The FHA Budget Subsidy Simulation System: A Dynamic Simulation Model of Budget Outcomes for FHA Single-Family Mortgage Insurance: Technical Paper 2003-07

Working Paper
July 1, 2003

Charles A. Capone, Jr.

This paper introduces a dynamic simulation model of value to the government from FHA single-family mortgage insurance. The model, known as the FHA Budget Subsidy Simulation System (FHA-BSSS), was built at CBO as a tool for analyzing the sensitivity to economic fluctuations of net receipts from or outlays to FHA, and how that sensitivity could be used to inform initial budget estimates and ongoing re-estimates.

The FHA-BSSS is a software system that utilizes loan-record databases and econometric models to forecast FHA cash flows and resulting budget subsidy rates in a stochastic environment. Separate econometric models are used to create the economic forecasts, relate mortgage termination rates to economic conditions, and to determine post-default outcomes and costs. FHA cash flows are computed from predicted mortgage events, and then are converted into budget subsidy rates and dollars.

This technical paper both describes the research entailed in building the FHA-BSSS, and provides implementation details to allow replication of the model. The paper ends with some basic results from using the FHA-BSSS to make current estimates of subsidy rates on 1992-2007 budget-year cohorts of FHA insured loans. The model version used was current as of March 2003, economic data was current as of December 2002, and FHA loan information was current as of September 30, 2002.