The government could save billions if it allowed only first-time homebuyers and low- to moderate-income borrowers to access Federal Housing Administration products, according to a new study from the Congressional Budget Office.
The FHA would reduce insurance losses by $7 billion were the administration to take such a step, according to the non-partisan CBO, along with a $77 billion drop in new loan guarantees.
The CBO performed this analysis in response to an increased proliferation of private products that cater to folks looking for their first mortgages, or who may have less-than-perfect credit. A much wider chunk of borrowers flocked to FHA products in the wake of the recession at the end of the last decade, the CBO said, when private lenders became significantly more skittish — but that trend seems to be swinging back the other way.
“Recently, mortgage borrowers with good credit scores, large down payments, or low ratios of debt to income have started to see more options in the private market,” the CBO wrote in its analysis.
“The Congressional Budget Office estimates that the share of FHA-insured mortgages going to such borrowers is likely to keep shrinking as credit standards in the private market continue to ease. That change would leave FHA with a riskier pool of borrowers, creating risk-management challenges similar to the ones that contributed to the agency’s high levels of insurance claims and losses during the recession.”
Sharply restricting access to the program wasn’t the only scenario the CBO ran: The office also looked at what would happen if FHA changed its rules to insure only a portion of potential lender losses, required counseling for certain forward-mortgage borrowers, or lowered the maximum value of mortgages that FHA can insure.
The CBO also looked at an interesting fix that would see the FHA giving borrowers a grant to cover part of their down payment, then receive a portion of the home’s appreciation in value over time.
Though the CBO didn’t probe the potential of combing multiple fixes, all eight scenarios resulted in savings — with the greatest amount, $11 billion, coming from a scheme in which the FHA only partially insured against losses in first-loss position. The restricted-eligibility option came in third place among the options, with more savings than the implementation of more counseling and the down-payment grant system — and significantly more than the implementation of risk-based pricing and the addition of a residual-income test, which netted only $2 billion in savings each.
“The options are designed to let FHA continue to fulfill its primary mission of ensuring access to credit for first-time homebuyers and low-income borrowers,” the CBO noted.
Written by Alex Spanko