The hidden cost of government: Federal housing guarantees won't save $63 billion, they will cost $2.2 billion

The Congressional Budget Office reported Tuesday that single-family mortgages guaranteed by the Federal Housing Administration over the last two decades will now cost a taxpayers a few billion dollars, and won't save tens of billions of dollars as first anticipated.

The FHA guarantees help higher-risk people, including those with lower incomes or credit scores, to buy homes. According to CBO, borrowers pay fees under the program, and that helps the FHA ensure timely mortgage payments to lenders.

A new report says a mortgage credit for first-time homebuyers and others with higher credit risks will not save the government billions of dollars, as first estimated.
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CBO's report said that using the government's own accounting method, the $2.8 trillion in mortgages guaranteed by the FHA from 1992 to 2013 will now cost the government $2.2 billion. The report noted that cost is "quite different from the $63.0 billion in budgetary savings implied by the original estimates for those guarantees recorded in the federal budget."

CBO said the housing downturn that started in 2007 is a major factor in the new estimate, as the FHA saw a huge uptick in the number of mortgages it guaranteed when other sources of credit dried up.

"From 2008 through 2013, FHA insured over 20 percent of the mortgages made to purchasers 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," the report said.

The CBO report is the latest example of how bad estimates at the start of a program can create an overly optimistic picture of the program's costs over many years. While the housing crash contributed, another part of the problem is the government's system of accounting for the credit programs it runs.

Current law requires budget estimates for those programs to be based on amounts that reflect the current value of all payments over the life of a loan. But those estimates tend to downplay the real cost of these programs, including the FHA loan guarantee program.

For example, CBO noted that new mortgage guarantees in 2014 and 2015 will produce budget savings, using the government's current system. "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 savings," CBO said.

Back May, CBO noted the same problem exists for federally backed student loans. While Democrats routinely argue that the government makes money off of student loans, that is only true when the loans are considered under the government's accounting system.

Specifically, CBO noted that while the government estimates federal student loan programs will generate $212 billion in revenues over 10 years, the use of a more market-based accounting system shows the programs will really cost $332 billion.