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Strange accounting suggests FHA loss

by Peter G. Miller
June 2nd, 2011

In the game of scoring political points one need look no further than a new report issued by the Congressional Budget Office (CBO) to see theory differ from reality. According to Accounting for FHA’s Single-Family Mortgage Insurance Program on a Fair-Value Basis, the Federal Housing Authority (FHA) could be a big cost to the government.

FHA’s real cost

This, in fact, is not the case. It could be the case if we use an absurd form of accounting. In other words, elephants can’t fly but if we change physics enough than in theory that would be a real worry.

“The costs of FHA’s single-family mortgage insurance program are recorded in the federal budget using a methodology spelled out in the Federal Credit Reform Act of 1990 (FCRA),” says the CBO. “This analysis examines the budgetary impact of using a different accounting approach–fair-value estimating–which provides a more comprehensive measure of the cost of that program.”

So what’s the difference? There are several points:

First, with traditional accounting the FHA would “produce budgetary savings of $4.4 billion in fiscal year 2012.” In other words, $4.4 billion would go from FHA borrowers to the federal government next year.

Second, if we spin the dial and use the “fair value estimating” then we can determine that the government will actually lose $3.5 billion.

FHA “fuzzy math?”

This analysis, of course, is bogus. As the WallStreetPit points out: “No other financial institution (public or private) has to measure their book based on fair value. So why look at FHA on that basis? Simple answer. The CBO thinks that fair value versus the FHA accounting is a good proxy for the imbedded losses at FHA.” (Parenthesis theirs)

Actually, the CBO is responding to a request from a member of Congress–an important member of Congress–Rep. Paul Ryan (R-WI), chairman of the House Budget Committee and famously the author of legislation that would end Medicare.

Back in the real world the results are different.

The FHA, said former Commissioner David H. Stevens, “is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

In the worse real estate market in decades–a market caused in large measure by the irresponsibility of private-sector lenders–the FHA was still delivering envelopes of cash to the U.S. Treasury.

Or, as the president of the National Association of Realtors, Ron Phipps, explains: “Our data shows only one out of five first-time buyers needing a mortgage could afford a 20 percent downpayment, and without first-time buyers the trade-up market would stall with very negative consequences for housing and the overall economy. Ironically, low downpayment FHA and VA loans, which are so critical to this segment, have performed well and never needed a taxpayer bailout because those borrowers stayed well within their budgets.”

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