Tag Archives: Congressional Budget Office

FHA’s Net Cost of $15 Billion

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The Congressional Budget Office posted FHA’s Single-Family Mortgage Guarantee Program: Budgetary Cost or Savings? In response to the question, “Has FHA’s Guarantee Program for Single-Family Mortgages Produced Net Savings to Taxpayers,” the CBO responds,

No. Collectively, the single-family mortgage guarantees made by FHA between 1992 and 2012 have had a net federal budgetary cost of about $15 billion, according to the most recent estimates by FHA. In contrast, FHA’s initial estimates of the budgetary impact of those guarantees sum to savings of $45 billion . . .. That swing of $60 billion from savings to cost primarily reflects higher-than-expected defaults by borrowers and lower-than-expected recoveries when the houses of defaulted borrowers have been sold—especially for loans made over the 2004-2009 period. (1)

The document contains a chart of estimates of the budgetary impact of the FHA’s single-family mortgage guarantees by year. It shows that the 2008 vintage was particularly bad, accounting for over $15 billion in losses by itself (the other years’ savings and costs would thus net out).

There are some disturbing aspects of this finding and some that are not. First, the disturbing ones. The FHA has not been transparent about its potential for losses and bailouts (see here for instance). Second, its own financial projections have been overly optimistic.

That being said, the mere fact that the FHA is expected to have losses is not in itself an indictment of the government’s strategy of using the FHA to provide liquidity to the mortgage markets during the financial crisis. If only this were done forthrightly . . . but perhaps that is too much to ask in the midst of the crisis itself.

The Mortgage Interest Deduction: A Taxing Expenditure

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The Congressional Budget Office has issued a report, The Distribution of Major Tax Expenditures in the Individual Income Tax System,  which evaluates the mortgage interest deduction and the state and local tax deduction among other tax expenditures.  It finds (consistent with all previous findings) that they accrue disproportionately — grossly so — to the wealthy.  The mortgage interest deduction has a budgetary effect of $70 billion and the state and local tax deduction has a budgetary effect of $77 billion. (6, Table 1) (to be clear, budgetary effect is not the same as lost revenue; read the report for an explanation of the difference)

Itemized deductions such as these “provide the largest benefits — in both absolute dollars and relative to income — to the highest-income taxpayers.  Those tax expenditures benefit only the roughly one-third of taxpayers who itemize their deductions, and lower-income taxpayers are much less likely than higher-income taxpayers to do so.” (17)  The CBO “estimates that the top quintile will receive almost three-quarters of the benefit of the deduction in 2013, including 15 percent accruing to the top percentile.” (18)

I and many, many others have argued that this is not a good state of affairs but the real estate industry are very well organized around this issue.  Real estate brokers are particularly focused on this because a reduction in these deductions would likely lead to a significant and permanent reduction in their income.  Smaller deductions would make owning a home less financially attractive and thereby push down prices.  Brokers typically get paid by a percentage commission of the sales price.  So they would suffer not just during a transition period (as sellers in the transition period would) but for all time.

So there is no reason to believe that we will see reform around these regressive tax expenditures in the near future, but it should always be kept on the table as part of a tax reform package, particularly if it is implemented in some incremental way (for example, capping the value of the deductions individually or as part of a basket of deductions).