the baseline for analyzing legislative proposals this year). 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. Under the accounting approach required by the Federal Credit Reform Act of 1990 (FCRA), new mortgage guar- antees made by the FHA in 2014 and 2015 will produce budgetary savings, CBO projects. However, 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 2 savings. 1. For a more detailed account of the historical costs of FHA's programs, see Congressional Budget Office, FHA's Single-Family Mortgage Guarantee Program: Budgetary Cost or Savings? CBO Blog (October 21, 2013), www.cbo.gov/publication/44628. What Is FHAs Single-Family Mortgage Insurance Program? FHA has historically guaranteed mortgages of borrowers who might otherwise find it difficult to obtain mortgage credit, including first-time homebuyers, lower-income borrowers, and borrowers with lower credit scores. Under its single-family mortgage insurance program, FHA guar- antees the timely payment of principal and interest to mortgage lenders in return for fees paid by the borrowers. Following the housing downturn that began in 2007, FHA's pool of borrowers expanded substantially as mort- gage financing from sources other than FHA became more difficult to obtain. From 2008 through 2013, FHA insured over 20 percent of the mortgages made to pur- chasers of single-family homes each year, and the amount of outstanding mortgage borrowing insured by FHA at the end of fiscal year 2013 was more than $1 trillion. How Are the Costs of Credit Programs Measured in the Budget? Federal credit programs such as loans and loan guarantees are accounted for in the budget on an accrual basis, as specified by FCRA. The accrual amount is the estimated lifetime cost of the loan or guarantee; for a guarantee, it equals the present value of the estimated claim payments minus recoveries and fees over the life of the guarantee. 2. For details on the analysis summarized in this report, see Francesca Castelli, Gabriel Ehrlich, Damien Moore, and Jeffrey Perry, Modeling the Budgetary Costs of FHA's Single Family Mortgage Insurance, Working Paper 2014-05 (Congressional Budget Office, September 2014), www.cbo.gov/publication/45711. Note: Numbers in the text may not add up to totals because of rounding.

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