Help Borrowers, Don't Hurt Them: Federal Credit Programs Need to Focus on Outcomes, Not Volume

• Author: Thomas H. Stanton
• DOI: http://doi.org/10.1111/puar.12814
• Published date: 01 November 2017
• Date: 01 November 2017

Help Borrowers, Don’t Hurt Them: Federal Credit Programs Need to Focus on Outcomes, Not Volume 815

Public Administration Review,

Vol. 77, Iss. 6, pp. 815–816. © 2017 by

The American Society for Public Administration.

DOI: 10.1111/puar.12814.

Thomas H. Stanton

Johns Hopkins University

Thomas H. Stanton teaches at Johns

Hopkins University. He is a fellow of the

National Academy of Public Administration,

former member of the federal Senior

Executive Service, and past president of

the Association for Federal Enterprise Risk

Management.

E-mail: tstan77346@gmail.com

Perspective

F ederal loan and loan guarantee programs have

grown to immense proportions, amounting

to $3.6 trillion in FY2016. That ’ s well over

$10,000 for every man, woman, and child in the

United States. Credit programs are growing at a

remarkable rate. As of the FY2018 budget, loans and

loan guarantees outstanding have doubled in size in

only 10 years, since the Financial Crisis.

Much of the expansion of federal credit derives from

its favorable treatment in the federal budget compared

to other tools of government. But credit can be

difficult to manage; unlike grants or tax expenditures,

loans must be repaid. While possibly attractive to

lawmakers and other policy makers, extending credit

to borrowers who cannot be reasonably expected to

repay their debt can inflict harm on the people or

businesses that federal programs are supposed to be

helping.

There are signs that some programs, and especially

some of the largest programs, may be extending too

much credit, in the sense that too many borrowers

are hurt by defaults and the associated stresses

on borrowers. The stresses are compounded by

bankruptcy laws that preclude a debtor from writing

off a student loan in bankruptcy or from writing

down the size of a mortgage even when a home has

lost substantial value.

Federal student loans can cause substantial harm: the

U.S. Department of Education projects that one-

fourth of undergraduate student loans originated

this year will end in default. A large fraction of

defaults appears to involve the most disadvantaged

borrowers.

The same issue can be seen in Federal Housing

Administration (FHA) home mortgage loans. About

one in five borrowers with a credit score of 620 and

little down payment (i.e., a disadvantaged borrower)

is calculated to default on his or her FHA-insured

mortgage. Other loan and loan guarantee agencies

report substantial overall default rates for some of

their programs.

While the Credit Reform Act of 1990 has made

progress over earlier approaches, budget rules continue

to encourage such outcomes. Despite its high level

of defaults, deferrals, and special repayment options,

the federal student loan program continues to report

that its loans yield a surplus in the federal budget.

The FHA single-family mortgage program benefits

from cross-subsidies that allow surpluses from lower-

default households to offset the costs of defaults by

disadvantaged households, and reports a surplus on its

loan guarantees.

Federal credit programs need to report on outcomes

rather than merely on outputs (i.e., volumes of credit

extended). Reporting of outcomes has long been

required by the Government Performance and Results

Act. A recent research report offers credit program

managers examples of useful approaches to measuring

outcomes ( Federal Credit Programs: Borrower Outcomes

Matter More than Volume, www.thomas-stanton.com ).

For example, a federal credit program can look at the

riskiest loan that it makes and conduct a benefit–cost

analysis. These outcomes can differ significantly

from a benefit–cost analysis for loans to the median

borrower in a program.

Thus, if one out of five disadvantaged households

defaults on its FHA low-down payment loan, both

benefits and costs for those borrowers need to be

tested. On the benefit side, to what extent does

homeownership offer disadvantaged families a safe

and healthful environment? To what extent do

disadvantaged households itemize their taxes and

benefit from tax subsidies such as through the home

mortgage interest deduction? To what extent does

homeownership offer a disadvantaged household

the opportunity to acquire wealth, or—as we saw in

the Financial Crisis—are homes in disadvantaged

neighborhoods too prone to lose rather than gain

value? On the cost side of the ledger, what happens

Help Borrowers, Don ’ t Hurt Them:

Federal Credit Programs Need to

Focus on Outcomes, Not Volume