This week the House and Senate Budget Committees will markup the FY16 budget resolutions. One problematic proposal being considered includes a switch to fair value accounting which would make popular federal home loans like those backed by the Federal Housing Administration and the Department of Veterans Affairs look more expensive in the federal budgeting process even though their actual costs would not change.
The current accounting rules for federal credit programs were established in 1990 under the “Federal Credit Reform Act” to ensure that accurate federal costs were represented and to allow comparisons between federal programs. A move to fair value accounting would artificially inflate the costs of these programs because fair value is calculated using a market interest rate, when in reality, federal programs borrow at Treasury rates. Fair value accounting would also add on the cost that the private sector experiences rather than the actual costs that the federal government incurs.
The costs could require billions more in federal appropriations or force programs like FHA to change their policies and restrict credit.
Economist Ann Schnare does a great job explaining the financial impact that fair value accounting would have on FHA in her March 17 opinion piece for The Hill:
The choice between accounting treatment may seem arcane, but the implications are very real. Under the current approach, for example, [the Congressional Budget Office] estimates that FHA will produce a “savings” of $63 billion over the next ten years. In other words, the program will be a net money maker for the federal government. However, applying fair value accounting to the same projected net revenue stream would lead to a subsidy of $30 billion. It doesn’t take a much imagination to predict what might happen to FHA—or, for that matter, the student loan program–should the government adopt a fair value approach.
Applying fair value accounting to federal credit programs is like estimating risk based on the value of apples when we should be calculating oranges
The federal government is not a private company. It is not profit-driven, and operates to fulfill a societal goal. The FHA single family mortgage insurance program facilitates the American dream of homeownership for millions of American families and helps the economy.
In the end, however, the basic problem with the fair value approach for budgetary purposes may be that it ignores the fundamental role that government credit programs are designed to serve, namely, to provide counter-cyclical stability and/or serve so-called “under-served” segments of the population. In the recent housing downturn, the private mortgage market all but disappeared. Even if one could estimate what private investors would have charged in that environment—which would have been difficult at best in the absence of market transactions —evaluating (and presumably pricing) the FHA program to reflect the risk aversion of private investors at that particular point in time would have totally negated the program’s counter-cyclical role and further undermined the housing recovery.
NAR, along with organizations across industries, has called on Budget committee leadership to oppose any proposal that mandates fair value accounting.