Is FHA a Subsidy Program?

20 July 1998 "Is FHA a Subsidy Program?" Yes and no. FHA supports numerous programs, some of which are explicitly or implicitly subsidized. For example, a special program of mortgage insurance for members of the armed forces is subsidized by the armed forces while special programs for older declining urban areas and for displaced households are partially subsidized by FHA through insurance premiums that don't cover losses. Its standard ("Section 203b") program, however, was designed from the beginning to be self-supporting out of the insurance premiums paid by borrowers. When during the late 80s rising defaults eroded the reserves that FHA maintains to pay losses under this program, the insurance premiums were raised substantially to restore the reserves to an adequate level. Critics of FHA argue that insurance premiums are set to cover losses but not to yield a profit to the Government, so that a subsidy is involved even in the self-sustaining program. This is true, but compared to most other approaches to providing housing subsidies, this one is extremely efficient. The cost is a small fraction of the cost of supplementing the borrower's mortgage payment or paying part of the down payment, which are common ways of providing housing subsidies in other countries. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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