Discretionary Spending

Function 370 - Commerce and Housing Credit

Change FHA’s Exposure to Risk From Single-Family Mortgage Guarantees

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.

The Federal Housing Administration (FHA) insures the mortgages of people who might otherwise have trouble getting a loan, particularly first-time homebuyers and low-income borrowers seeking to purchase or refinance a home. FHA’s exposure to risk on its mortgage guarantees creates uncertainty about how much they will end up costing the federal government. CBO analyzed seven illustrative policy options that would reduce the cost of risk to the federal government from FHA’s single-family mortgage guarantees:

  • Guaranteeing some rather than all of the lender’s losses on a defaulted mortgage;
  • Increasing FHA’s use of risk-based pricing to tailor up-front fees to the riskiness of specific borrowers;
  • Adding a residual-income test to the requirements for an FHA-insured mortgage to better measure borrowers’ ability to repay the loan (as the Department of Veterans Affairs does in its mortgage-guarantee program);
  • Reducing the limit on the size of a mortgage that FHA can guarantee;
  • Restricting eligibility for FHA-insured mortgages only to first-time homebuyers and low- to moderate-income borrowers;
  • Requiring some borrowers to receive mortgage counseling to help them better understand their financial obligations; and
  • Providing a grant to help borrowers with their down payment, in exchange for which FHA would receive part of the increase in their home’s value when it was sold.