Discretionary Spending

Function 370 - Commerce and Housing Credit

Convert the Home Equity Conversion Mortgage Program Into a Direct Loan Program

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

This option would replace the Home Equity Conversion Mortgage (HECM) program with a direct loan program in 2020. Instead of guaranteeing reverse mortgages that private lenders originate, the Federal Housing Administration (FHA) would make loan disbursements directly to borrowers.

Using the budgetary procedures prescribed by the Federal Credit Reform Act of 1990, CBO projects that if FHA charged borrowers an interest rate similar to those charged by private lenders, the option would result in discretionary savings with a net present value of $3.1 billion from 2020 to 2028, provided that federal appropriations were reduced accordingly. (A present value is a single number that expresses a flow of current and future payments in terms of an equivalent lump sum paid today; the present value of future cash flows depends on the rate of interest, or discount rate, that is used to translate them into current dollars.) Using fair-value accounting—an alternative method that is based on market values and that more comprehensively accounts for the risk that the government assumes in guaranteeing or making loans—CBO projects that net discretionary savings would amount to $6.9 billion over the same period. The savings are uncertain and depend on a number of factors, including CBO's projections of interest rates, house prices, and the size of the HECM program, as well as CBO's assessment of how lenders and borrowers would react to such a change.