The Fiscal Cliff: What Does it Mean for FHA and Housing?

With the pending Presidential election in November and the end of 2012 fast approaching, there has been ongoing talk recently of the “fiscal cliff” and what happens if Congress allows the U.S. to “fall off” that economic edge in 2013.

Economists, political pundits and everyone from the Congressional Budget Office to the Today Show have referenced the cliff, and with it, the question: what does it mean for Americans? 

The fiscal cliff, like the budget ceiling debate of 2011, is a point at which much change can happen in a sudden rush—in this case, the expiration of several tax cuts that have become commonplace in recent years as well as scheduled reductions in spending. 

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Generally speaking, it will mean higher tax burdens for most Americans—some estimates say as many as 90% of the population—and less funding for government programs. 

Bearing those new costs at once as well as losing funding from annual appropriations for government-funded programs could stand to have a sweeping effect on American households as well as a shrinking effect on a U.S. economy that is still struggling to make a comeback in the wake of the biggest recession since the Great Depression. 

So, what will become of programs under FHA, and what does this fiscal cliff mean for housing? 

The picture might not be quite as dire as some would paint it, says Dean Baker, economist and co-founder of the Washington D.C.-based Center for Economic and Policy Research. 

“There is no way that we will see the full cuts in the sequestration and the full tax increases go info effect for the whole year,” he says. “We may pass January 1, but there is no real consequence to this. There will be a deal that will restore at least some of the Bush tax cuts and some of the money being cut in the sequester.”

For housing in particular, however, it could put a slight damper on the recovery, which has struggled at best and is just beginning to show signs of new life in the most recent data reports from indicators Case-Shiller and industry resources such as Zillow. Creeping ahead at a slow pace, the market’s meager comeback actually may stand as a buffer for the impact of fiscal downfall. 

“It will likely slow the economy, but not derail the recovery. I suspect the effect on the housing market will be very limited,” Baker said. “House prices are down considerably from where they were at the peak of the bubble. With interest rates near record lows, we will continue to see healthy demand for housing and probably some continued modest price appreciation.” 

Programs that receive federal appropriations and rely on that funding to stay afloat could be the ones to suffer, says Julia Gordon, director, Housing Finance & Policy for the Center for American Progress, based in Washington D.C.

The FHA’s reverse mortgage program has sought a government subsidy in years past, but has remained cash-flow positive for the past two years. 

“Budget reductions will likely impact a number of programs across the board, including affordable housing and rental assistance programs,” Gordon says. “TARP-funded homeowner assistance programs, such as HAMP or HARP would not be impacted because those funds are already appropriated.” 

To the effect that the cliff could impact the economy more generally, it will be felt by all programs and all people—to an extent—Gordon says. 

“Presumably, failing to reach a budget compromise will impact all sectors of the economy, including the housing sector,” she says. 

With respect to reverse mortgages under FHA, the only assumption that can be made is that seniors are likely to suffer under the potential sequestration, but in line with other populations as well. 

“One has to assume that indiscriminate budget cuts can not be good for older Americans as a general proposition,” she says. 

Written by Elizabeth Ecker

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  • If the fiscal cliff passes without specific appropriations extensions, HUD might have to slow down its operations creating many problems for HECM lenders, new borrowers, and even some existing borrowers.

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