When the housing bubble popped, the government programs that got the most attention were Fannie Mae and Freddie Mac, quasi-governmental agencies that had the “quasi” removed once subprime losses became too much for investors to bear.
But Fannie Mae and Freddie Mac weren’t the only federal programs involved in the mortgage market. There was also the Federal Housing Administration, which has guaranteed nearly $2.7 trillion worth of mortgages, mostly for single-family detached homes, over the past two decades.
That program, funded through what’s known as the Mutual Mortgage Insurance Fund, was expected to earn the government $45 billion over the last 20 years. But new data from the Congressional Budget Office shows that not only did the program — dedicated to guaranteeing loans on single-family houses, and distinct from the agency’s multifamily loan guarantee program — fail to make money, but it actually lost $15 billion. (The analysis was occasioned by the need for a $1.7 billion cash infusion from the Treasury to the FHA on September 30.)
“That swing of $60 billion from savings to cost,” wrote CBO budget analysts Chad Chirico and Susanne Mehlman, “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.”
The losses peaked in 2008, when instead of earning the government $400 million, as projected, the program ended up costing taxpayers $14.1 billion. Even during the 1990s and early 2000s, when the FHA was expecting to receive a modest return of a few billion dollars each year, it ended up just about breaking even half the time.
The silver lining, though, is that since 2010, estimated returns have — at least so far — proven accurate. The CBO analysis confirmed the estimates for 2010 and 2011, and actually raised projected profits for 2012: the FHA had originally guessed that the program would bring in $5.4 billion in profit, whereas the CBO now thinks it could be more like $10.5 billion.
Whether these numbers will remain accurate, though, is another question. The FHA has seriously ramped up its lending in the wake of the crash, with loan originations spiking in 2008. This has some worried that the FHA’s new subprime loans, which require a downpayment of just 3.5 percent and a credit score of just 580, are priming the bump for another crisis, this time explicitly (as opposed to implicitly, in the case of Fannie and Freddie) guaranteed by the feds.
The Works is made possible with the support of the Surdna Foundation.
Stephen J. Smith is a reporter based in New York. He has written about transportation, infrastructure and real estate for a variety of publications including New York Yimby, where he is currently an editor, Next City, City Lab and the New York Observer.