The fiscal year 2012 appropriations process is well underway in the U.S. House of Representatives, and lawmakers will for the first time have the chance to show taxpayers what the Federal Housing Administration’s loan guarantees really cost—and budget accordingly.
Until now, FHA’s single-family mortgage insurance program, which provides default guarantees to lenders making home mortgages to first-time and lower-income homebuyers, existed in the budgeting equivalent of the fourth dimension. The program provided homeowners with subsidized mortgages—loans with terms better than any private lender would make—but also appeared profitable for the government. That meant that Congress wasn’t required to come up with any funding in an annual appropriation to cover the subsidies taxpayers provide to homeowners through the FHA. The subsidies appeared “free” and lawmakers treated them as such.
The fiscal year 2012 appropriation promises to be different. In April the House passed a budget resolution to govern the fiscal year 2012 appropriations process that could inject a dose of reality and honesty into FHA’s annual cost estimates. The House-passed budget resolution allows the chairman of the budget committee to use a “fair-value” estimate of FHA’s costs (or any loan program for that matter) when enforcing overall appropriations limits rather than the previously-required estimates the Congressional Budget Office would report under the Federal Credit Reform Act of 1990 (FCRA).
It turns out that the “free subsidies” that the FHA has been assumed to be providing under the FCRA scoring are indeed too good to be true. They are an accounting fiction that arises under the Federal Credit Reform Act and therefore shouldn’t be held up as proof that the government brings an inherent efficiency advantage to the business of mortgage finance.
Under accounting rules spelled out in that law, the expected performance of government-backed loans is discounted at risk-free interest rates (i.e. the interest rates on U.S. Treasury securities) instead of rates that reflect the uncertainty of loan performance. That less-than-full accounting of the risks taxpayers bear makes government-backed loans look free even if they provide terms to borrowers well below market rates. A fair-value estimate, on the other hand, discounts expected loan performance based on a loan’s inherent risks and thus provides a cost measure in tune with how taxpayers actually value the risks the government is taking with their money.
In May, the Congressional Budget Office sent House Budget Committee Chairman Paul Ryan (R-WI) a “fair-value” cost estimate of the $233 billion in new loans the FHA’s single-family mortgage insurance program will guarantee in fiscal year 2012. CBO says the loans would cost taxpayers $3.5 billion when valued using fair-value estimates, compared to “earning” $4.4 billion when valued using Federal Credit Reform Rules.
The estimate is well-timed to influence the FHA’s fiscal year 2012 appropriation. Under the new “fair-value” rule in this year’s House-passed budget resolution Chairman Ryan has the discretion to insist that the $3.5 billion cost of FHA subsidies be covered in the appropriations cap for the first time.
The FHA falls within the jurisdiction of the Transportation, Housing and Urban Development appropriations bill, and the House isn’t expected to vote on the fiscal year 2012 version of the bill until later this summer. In fact, the House Appropriations Committee hasn’t released a draft yet.
The House-passed budget resolution effectively limits spending on that bill to $47.7 billion and it’s up to the budget committee to enforce that limit. That gives Chairman Ryan and other members of the budget committee leverage to ensure the Transportation, Housing and Urban Development appropriations bill includes $3.5 billion for the FHA’s single-family mortgage insurance program—the fair-value cost of the program’s new mortgage guarantees for fiscal year 2012. Chairman Ryan can declare ahead of time that if the House Appropriations Committee assumes the FHA program “earns” $4.4 billion (the Federal Credit Reform Act estimate) in order to keep spending on the Transportation, Housing and Urban Development appropriations bill within the limit of $47.7 billion, then he will rule that the bill in fact exceeds the spending cap by $7.9 billion (the difference between the two estimates for FHA loan guarantees).
Of course, if the appropriations committee ignores the fair-value estimate for FHA mortgage guarantees, it would be slap in the face to Chairman Ryan and could lead to a showdown among Republicans over the appropriations process. Worse yet, it would make a mockery of the fiscal responsibility and spending limits that House Republicans have pledged to support.