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.

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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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  • As indicated  two paragraphs below, the cited report specifically excludes HECMs.  The following paragraph focuses on the term “self-sustaining” as used by FHA and HUD when it comes to HECMs.
     
    The concept of interest cost is an important one IF one is looking at the real economic costs of the FHA programs to taxpayers.  A portion of the market interest costs related to all FHA programs and some of the related loss due to market interest income is not reflected in HUD accounting since it is the Department of the Treasury which handles cash inflows, cash outflows, and the true cost of borrowing; those additional costs (or, although rare, gains) are not passed back to the HECM program.  From a pure FHA accounting standpoint, the HECM fund might be self-sustaining but from both an overall federal government and taxpayer economic point of view the program has more costs than used (or should be used) by FHA in determining if program operations are self-sustaining based on the non-comprehensive mandated method of accounting for FHA program operations.
     
    As previously stated the CBO report cited in the story does not include HECMs.  Footnote 1 on Page 2 specifically states:
     
    “1. 2 U.S.C. 661 et seq.  In this document, the term “single-family mortgage insurance program” refers to various FHA initiatives supported by the Mutual Mortgage Insurance Fund that guarantee mortgages on single-family homes. The term excludes programs that guarantee home-equity conversion mortgages or mortgages on multifamily homes.”
     
    The second sentence of the full report itself which starts on Page 2 of 16 and ends with the reference to Footnote 1 states:
     
    “The costs of FHA’s single-family mortgage insurance program are recorded in the federal budget using a methodology spelled out in the Federal Credit Reform Act of 1990 (FCRA).1”

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