    [Analytical Perspectives]
    [Crosscutting Programs]
    [7. Credit and Insurance]
    [From the U.S. Government Printing Office, www.gpo.gov]

    [[Page 75]]

                             7. CREDIT AND INSURANCE

      Federal credit programs offer direct loans and loan guarantees for a
    wide range of activities, primarily housing, education, business and
    community development, and exports. At the end of 2003, there were $249
    billion in Federal direct loans outstanding and $1,184 billion in loan
    guarantees. Through its insurance programs, the Federal Government
    insures bank, thrift, and credit union deposits, guarantees private
    defined-benefit pensions, and insures against other risks such as
    natural disasters, all up to certain limits.
      The Federal Government also enhances credit availability for targeted
    sectors indirectly through Government-Sponsored Enterprises (GSEs)--
    privately owned companies and cooperatives that operate under Federal
    charters. GSEs increase liquidity by guaranteeing and securitizing
    loans, as well as by providing direct loans. In return for serving
    social purposes, GSEs enjoy many privileges, which differ across GSEs.
    In general, GSEs can borrow from Treasury in amounts ranging up to $4
    billion at Treasury's discretion, GSEs' corporate earnings are exempt
    from state and local income taxation, GSE securities are exempt from SEC
    registration, and banks and thrifts are allowed to hold GSE securities
    in unlimited amounts and use them to collateralize public deposits.
    These privileges leave many people with the impression that their
    securities are risk-free. GSEs, however, are not part of the Federal
    Government, and their securities are not federally guaranteed. By law,
    GSE securities carry a disclaimer of any U.S. obligation.
      This chapter discusses the roles and risks of these diverse programs
    and entities in the context of evolving financial markets and assesses
    their effectiveness and efficiency.
         The first section analyzes the roles of Federal credit and
              insurance programs. Federal programs play useful roles when
              market imperfections prevent the private market from
              efficiently providing credit and insurance. Financial
              evolution has partly corrected many imperfections and
              generally weakened the justification for Federal intervention.
              The roles of Federal programs, however, may still be critical
              in some areas.
         The second section examines how credit and insurance
              programs fared with the Program Assessment Rating Tool (PART)
              and discusses special features of credit programs that may
              need to be considered in interpreting and refining this tool.
         The third section reviews Federal credit programs and GSEs
              in four sectors: housing, education, business and community
              development, and exports. This section discusses program
              objectives, recent developments, performance, and future plans
              for each program.
         The final section describes Federal deposit insurance,
              pension guarantees, disaster insurance, and insurance against
              terrorism and other security-related risks in a context
              similar to that for credit programs.

                I. FEDERAL PROGRAMS IN CHANGING FINANCIAL MARKETS

    The Federal Role

      The roles of Federal credit and insurance programs can be broadly
    classified into two categories: helping disadvantaged groups and
    correcting market imperfections. Subsidized Federal credit programs
    redistribute resources from the general taxpayer to disadvantaged
    regions or segments of the population. Since disadvantaged groups can be
    assisted through other means, such as direct subsidies, the value of a
    credit or insurance program critically depends on the extent to which it
    corrects market imperfections.
      In most cases, private lending and insurance businesses efficiently
    meet societal demands by allocating resources to the most productive
    uses, and Federal intervention is unnecessary or can even be
    distortionary. However, Federal intervention may improve the market
    outcome in some situations.
      Insufficient Information. Financial intermediaries promote economic
    growth by allocating credit to the most productive uses. This critical
    function, however, may not be performed effectively when there is little
    objective information about borrowers. Some groups of borrowers, such as
    start-up businesses, start-up farmers, and students, have limited
    incomes and credit histories. Many creditworthy borrowers belonging to
    these groups may fail to obtain credit or be forced to pay excessively
    high interest. Government intervention, such as loan guarantees, can
    reduce this inefficiency by enabling these borrowers to obtain credit
    more easily and cheaply and also by providing opportunities for lenders
    to learn more about those borrowers.
      Externalities. Decisions at the individual level are not socially
    optimal when individuals do not capture the full benefit (positive
    externalities) or bear the full cost (negative externalities) of their
    activities. Examples of positive and negative externalities are
    education and pollution. The general public benefits from the high
    productivity and good citizenship of a well-educated person and suffers
    from pollution. Without Government intervention, people will engage less
    than socially opti

    [[Page 76]]

    mal in activities that generate positive externalities and more in
    activities that generate negative externalities. Federal programs can
    address externalities by influencing individuals' incentives.
      Limited Ability to Secure Resources. The ability of private entities
    to absorb losses is more limited than that of the Federal Government,
    which has general taxing authority. For some events potentially
    involving a very large loss concentrated in a short time period,
    therefore, Government insurance commanding more resources can be more
    credible and effective. Such events include massive bank failures and
    some natural and man-made disasters that can threaten the solvency of
    private insurers. Resource constraints can also limit the lending
    ability of private entities. Small lenders operating in a local market,
    in particular, may have limited access to capital and occasionally be
    forced to pass up good lending opportunities.
      Imperfect competition. Competition is imperfect in some markets
    because of barriers to entry, economies of scale, and foreign government
    intervention. For example, legal barriers to entry or geographic
    isolation can cause imperfect competition in some rural areas. If the
    lack of competition forces some rural residents to pay excessively high
    interest on loans, Government credit programs aiming to increase the
    availability of credit and lower the borrowing cost for those rural
    residents may improve economic efficiency.

    Effects of Changing Financial Markets

      Financial markets have undergone fundamental changes that greatly
    enhanced competition and economic efficiency. The main forces behind
    these changes are financial services deregulation and technological
    advances. Deregulation, represented by the Riegle-Neal Interstate
    Banking and Branching Act of 1997 and the Financial Services
    Modernization Act of 1999, has increased competition and prompted
    consolidation by removing geographic and industry barriers. By
    increasing the availability of information and lowering transaction
    costs, technological advances have significantly contributed to
    enhancing liquidity, refining risk management tools, and spurring
    globalization. These developments have significant implications for
    Federal credit and insurance programs.
      Financial evolution has generally increased the private market's
    capacity to serve the populations traditionally targeted by Federal
    programs, and hence has weakened the role of Federal credit and
    insurance programs. The private market now has more information and
    better technology to process it, has better means to secure resources,
    and is more competitive. To improve the effectiveness of credit and
    insurance programs, therefore, the Federal Government may focus on more
    specific objectives that have been less affected by financial evolution
    and on narrower target populations that still have difficulty in
    obtaining credit from private lenders. Problems related to
    externalities, for example, are likely to persist because the price
    mechanisms that drive the private market will continue to ignore the
    value of the externality. In addition, the benefits of deregulation and
    technological advances may have been uneven across populations. The
    Federal Government also needs to pay more attention to new challenges
    introduced by financial evolution and other economic developments.
      Information about borrowers is more widely available and easier to
    process, thanks to technological advances. Lenders now have easy access
    to large databases, powerful computers, and sophisticated analytical
    models. Thus, many lenders use credit scoring models that evaluate
    creditworthiness based on various borrower characteristics derived from
    extensive credit bureau data. As a result, creditworthy borrowers are
    less likely to be turned down, while borrowers that are not creditworthy
    are less likely to be approved for credit. The Federal role of improving
    credit allocation, therefore, is generally not as strong as it once was.
    The benefit from financial evolution, however, can be uneven across
    groups and over time. Credit scoring, for example, is still difficult to
    apply to some borrowers with unique characteristics that are difficult
    to standardize. In times of economic downturn or financial instability,
    lenders can be overly cautious, turning away some creditworthy
    borrowers.
      Financial evolution has also alleviated resource constraints faced by
    private entities. Financial derivatives, such as options, swaps, and
    futures, have improved the market's ability to manage and share various
    types of risk such as price risk, interest rate risk, credit risk, and
    even catastrophe-related risk. An insurer can distribute the risk of a
    natural or man-made catastrophe among a large number of investors
    through catastrophe-related derivatives, although the extent of risk
    sharing in this way is still limited because of the small size of the
    market for those products. Securitization (pooling a certain type of
    asset and selling shares of the asset pool to investors) facilitates
    fund raising and risk management. By securitizing loans, even a lender
    with limited access to capital can make a large amount of loans, while
    limiting its exposure to credit and interest risk.
      Imperfect competition is much less likely in general. Financial
    deregulation removed legal barriers to competition. More commercial
    firms borrow directly in capital markets, bypassing financial
    intermediaries; the use of commercial paper (short-term financing
    instruments issued by corporations) has been particularly notable.
    Nonbank financial institutions, such as finance companies and venture
    capital firms, have increased their presence, providing more financing
    alternatives to small, start-up firms that formerly relied heavily on
    banks. Internet-based financial services have lowered the cost of
    financial transactions and reduced the importance of physical location.
    Due to globalization, foreign financial institutions actively compete in
    the U.S. market. All of these developments have increased competition.
      Nevertheless, concerns remain. The removal of geographic barriers
    spurred consolidation among banks.

    [[Page 77]]

    Consolidation can negatively affect the markets that were traditionally
    served by small banks. Large financial institutions with global
    operations may want to focus more on large customers and business lines
    that utilize economies of scale and scope more fully, leaving out small
    borrowers in remote rural areas and inner city areas. Another concern is
    that nontraditional financing sources, such as commercial paper and
    venture capital, can become unavailable when they are needed most. For
    example, commercial-paper issuance by nonfinancial companies and venture
    capital investments plunged during the last recession. The decreased
    volume of these instruments may have mostly reflected changed market
    conditions, such as decreased investment demand. A part of the reason,
    however, may have been the investors' overreaction to unfavorable market
    conditions, which could cause financing difficulties for creditworthy
    firms. Federal credit programs can play useful roles on these occasions.
      Overall, the financial market is evolving to be more efficient and
    safer. Financial evolution and other economic developments, however, are
    often accompanied by new risks. Federal agencies need to be vigilant to
    identify and, when appropriate, to manage new risks. Consolidation, for
    example, has increased bank size. Thus, the failure of even a single
    large bank can seriously drain the federal deposit insurance fund. As a
    result of deregulation, banks engage in more activities. While
    diversification across business lines may generally improve the safety
    of banks, new businesses introduce new risks. For example, one concern
    raised recently is that the motive to obtain underwriting business from
    borrowing firms may have affected lending decisions, undermining loan
    quality at some large banking organizations. Globalization also has both
    an upside and a downside. A financial institution with a worldwide
    operation may overcome difficulties in the U.S. market more easily, but
    it is more heavily exposed to economic turmoil in other countries,
    especially those that are less-developed or politically unstable. The
    large size of some GSEs is also a potential problem. Financial trouble
    of a large GSE could cause repercussions in financial markets, affecting
    federally insured entities and economic activity. Three years of stock
    market declines following the 2000 peak and the slow economic recovery
    have increased the risk and uncertainty for the pension benefit guaranty
    program by impairing the financial health of many pension funds and
    firms offering pension benefits. New and amended insurance programs for
    security-related risks also make the Federal Government's liability more
    uncertain. Security-related events such as terrorism and war are highly
    uncertain in terms of both the frequency of occurrence and the magnitude
    of potential loss.

                II. PERFORMANCE OF CREDIT AND INSURANCE PROGRAMS

      The Program Assessment Rating Tool (PART) produces an assessment of
    the performance of federal programs, which is designed to be consistent
    across programs. This section analyzes the PART score for credit and
    insurance programs as a group to identify the strengths and weaknesses
    of credit and insurance programs. Also discussed are special features of
    credit programs that may need to be considered in interpreting and
    refining the common assessment of performance.

    PART Scores

      The PART classifies performance into four categories (program purpose
    and design, strategic planning, program management, and program results)
    and assigns a numerical score (0 to 100 percent) to each category. For
    the final evaluation, the PART weights the four categories, placing a
    particularly heavy weight on program results.
      There are 14 credit programs and 2 insurance programs among 399
    programs that have been rated by the PART (excluding programs that were
    assessed for the 2004 Budget but are being reassessed as components of a
    different program in 2005 to avoid double-counting). Overall, the PART
    scores for credit and insurance programs are fairly similar to those for
    other programs (see Table ``Summary of PART Scores''). When
    appropriately weighted, higher scores for credit and insurance programs
    in some categories are roughly offset by lower scores in other
    categories. A detailed analysis suggests that the dispersion of scores
    across programs is also similar for the two groups of programs.

                                                 SUMMARY OF PART SCORES
    ----------------------------------------------------------------------------------------------------------------
                                      Purpose
                Programs                and     Strategic   Program    Program                  Rating
                                       Design    Planning     Mgmt     Results
    ----------------------------------------------------------------------------------------------------------------

    ED Student Loan Guarantees.....         60         75         33         53  Adequate
    ED Direct Studen Loans.........         60         75         33         53  Adequate
    ED Perkins Loans...............         20         50         33          0  Ineffective
    SBA Section 504................         60         50        100         60  Adequate
    SBA Disaster Assistance........        100        100         78         73  Moderately Effective
    SBA SBIC Venture Capital.......         60         88         67         60  Adequate
    FSA Loan Guarantees............        100         63        100         67  Moderately Effective
    RHS Community Facilities.......         80         50        100         33  Results Not Demonstrated
    RUS Rural Electric Utility.....         80         17         90         25  Results Not Demonstrated
    RUS Telecommunications.........         60         50        100         33  Results Not Demonstrated
    RBS Business and Industry......         80         75        100         33  Adequate
    Ex-Im Bank L-T Guarantees......        100         86        100         67  Moderately Effective
    OPIC Insurance.................        100         75        100         42  Adequate
    OPIC Finance...................        100         75        100         42  Adequate
    Crop Insurance.................         80         67         86         58  Results Not Demonstrated
    National Flood Insurance.......         90         86        100         67  Moderately Effective

    Credit and Insurance Programs
    Average........................         77         68         83         48  ...................................
    Standard Deviation.............         22         20         26         19  ...................................
    ----------------------------------------------------------------------------------------------------------------

    Other Programs (all programs
     excluding credit and insurance
     programs)
    Average........................         85         70         79         47  ...................................
    Standard Deviation.............         19         24         19         26  ...................................
    ----------------------------------------------------------------------------------------------------------------

      Across categories, there are some similarities, as well as
    differences, between credit and insurance programs and other types of
    programs. For most programs, the scores are relatively high for program
    purpose and design and for program management, while the scores are low
    for program results. This general pattern holds for credit and insurance
    programs. Relative to other programs, however, credit and insurance
    programs scored low in program purpose and design and high in program
    management.
      The PART indicates that most credit and insurance programs have clear
    purposes. Some credit and insurance programs, however, fail to score
    high in program design. Some are duplicative of other federal programs
    or private sources, and some have outdated designs due to failure to
    adapt to changed economic and financial environments. For example,
    Federal involvement in venture capital financing is difficult to
    justify, given that the venture capital market has matured.
      Regarding strategic planning, many credit and insurance programs
    reveal the need to improve on setting targets and time frames for their
    long-term measures, evaluating program effectiveness and improvements on
    a regular basis, and tying budgets to accomplishment of performance
    goals.
      Program management is a relatively strong area for credit and
    insurance programs. They are particularly

    [[Page 78]]

    strong in basic financial and accounting practices, such as spending
    funds for intended purposes. The financial complexity of credit and
    insurance programs may have forced program managers to develop better
    financial management tools. Nevertheless, some credit and insurance
    programs show weaknesses in more sophisticated financial management,
    such as cost control. Another weakness for some credit and insurance
    programs is in collecting and effectively utilizing performance
    information.
      Program results, the most important category of performance, are a
    weak area for credit and insurance programs, as well as for other
    programs assessed by the PART. While most credit and insurance programs
    had some success in achieving short-term performance and efficiency
    goals, most of them have had trouble making progress toward long-term
    goals. A more troubling indication from detailed analyses is that many
    credit and insurance programs have a low PART score for program
    effectiveness and achieving results. Based on this finding, the managers
    of credit and insurance programs need to place much more emphasis on
    results-driven management.

    Common Features

      Credit programs share many features that distinguish them from other
    programs. For example, the cost is uncertain because of various risks,
    such as default risk, prepayment risk, and interest rate risk. Given
    these risks, risk management is an important aspect of credit programs.
    Most credit programs are also intended to address imperfections in
    financial markets. These common features are discussed in the context of
    the four areas of the PART. Although this section focuses on credit
    programs, much of the discussion also applies to insurance programs. For
    example, the cost is uncertain for insurance programs, too, because
    insured events occur unexpectedly. Financial market imperfections are
    also the main justification for insurance programs.
      In analyzing the PART scores of credit programs, it is important to
    understand the common features of credit programs. Understanding common
    features facilitates the comparison of efficiency across credit programs
    and helps lead to improvements in performance. For example, if the PART
    score related to a common feature, such as risk management, is
    particularly low for a credit program, managers of the program may
    significantly improve performance by emulating the practice of other
    credit programs. A uniformly low PART score for all credit programs, on
    the other hand, may indicate that credit programs are facing a unique
    difficulty. In that case, program managers may need to make collective
    efforts to identify the difficulty and to address the problem.
    Individual efforts would be less efficient.

      Program purpose and design. Program purposes widely vary across credit
    programs. They include increasing homeownership, increasing college
    graduates, promoting entrepreneurship, and promoting exports. The
    private market serves some of these distinctive purposes better now than
    it did in the past. Thus, it can be useful to compare the effects of
    changes in financial markets on the need for various credit programs.
      Credit programs share many critical elements of design. Using the
    common tool, credit, they try to correct

    [[Page 79]]

    imperfections in financial markets. Thus, credit programs mostly target
    those borrowers who would not be able to obtain credit in the private
    market without government assistance. In addition, the lending business
    involves many complexities, such as setting appropriate lending terms,
    screening borrowers, and monitoring borrowers. Given these complexities,
    it is important to utilize the private sector's expertise. Targeting the
    right borrowers and utilizing the private sector's expertise require
    careful program design, which needs to consider various factors, such as
    borrowers' incentives, private lenders' incentives, the state of
    financial markets, and general economic conditions. Excessively low
    lending rates, for example, might attract many borrowers who could
    obtain credit from private lenders. To be effective, partnership with
    the private sector should be designed such that the private partner's
    profit is closely tied to its performance in achieving the public
    purpose. Private lenders are generally better at screening borrowers,
    but their incentive to screen borrowers effectively evaporates if the
    Government provides a 100-percent loan guarantee. Credit programs with
    low PART scores related to these aspects of program design may draw
    useful lessons from the practices of other credit programs.
      Strategic planning. Credit programs operate in rapidly changing
    financial markets. Thus, an important aspect of strategic planning for
    credit programs is to adapt to changes in financial markets. To achieve
    the maximum efficiency, program managers need to watch closely and adapt
    their programs quickly to new developments. For example, private lenders
    are more willing to serve many customers to whom they did not want to
    lend in the past. Thus, some Federal credit programs may need to focus
    more narrowly on customers who are still underserved by private lenders.
    Quickly adopting new technologies is also important, because financial
    institutions are increasingly applying advanced technologies to risk
    management.
      Program management. Some elements of program management are more
    important for credit programs than for other programs. To address these
    areas of special interest, the PART adds two extra items for credit
    programs: risk management and estimation models. Credit programs face
    similar risks in the lending business. To minimize the risks, program
    managers must carefully manage the loan portfolio that is held either
    directly or by private lenders. Once a loan defaults, effective
    collection efforts can reduce the loss. Estimating the program cost is a
    critical feature of credit programs. The cashflow is uncertain for
    credit programs. Some loans default, while some others are prepaid. The
    program cost must be estimated based on the expected default,
    prepayment, and recovery rates. This estimation is critical for program
    evaluation. Without knowing the cost, one cannot tell if a program is
    effective.
      Some other management issues that apply to all government programs are
    particularly important for credit programs. Data collection is essential
    for effective risk management and cost estimation. Effective risk
    management requires accurate and timely information. Default and
    prepayment histories are key ingredients in cashflow estimation. In
    addition, accurate estimation requires detailed data on borrower and
    lender characteristics. Thus, managers of credit programs need to make
    extensive efforts to collect and process relevant information. To
    achieve efficiency and effectiveness, it is also important to have well
    organized procedures and to coordinate with other credit programs to
    carry out many complex functions, such as loan origination, loan
    servicing, lender monitoring, and collection of defaulted loans.
    Financial management is more challenging for credit programs because of
    the complex structure of cashflows.
      Program Results. The main difficulty in evaluating program performance
    is to measure the net outcome of the program (improvement in the
    intended outcome net of what would have occurred in the absence of the
    program). For example, although many Federal programs help college
    students, it is difficult to tell how many of those would not have
    obtained a college education without Federal assistance. For credit
    programs, this difficulty is compounded by the uncertainty of the
    program cost. In evaluating programs, the outcome must be weighed
    against the cost. For a program intended to increase the number of
    college graduates, the relevant statistic is the number of college
    graduates due to the program per dollar spent by the program, not just
    the total number of college graduates produced by the program. For
    credit programs, the validity of this evaluation critically depends on
    the accuracy of the cost estimation. An underestimation (overestimation)
    of the cost would make the program appear unduly effective
    (ineffective). Thus, results for credit programs need to be interpreted
    in conjunction with the accuracy of the cost estimate. In some cases,
    whether a program's performance has improved over the past may be more
    meaningful than whether it performs better than others.
      It is also important to evaluate credit programs in the context of
    changing financial markets. The financial sector is very dynamic, and
    the net outcome of a credit program may change quickly with the state of
    financial markets. The net outcome can decrease, as private entities
    become more willing to serve those customers whom they were reluctant to
    serve in the past, or it can increase if financial markets fail to
    function smoothly due to some temporary disturbances. A sub-par
    performance by a credit program could be related to financial market
    developments; the program might fail to adapt to rapid changes in
    financial markets, or its function might become obsolete due to
    financial evolution. The program should be restructured in the former
    case, and discontinued in the latter case.

    [[Page 80]]

                           III. CREDIT IN FOUR SECTORS

    Housing Credit Programs and GSEs

      The Federal Government makes direct loans, provides loan guarantees,
    and enhances liquidity in the housing market to promote homeownership
    among low- and moderate-income people and to help finance rental housing
    for low-income people. While direct loans are largely limited to low-
    income borrowers, loan guarantees are offered to a much larger segment
    of the population, including moderate-income borrowers. Increased
    liquidity achieved through GSEs benefits virtually all borrowers in the
    housing market.

    Federal Housing Administration

      In June 2002, the President issued America's Homeownership Challenge
    to increase first-time minority homeowners by 5.5 million through 2010.
    During the first 15 months since the goal was announced, over one
    million minority families have become homeowners, setting a pace to
    exceed this goal. HUD's Federal Housing Administration (FHA) accounted
    for over 250,000 of these first-time minority homebuyers through its
    insurance funds, mainly the Mutual Mortgage Insurance Fund. FHA mortgage
    insurance provides access to homeownership for people who lack the
    financial resources or credit history to qualify for a conventional home
    mortgage. In 2003, FHA insured $159 billion in mortgages for over 1.3
    million households. Most of these were people buying their first homes,
    many of whom were minorities. The dollar volume of FHA mortgages
    exceeded the 2002 volume by seven percent, driven by high housing demand
    and increased refinancings in response to lower interest rates.
      For fiscal year 2005, FHA is proposing two new mortgage programs that
    reduce the biggest barriers to homeownership--the down payment and
    impaired credit. The Zero Down mortgage allows first-time buyers with a
    strong credit record to finance 100 percent of the purchase price and
    closing costs. For borrowers with limited or weak credit histories,
    Payment Rewards initially charges a higher insurance premium, but
    reduces the borrower's premiums once they have established a history of
    regular payments, thereby demonstrating their creditworthiness.
      The Budget expands HUD's support for new homeowners by increasing
    funds for pre- and post-purchase housing counseling services through a
    network of counseling agencies. At the proposed funding level, almost
    800,000 potential and existing homeowners will receive counseling in
    2005.
      The President's Management Agenda sets out several critical tasks for
    FHA to complete to combat fraud and improve risk management. In 2005, as
    in 2004, HUD will conduct quarterly rounds of Credit Watch--a lender
    monitoring program that rates lenders and underwriters by the
    performance of their loans and allows FHA to sever relationships with
    those showing poor performance. HUD also will have in place an automated
    system to enforce its regulations prohibiting the predatory practice of
    property flipping and will refine the Appraiser Watch system established
    in 2003 in order to closely monitor appraiser performance and hold
    appraisers accountable for the quality of their work. These efforts will
    reduce the possibility of improperly originated FHA loans that victimize
    the borrower and expose FHA to excessive losses.

    VA Housing Program

      The Department of Veterans Affairs (VA) assists veterans, members of
    the Selected Reserve, and active duty personnel to purchase homes as
    recognition of their service to the Nation. The program substitutes the
    Federal guarantee for the borrower's down payment. In 2003, VA provided
    $66 billion in guarantees to assist 508,436 borrowers. Both the volume
    of guarantees and the number of borrowers increased substantially from
    2002 as lower interest rates increased loan originations and
    refinancings in the housing market.
      Since the main purpose of this program is to help veterans, lending
    terms are more favorable than loans without a VA guarantee. In
    particular, VA guarantees zero down payment loans. The subsidy rate
    decreased due to an improved default rate methodology that more
    appropriately recognizes the relationship between defaults and interest
    rates.
      In order to help veterans retain their homes and avoid the expense and
    damage to their credit resulting from foreclosure, VA plans aggressive
    intervention to reduce the likelihood of foreclosures when loans are
    referred to VA after missing three payments. VA was successful in 45
    percent of its 2003 interventions, and its goal is to achieve at least a
    47 percent success rate in 2005. VA is continuing its efforts to reduce
    administrative costs through restructuring and consolidations.
      In order to refocus VA's housing loan program towards its original
    intent of serving as a readjustment benefit from military to civilian
    life, the Administration will be transmitting legislation that would
    limit eligibility for veterans' housing loans to one-time use in lieu of
    the lifetime multi-use entitlement it has become. For those who are
    already veterans upon enactment of this bill, the proposal allows
    unlimited usage for the next five years, and then only once thereafter.
    The proposal would not limit use by active duty members.

    Rural Housing Service

      The U.S. Department of Agriculture's (USDA's) Rural Housing Service
    (RHS) offers direct and guaranteed loans and grants to help very low- to
    moderate-income rural residents buy and maintain adequate, affordable
    housing. The single family guaranteed loan program guarantees up to 90
    percent of a private loan for low to moderate-income rural residents.
    The program's emphasis is on reducing the number of rural residents
    living in substandard housing. In 2003, $3.1 billion of guarantees went
    to 31,100 households, of which 30 per

    [[Page 81]]

    cent went to very-low and low-income families (with income 80 percent or
    less than median area income).
      In 2002, RHS approved separate risk categories for guarantee
    refinancing (refis) and guarantees of new loans. As part of that change,
    RHS also reduced the guarantee fee to 0.5 percent for the refis. This
    change reflected the lower risk on refis as compared to an unseasoned
    borrower receiving a new loan. It is also consistent with the rate HUD
    and VA charge on their refis of similar loans. For 2005, RHS will
    increase the guarantee fee on new loans to 1.75 percent from 1.5
    percent. This will be coupled with language that would allow the
    guarantee fee to be financed as part of the loan. The ability to finance
    the guarantee fee is more in line with the housing industry, including
    HUD and VA, and will allow more lower income rural Americans to realize
    the dream of home ownership.
      In 2003, RHS continued to enhance a web-based system that will, with
    future planned improvements, provide the capacity to accept electronic
    loan originations from their participating lenders. RHS is also
    continuing development of an automated underwriting system (AUS) that
    will add significant benefits to loan processing efficiency, consistency
    and timeliness for RHS, the lenders, and customers. RHS continues to
    operate under the ``best practice'' for asset disposition for its
    guaranteed loan program. For single family guarantees, the lender is
    paid the loss claim, including costs incurred for up to three months
    after the default. After the loss claim is paid, RHS has no involvement
    in the property, and it becomes the sole responsibility of the lender
    for disposition. RHS is also developing the capacity to partner with
    lenders to seek recovery of loss claims from the former homeowner. They
    are also in the process of centralizing and automating the loss claim
    process to improve consistency and efficiency.
      RHS programs differ from other Federal housing loan guarantee
    programs. RHS programs are means-tested and more accessible to low-
    income, rural residents. In addition, the RHS direct loan program offers
    deeper assistance to very-low-income homeowners by reducing the interest
    rate down to as low as 1 percent for such borrowers. The program helps
    the ``on the cusp'' borrower obtain a mortgage, and requires graduation
    to private credit as the borrower's income and equity in their home
    increases over time. The interest rate depends on the borrower's income.
    Each loan is reviewed annually to determine the interest rate that
    should be charged on the loan in that year based on the borrower's
    projected annual income. The program cost is balanced between interest
    subsidy and defaults. For 2005, RHS expects to provide $1.1 billion in
    loans with a subsidy cost of 11.58 percent.
      RHS also offers multifamily housing loans, which includes farm labor
    housing loans. Direct loans are offered to private developers to
    construct and rehabilitate multi-family rental housing for very-low to
    low-income residents, elderly households, or handicapped individuals. As
    an incentive to the developers to provide low income rental housing in
    rural areas, these loans are heavily subsidized; the interest rate is
    between 1 and 2 percent. RHS rental assistance grants supplement the
    loan to the developer in the form of project based rent subsidies for
    very low-income rural households (for continuation of this assistance
    plus new commitments, the cost will be $592 million in 2005). RHS will
    address management issues in its multifamily housing portfolio in 2005
    by restricting the $60 million loan level to repair and rehabilitation
    of its existing portfolio (17,400 projects, 446,000 units). Farm labor
    housing will have a program level of $59 million and will provide for
    new construction as well as repair/rehabilitation. RHS also offers
    guaranteed multifamily housing loans with a loan level of $100 million a
    year.

    Housing GSEs

      Three organizations were chartered by Congress to increase the flow of
    credit for housing. These government-sponsored enterprises (GSEs) are
    privately owned companies; the shares of two of them are listed on the
    New York Stock Exchange. They receive special benefits as a result of
    their Government sponsorship, including exemption from State and local
    taxes. Their missions are to increase the liquidity and improve the
    distribution of mortgage financing, particularly for low- and moderate-
    income borrowers. Two of the GSEs, Fannie Mae and Freddie Mac, primarily
    accomplish this mission by guaranteeing mortgages for sale as securities
    to investors. The third GSE, the Federal Home Loan Bank System, provides
    loans at preferred rates to member financial institutions. The three
    GSEs have grown significantly since they were chartered decades ago and
    are now three of the largest financial companies in the world.

                                          GROWTH OF THE GSEs IN THE LAST DECADE
                                                   Dollars in millions
    ----------------------------------------------------------------------------------------------------------------
                                               Balance Sheet Assets                    Balance Sheet
                                             ------------------------                   Liabilities
                                                                        Change   ------------------------   Change
                                                 1992        2002                    1992        2002
    ----------------------------------------------------------------------------------------------------------------
    Fannie Mae..............................   $ 172,055   $ 887,515        416%   $ 163,602   $ 871,227        433%
    Federal Home Loan Bank System...........   $ 161,834   $ 763,631        372%   $ 151,210   $ 727,307        381%
    Freddie Mac.............................    $ 62,739   $ 752,249       1099%    $ 59,281   $ 718,610       1112%
    ----------------------------------------------------------------------------------------------------------------
    Total...................................    $396,628  $2,403,395        506%    $374,093  $2,317,144        519%
    ----------------------------------------------------------------------------------------------------------------
    Note: Freddie Mac data not audited. Freddie Mac liabilities exclude minority interest in consolidated
      subsidiaries.

      The GSEs are increasingly in the asset management business, growing
    significant portfolios of mortgages

    [[Page 82]]

    and mortgage-backed securities. The GSEs are highly leveraged, holding
    much less capital in relation to their assets than similarly sized
    financial institutions. A consequence of that highly leveraged condition
    is that a misjudgment or unexpected economic event could quickly deplete
    this capital, potentially making it difficult for a GSE to meet its debt
    obligations. Given the very large size of each enterprise, even a small
    mistake by a GSE could have consequences throughout the economy. More
    than six out of ten institutions in the banking industry hold as assets
    GSE debt in excess of 50 percent of their equity capital. As shown in
    the accompanying table (Growth of the GSEs in the Last Decade), the
    outstanding liabilities of the GSEs have grown by more than five hundred
    percent since 1992, to $2.3 trillion at the end of December 2002. For
    comparison, the privately held debt of the Federal Government at that
    time was $3.0 trillion.\1\ In 2003, the Office of Federal Housing
    Enterprise Oversight (OFHEO), which oversees the safety and soundness of
    Fannie Mae and Freddie Mac, studied the risks posed by these GSEs to the
    financial system. Its study indicated that should a GSE experience large
    unexpected losses, the market for its and other GSEs' debt might become
    illiquid. Institutions holding this debt would see a rapid depletion in
    the value of their assets and a loss of liquidity, spreading the
    problems of the GSEs into financial sectors beyond the housing market.
    ---------------------------------------------------------------------------
      \1\ Privately held debt differs from debt held by the public (the
    measure generally used in the budget) by not including the Federal debt
    held by the Federal Reserve Banks.
    ---------------------------------------------------------------------------
      Freddie Mac. In 2003, serious accounting problems surfaced at Freddie
    Mac, leading its Board of Directors in June to remove the company's top
    management, including its Chairman and CEO, its President and COO, and
    its Chief Financial Officer. This triggered multiple lawsuits on behalf
    of investors, and investigations by OFHEO, the Securities and Exchange
    Commission, and the Department of Justice, some still underway. The
    company restated its earnings, both up and down, over the period 2000-
    2002. OFHEO reported that Freddie Mac misstated its financial results
    and assessed Freddie Mac a monetary penalty of $125 million. The
    magnitude of the accounting restatement was large. The net impact is a
    cumulative increase of $5 billion in reported earnings over 2000-2002,
    which will result in a decrease in reported earnings in future years.
    Most of these amounts are linked to changes in the valuation of
    derivative financial instruments under relatively new accounting
    standards. The $5 billion increase in earnings represented over twenty
    percent of Freddie Mac's total capital available to cover losses and
    illustrates why an error by a GSE, intentional or not, may pose risks to
    investors. To date, Freddie Mac has made progress towards, but has not
    achieved, accurate and timely financial reporting and controls. Freddie
    Mac expects to provide an annual report for 2002 in the first quarter of
    2004. Freddie Mac expects to publish 2003 results by June 2004.
      Fannie Mae. Fannie Mae reported an accounting error in November 2003,
    requiring it to file a correction with the Securities and Exchange
    Commission. The correction of Fannie Mae's reported balance sheet showed
    a change of over $1 billion in shareholders' equity. The company
    reported that the error was unintentional, the result of a computational
    mistake made when implementing a new accounting standard. OFHEO has
    begun an investigation of the accounting practices at Fannie Mae.
      Federal Home Loan Bank System. The Federal Home Loan Bank System, a
    cooperative of twelve regional banks that issue debt for which all are
    jointly and severally liable, suffered a significant decline in profits
    in 2003, primarily stemming from investment losses and a failure to
    hedge interest rate risk adequately at several Federal Home Loan Banks.
    As a result, one ratings organization downgraded its outlook for some
    individual banks of the 12-bank System.
      The Administration stated in September and October 2003 that the
    Government's supervisory system for the three housing GSEs has neither
    the tools nor the stature to deal effectively with the current size,
    complexity, and importance of these companies. Department of the
    Treasury Secretary John Snow and then Department of Housing and Urban
    Development (HUD) Secretary Mel Martinez proposed a set of reforms on
    behalf of the Administration to give housing finance a regulatory
    framework as strong as those in place for other financial sectors. The
    reforms follow the principles accepted throughout the world as
    requirements for first-class regulation, based on a three-pronged
    regulatory approach: strong market discipline, effective supervision,
    and adequate capital requirements.
      Market discipline. Chief among the factors that guide a company in its
    decision-making is the discipline imposed by the market. Market
    participants can signal to a company that it is making risky choices,
    for example, by charging the company more to borrow, or paying less for
    its stock. This discipline places constraints on companies. As Federal
    Reserve Chairman Alan Greenspan has noted, however, market discipline is
    not as strong for the GSEs as it is for other private companies. Some
    mistakenly perceive that GSE securities are backed by the Government--
    despite the fact that the Government explicity does not guarantee their
    securities. In both domestic and international markets, therefore,
    investors pay a premium for GSE debt by accepting a relatively low rate
    of return. As a result, the enterprises are able to finance their
    activities at a lower cost than others. The Congressional Budget Office
    estimated that in 2002 the value of the resulting subsidy exceeded $15
    billion per year.
      Market discipline also is hindered because GSE investors do not enjoy
    the same level of disclosure, or oversight of disclosures, as investors
    in fully private companies. The GSEs have a statutory exemption from the
    registration and disclosure requirements of the Securities and Exchange
    Commission (SEC). Recognizing this disadvantage to GSE investors, the
    Administration in 2002 called upon the three housing GSEs to register
    voluntarily their equity securities under the 1934 Secu

    [[Page 83]]

    rities Exchange Act, triggering mandatory SEC disclosures. To date, only
    Fannie Mae has complied, registering with the SEC in March 2003. Freddie
    Mac does not anticipate being in compliance until 2005, and the Federal
    Home Loan Bank System has not committed to comply voluntarily. The
    Federal Housing Finance Board has proposed a rule that would require
    each Federal Home Loan Bank to register voluntarily with the SEC under
    the 1934 Securities Exchange Act. Mandatory SEC disclosures would
    improve market discipline, and additional disclosures might further
    enhance investor awareness of and discipline over the GSEs' risk-taking.
      Market discipline also requires that a company be controlled by those
    who represent the best interests of its owners. An independent Board of
    Directors, therefore, is essential. A board unduly influenced by the
    company's management may have reason not to provide investors timely and
    adequate information. In 2002, the President established a 10-point plan
    for corporate governance practices that emphasized the importance of
    corporate board independence. In addition, the Administration proposed
    in 2003 to eliminate the Presidential appointees to the Fannie Mae and
    Freddie Mac Boards.
      Supervision. An effective financial regulator must possess authorities
    and capabilities commensurate with its responsibilities. The
    Administration has determined that the safety and soundness regulators
    of the housing GSEs lack sufficient powers and stature to meet their
    responsibilities, and therefore that both OFHEO, regulator of Fannie Mae
    and Freddie Mac, and the Federal Housing Finance Board, regulator of the
    Federal Home Loan Bank System, should be replaced with a new,
    strengthened regulator.
      The Administration has proposed a new regulator, empowered with
    expanded enforcement authorities, independent litigation authority,
    receivership authority, and control over its funding levels independent
    of Congressional appropriations. It regards such authorities as
    essential to a world-class regulator.
      A new regulator must have full authority together with accountability
    for the prudential supervision of the enterprises, which includes the
    authority to approve new activities of the enterprises. Under current
    law, the responsibility for new program approval of Fannie Mae and
    Freddie Mac has been split between OFHEO, an independent agency within
    HUD, and HUD itself. Neither, therefore, is fully accountable for this
    key element of effective supervision of these two large and complex
    entities. The Administration's proposal would remedy this by
    establishing a single new regulator with consolidated responsibility for
    the prudential operation of Fannie Mae, Freddie Mac, and the Federal
    Home Loan Banks, as well as authority to review their on-going business
    activities and reject new ones proposed by the GSEs, if they would be
    inconsistent with the charter or prudential operations of the GSEs, or
    incompatible with the public interest. HUD would continue to be
    consulted on new activities.
      A new regulator must have the stature to avoid regulatory capture,
    i.e., undue influence by the entities it regulates. This is difficult
    for a regulator of a small number of very large entities. The
    Administration proposes placing the new regulator within the Department
    of the Treasury to provide the necessary stature and other supervisory
    benefits, provided the Department is given adequate oversight authority.
    The Administration, however, does not support an outcome that would
    create the illusion of greater oversight by the Treasury without the
    authority to make it a reality.
      Capital requirements. Because neither investors nor regulators can
    predict all of the impacts of possible errors by a company or unexpected
    economic changes, requirements that ensure that the GSEs hold capital
    adequate to cushion such shocks are essential. Capital requirements must
    be set with an eye to both known risks and unknown or unquantifiable
    risks. Losses from these latter risks can well exceed losses from
    measured risks, as shown by the rapid depletion of capital in 1998 for
    the highly leveraged hedge fund, Long-Term Capital Management. For this
    reason, it is essential that the new regulator of the housing GSEs have
    ongoing authority to adjust both risk-based and minimum capital
    requirements. The accompanying table (Capital Held by the GSEs and 10 of
    the Largest U.S. Financial Institutions) contrasts the capital held by
    the GSEs with that held by similarly sized financial institutions. On
    average, the GSEs hold less than one-half the capital of these other
    companies.

          CAPITAL HELD BY THE GSEs AND 10 OF THE LARGEST U.S. FINANCIAL
                                  INSTITUTIONS
                    (Dollars in millions; December 31, 2002)
    ------------------------------------------------------------------------
                                                                  Capital
                                     Balance                       Ratio:
      Companies ranked by assets      Sheet     Stockholders'   Equity    to
                                      Assets        Equity         Assets

    ------------------------------------------------------------------------
    Citigroup Inc................   $1,097,190       $86,718           7.9%
    Fannie Mae...................     $887,515       $16,288           1.8%
    Federal Home Loan Bank System     $763,631       $36,324           4.8%
    JP Morgan Chase & Co.........     $758,800       $42,306           5.6%
    Freddie Mac..................     $752,249       $31,330           4.2%
    Bank of America Corp.........     $660,458       $50,319           7.6%
    Wells Fargo & Co.............     $349,259       $30,358           8.7%
    Wachovia Corp................     $341,839       $32,078           9.4%
    Bank One Corp................     $277,383       $22,440           8.1%
    Washington Mutual Inc........     $268,298       $20,134           7.5%
    FleetBoston Financial Corp...     $190,453       $16,833           8.8%
    US Bancorp...................     $180,027       $18,101          10.1%
    American Express Company.....     $157,253       $13,861           8.8%

    Average all companies........  ...........  .............          7.2%
    Average GSEs.................  ...........  .............          3.6%
    Average excluding GSEs.......  ...........  .............          8.2%
    ------------------------------------------------------------------------
    Notes: In addition to GSEs, this table includes the ten largest publicly
      traded U.S. companies in the finance industry, in terms of balance
      sheet assets, excluding insurance companies and security brokers and
      dealers. Capital defined as stockholders' equity. Financial regulators
      may use an alternative definition of capital.
    Data sources: Securities and Exchange Commission public filings, Federal
      Home Loan Bank System Office of Finance, and Freddie Mac. Freddie Mac
      data not audited.

      Risks, and how they are measured, evolve over time. The Administration
    proposes to give the new GSE regulator full flexibility to establish
    risk-based capital standards. The current risk-based capital standards
    for Fannie Mae and Freddie Mac are rigidly defined by a 10-year old
    statute. The risk-based capital standards for the Federal Home Loan Bank
    System, while more flexible, have not been fully implemented.
      Affordable housing mission. As noted above, many investors perceive an
    implicit guarantee of GSE securities by the Government, and convey a
    large subsidy to the GSEs by paying a premium for their securities.
    Fannie Mae and Freddie Mac purchase two-thirds of all single-family
    mortgages originated (non-governmental, non-jumbo). With this large
    subsidy, and with their substantial market share, the GSEs conceivably
    could have a considerable impact on lowering mortgage costs. Yet the
    Congressional Budget Office estimated in 2001 that Fannie Mae and
    Freddie Mac lower mortgage rates by no more than 25 basis points, or
    one-quarter of one percentage point. A 2003 working paper by a member of
    the Federal Reserve Board staff estimates that the two GSEs lower
    mortgage rates by an even smaller amount. At the higher estimate of 25
    basis points, a homeowner saves about $25 on the monthly payment for a
    median-priced $160,000 thirty-year mortgage. One reason the effect is
    not larger is that Fannie Mae and Freddie Mac do not pass through the
    entire subsidy to mortgage borrowers. According to CBO, 37 percent is
    retained by the companies, their executives,

    [[Page 84]]

    shareholders, or other stakeholders. Current market and regulatory
    mechanisms are not sufficient to force the GSEs to pass on greater
    savings to borrowers.
      To encourage the GSEs to use their Government sponsorship to benefit
    those less likely to have access to mortgage credit and households with
    moderate or low incomes, the governing statutes require them to address
    affordable housing needs. For Fannie Mae and Freddie Mac, HUD is
    required to set and enforce annual housing goals. These require that a
    certain percentage of the two companies' mortgage purchases be mortgages
    for low- and moderate-income borrowers or from geographic areas that
    have been underserved by the market. For the Federal Home Loan Bank
    System, the Federal Housing Finance Board enforces a requirement to
    dedicate 10 percent of the System's profits to affordable housing and to
    provide subsidized loans to members' community investment programs.
    Given the different methods used to convey affordable housing subsidies,
    comparing the relative efforts of the Federal Home Loan Bank System with
    Fannie Mae and Freddie Mac is not simple. Comprehensive research in this
    area has not been undertaken. Such a comparative analysis would be
    useful to policy makers and GSE regulators.
      The Administration has identified weaknesses in the system for setting
    and enforcing the affordable housing goals for Fannie Mae and Freddie
    Mac. These weaknesses could result in their failure to perform the
    targeted housing mission for which they were created. For example, HUD
    needs new administrative authority to enforce the goals. Current law
    does not permit the Secretary to impose timely and appropriate penalties
    for a GSE's failure to meet a goal. This authority is necessary to
    ensure that the goals are strict requirements that the GSEs must meet.
      The Administration also has proposed that these two GSEs be required
    to meet a national home purchase goal, a tool specifically to promote
    affordable homeownership, particularly for first-time homebuyers. This
    goal would ensure that the GSEs' activities support home purchases, even
    in years when refinance activity is high. Although Fannie Mae and
    Freddie Mac provide liquidity in the refinance market, the share of
    funding they provide for home purchases declines during years when many
    mortgages are refinanced.
      HUD has conducted analyses showing that private lenders operating
    without the benefits and subsidies enjoyed by the GSEs contribute more
    to affordable housing than do Fannie Mae and Freddie Mac. For example,
    during 1999-2002, home loans for low- and moderate-income families
    accounted for 44.3 percent of all home purchase mortgages originated by
    lenders in the conventional conforming market. Yet these loans accounted
    for only 42.5 percent of Fannie Mae's purchases and 42.3 percent of
    Freddie Mac's purchases. The GSEs particularly lag the market in funding
    first-time homebuyers. First-time homebuyers accounted for 26.5 percent
    of each GSE's purchases of mortgages used to buy homes, compared with
    37.6 percent of home purchase mortgages originated in the conventional
    conforming market.
      The GSEs' risk management affects not only their owners and investors,
    but the entire financial system. Despite their Government sponsorship
    and mission, the GSEs do not lead the market in creating homeownership
    opportunities for less advantaged Americans. The

    [[Page 85]]

    Administration's proposed reforms to the supervisory system for the GSEs
    address these problems by promoting a strong and resilient financial
    system, while increasing opportunities for affordable housing and
    homeownership.

                       Education Credit Programs and GSEs

      The Federal Government guarantees loans through intermediary agencies
    and makes direct loans to students to encourage post-secondary
    education. The Student Loan Marketing Association (Sallie Mae), a GSE,
    makes secondary market purchases of guaranteed student loans from banks
    and other eligible lenders.

    Student Loans

      The Department of Education helps finance student loans through two
    major programs: the Federal Family Education Loan (FFEL) program and the
    William D. Ford Federal Direct Student Loan (Direct Loan) program.
    Eligible institutions of higher education may participate in one or both
    programs. Loans are available to students regardless of income. However,
    borrowers with low family incomes are eligible for loans with additional
    interest subsidies. For low-income borrowers, the Federal Government
    subsidizes loan interest costs while borrowers are in school, during a
    six-month grace period after graduation, and during certain deferment
    periods.
      In 2005, nearly 9 million borrowers will receive over 14.5 million
    loans totaling over $85 billion. Of this amount, nearly $57 billion is
    for new loans, and the remainder reflects the consolidation of existing
    loans. Loan levels have risen dramatically over the past 10 years as a
    result of rising educational costs and an increase in eligible
    borrowers.
      The FFEL program provides loans through an administrative structure
    involving over 3,500 lenders, 36 State and private guaranty agencies,
    roughly 50 participants in the secondary market, and approximately 6,000
    participating schools. Under FFEL, banks and other eligible lenders loan
    private capital to students and parents, guaranty agencies insure the
    loans, and the Federal Government reinsures the loans against borrower
    default. In 2005, FFEL lenders will disburse over 11 million loans
    totaling almost $65 billion in principal, roughly a third of which
    involve consolidations of existing loans. Lenders bear two percent of
    the default risk, and the Federal Government is responsible for the
    remainder. The Department also makes administrative payments to guaranty
    agencies and, at certain times, pays interest subsidies on behalf of
    borrowers to lenders.
      The William D. Ford Direct Student Loan program was authorized by the
    Student Loan Reform Act of 1993. Under the Direct Loan program, the
    Federal Government provides loan capital directly to more than 1,100
    schools, which then disburse loan funds to students. In 2005, the Direct
    Loan program will generate more than 3.5 million loans with a total
    value of nearly $21 billion, including over $6 billion in consolidations
    of existing loans. The program offers a variety of flexible repayment
    plans including income-contingent repayment, under which annual
    repayment amounts vary based on the income of the borrower and payments
    can be made over 25 years with any residual balances forgiven.
      The Congress is currently considering legislative reforms to both FFEL
    and DL as part of this year's Higher Education Act reauthorization.
    These reforms come at a critical time with college costs continuing to
    rise at increasing rates and the widening gap between the number of high
    income and low income students that attend college. The President's
    Budget proposes several legislative changes to the student loan programs
    to help make college more affordable for millions of students while
    making both student loan programs more cost efficient. To help students
    meet rising tuition costs, the Budget proposes to increase loan limits
    for first year students, retain variable interest rates beyond 2006 so
    students can continue to take advantage of historically low interest
    rates, expand borrower repayment options, and increase loan forgiveness
    for highly qualified teachers who teach math, science, or special
    education for five years in high-need schools. To fund these changes,
    the Administration proposes to reduce program costs through modest
    changes to lender subsidies and Guaranty Agency fees. For example, the
    Budget proposes to eliminate an expensive loophole that provides lenders
    with a federally financed 9.5% guaranteed return on loans that are tied
    to out-dated tax exempt bonds.
      The Administration's proposed changes are consistent with the PART
    findings for the student loan programs, which found that program
    benefits were not well targeted to student borrowers while they are
    attending school. The PART also found that both programs could meet
    their goals in a more cost effective manner if financial benefits for
    program participants were more closely tied to market realities. The
    PART generated specific proposals for addressing these areas, many of
    which are included in the HEA reforms package in the President's Budget.

    Sallie Mae

      The Student Loan Marketing Association (Sallie Mae) was chartered by
    Congress in 1972 as a for-profit, shareholder-owned, Government-
    sponsored enterprise (GSE). Sallie Mae was reorganized in 1997 pursuant
    to the authority granted by the Student Loan Marketing Association
    Reorganization Act of 1996. Under the Reorginization Act, the GSE became
    a wholly owned subsidiary of SLM Corporation and must wind down and be
    liquidated by September 30, 2008. In January 2002, the GSE's board of
    directors announced that it expects to complete dissolution of the GSE
    by Sep

    [[Page 86]]

    tember 30, 2006. The Omnibus Consolidated and Emergency Supplemental
    Appropriations Act of 1999 allows the SLM Corporation to affiliate with
    a financial institution upon the approval of the Secretary of the
    Treasury. Any affiliation will require SLM Corporation to dissolve the
    GSE within two years of the affiliation date (unless such period is
    extended by the Department of the Treasury).
      Sallie Mae makes funds available for student loans by providing
    liquidity to lenders participating in the FFEL program. Sallie Mae
    purchases guaranteed student loans from eligible lenders and makes
    warehousing advances (secured loans to lenders). Generally, under the
    privatization legislation, the GSE cannot engage in any new business
    activities or acquire any additional program assets other than
    purchasing student loans. The GSE can continue to make warehousing
    advances under contractual commitments existing on August 7, 1997. SLM
    Corporation and its affiliates, including the GSE, currently hold
    approximately 38 percent of all outstanding guaranteed student loans.

             Business and Rural Development Credit Programs and GSEs

      The Federal Government guarantees small business loans to promote
    entrepreneurship. The Government also offers direct loans and loan
    guarantees to farmers who may have difficulty obtaining credit elsewhere
    and to rural communities that need to develop and maintain
    infrastructure. Two GSEs, the Farm Credit System and the Federal
    Agricultural Mortgage Corporation, increase liquidity in the
    agricultural lending market.

    Small Business Administration

      The Small Business Administration (SBA), created in 1953, helps
    entrepreneurs start, sustain, and grow small businesses. As a ``gap
    lender'' SBA works to supplement market lending and provide access to
    credit where private lenders are reluctant to do so without a Government
    guarantee. Additionally, SBA assists home- and business-owners cover the
    uninsured costs of recovery from disasters.
      The 2005 Budget requests $326 million, including administrative funds,
    for SBA to leverage nearly $25 billion in financing for small businesses
    and disaster victims. The 7(a) General Business Loan program will
    support $12.5 billion in guaranteed loans--a more than 25 percent
    increase over 2004--while the 504 Certified Development Company program
    will support $4.5 billion in guaranteed loans. SBA will supplement the
    capital of Small Business Investment Companies (SBICs), which provide
    equity capital and long-term loans to small businesses, with up to $7
    billion in participating securities and guaranteed debentures.
      To continue to serve the needs of small businesses, SBA will focus
    program management in three areas:
      1) Targeting economic assistance to the neediest small businesses
      SBA seeks to target assistance more effectively to credit-worthy
    borrowers who would not be well-served by the commercial markets in the
    absence of a Government guarantee to cover defaults. SBA is actively
    encouraging financial institutions to increase lending to start-up
    firms, low-income entrepreneurs, and borrowers in search of financing
    below $150,000. Preliminary evidence shows that SBA's outreach for the
    7(a) program has been successful. Average loan size has decreased from
    $258,000 in 2000 to $167,000 in 2003, while the number of small
    businesses served has grown from 43,748 to 67,306 during the same time
    period. In addition, SBA issued new regulations for the Section 504
    program that foster additional competition among intermediaries, thereby
    allowing borrowers greater access to loans.
      2) Improving program and risk management
      Improving management by measuring and mitigating risks in SBA's $45
    billion business loan portfolio is one of the agency's greatest
    challenges. As the agency delegates more responsibility to the private
    sector to administer SBA guaranteed loans, oversight functions become
    increasingly important. SBA established the Office of Lender Oversight,
    which is responsible for evaluating individual SBA lenders. This office
    has made progress in employing a variety of analytical techniques to
    ensure sound financial management by SBA and to hold lending partners
    accountable for performance. These analytical techniques include
    financial performance analysis, industry concentration analysis,
    portfolio performance analysis, selected credit reviews, and credit
    scoring to compare lenders' performance. The oversight program is also
    developing on-site safety and soundness examinations and off-site
    monitoring of Small Business Lending Companies (SBLCs) and compliance
    reviews of SBA lenders. In addition, the office will develop incentives
    for lenders to minimize defaults and to adopt sound performance
    measures.
      Improving risk management also means improving SBA's ability to more
    accurately estimate the cost of subsidizing small businesses. During
    2003, the SBA followed through on its commitment to improve its accuracy
    in estimating the cost of the Section 7(a) General Business Loan program
    by developing a loan-level econometric credit and reestimate model for
    the program. The improved model should help SBA avoid repeating its
    experience during the 1990's, when subsidy costs for the 7(a) program
    were overestimated by $1 billion. (These subsidy overestimates, however,
    were significantly offset by program administrative costs during the
    same period.) More recent analysis, using the new model, shows that
    during the last few years the 7(a) program has cost almost $230 million
    more than previously estimated. Building upon the 7(a) modeling
    improvements, a comparable model was developed for the 2005 subsidy
    estimates for the Section 504 loan program.

    [[Page 87]]

      Improving risk management is especially important for the Small
    Business Investment Company (SBIC) venture capital program. Like the
    private venture capital market, performance in the SBIC program began to
    decline in 2000. The SBIC program is now expected to cost taxpayers
    approximately $2 billion due to defaults and other cash loses. In
    addition to the overall market decline, the poor performance in the SBIC
    program is due to the following structural flaws.
         The Federal Government's financial returns are not
              proportional to its investment. SBA invests up to two-thirds
              of total funds but, on average, receives only about ten
              percent of SBICs' profits. Ninety percent of those profits
              were generated by only 14 of 170 SBICs licensed in the
              Participating Securities program since 1994.
         SBICs do not have adequate incentives to pay back funds
              expeditiously to the Government. Under the current statute,
              SBICs make ``profit'' payments to SBA but these are generally
              insufficient to repay the original principal investment in a
              timely manner which extends SBA's risk exposure.
         The prior subsidy model underestimated the cost of the
              program. The technical assumptions (e.g., defaults,
              recoveries, and profits) have turned out to be more optimistic
              than actual program performance.
      The 2005 Budget takes steps to address the first of these issues by
    proposing to increase borrowers' fees and SBA's share of profits in the
    SBIC Participating Securties program. The Budget also proposes to
    accelerate repayments to the Government. In addition, the subsidy model
    for the Participating Securities program has been improved by
    incorporating more realistic technical assumptions, which are generally
    based upon historical experience. During 2004, SBA expects to reexamine
    the methodology used to calculate the cost to subsidize the SBIC
    Participating Securities program. With realized and projected losses of
    about $2 billion (reflected in an upward mandatory subsidy reestimate)
    on an outstanding portfolio of about $5 billion, these steps are
    critical if the program is to be fiscally sound and not rely on large
    taxpayer subsidies.
      SBA is improving oversight and accounting practices of its Secondary
    Market Guarantee (SMG) program for 7(a) guaranteed loans. To properly
    manage any risk associated with this fund which is authorized under
    section 5(g) of the Small Business Act, SBA is budgeting for the
    Government's liability in accordance with the Federal Credit Reform Act.
    In accordance with the commitment that SBA made last year, it refined
    its estimate of the Government's liability for the program, which is
    reflected in the $105 million upward mandatory reestimate cost in the
    2005 budget. Due to reforms that are being implemented in 2004, this
    program will not require discretionary subsidy appropriations to operate
    in 2005.
      In 1999, SBA initiated an asset sales program as a means of improving
    portfolio management and curtailing the growing level of assets--
    primarily disaster loans--serviced by SBA. More than $5 billion in
    direct and repurchased (defaulted) guaranteed loans were sold to
    investors in seven separate sales through 2002. These assets were sold
    to private sector buyers without any recourse for future default claims
    or interest supplements from the Government. While the sales reduced
    loan management burdens on SBA, discrepancies eventually appeared
    between accounting and budgetary records; the agency's financial
    statements indicated losses on the program of $1.8 billion while the
    model used to value loans for purposes of sales showed gains of
    approximately $800 million. SBA and the General Accounting Office
    attempted to identify the source of the discrepancies in early 2002, but
    neither was able to explain the inconsistencies. As a result, SBA
    assembled a team of financial experts and undertook a detailed review of
    the financial records relating to the program between October 2002 and
    February 2003. The assessment revealed three sources of discrepancies.
    First, accounting entries overstated loan values and did not fully
    reconcile to subsidy estimates. Second, the agency's credit subsidy
    model, which assessed costs at an aggregate program level, did not
    always provide reliable loan cost estimates. Third, the model used to
    provide individual loan values for asset sales significantly
    underestimated the worth of those assets and did not reconcile to the
    subsidy model. Because of the findings, SBA halted its eighth sale
    scheduled for April 2003 and all subsequent sales. In addition, SBA has
    adjusted its accounting records and developed a single new loan-level
    credit model that can also determine the value of individual loans
    proposed for sale. Adjustments in the financial records have revealed
    that selling repurchased SBA guaranteed loans was profitable, while the
    sale of performing disaster loans resulted in budgetary costs to the
    Federal Government. On net, SBA's asset sales program has resulted in an
    $828 million loss.
      3) Operating more efficiently
      To operate more efficiently, SBA has automated loan origination
    activities in the Disaster Loan program with a paperless loan
    application. As a result, loan-processing costs, times, and errors will
    decrease, while Government responsiveness to the needs of disaster
    victims will increase. SBA is also transforming the way that staff
    perform loan management functions in both the 7(a) and 504 programs. In
    2003, SBA implemented a pilot program at three of its 68 district
    offices to consolidate and expedite Section 504 loan processing. Results
    have been very positive with the average loan processing time reduced
    from four weeks to only a few days. SBA is expanding the pilot
    nationally. Similarly, SBA is also shifting additional responsibilities
    to intermediaries by centralizing loan liquidation functions for the
    Section 504 program and requiring intermediaries to assume increased
    liquidation responsibilities.

    [[Page 88]]

    USDA Rural Infrastructure and Business Development Programs

      USDA provides grants, loans, and loan guarantees to communities for
    constructing facilities such as health-care clinics, day-care centers,
    and water and wastewater systems. Direct loans are available at lower
    interest rates for the poorest communities. These programs have very low
    default rates. The cost associated with them is due primarily to
    subsidized interest rates that are below the prevailing Treasury rates.
      The program level for the Water and Wastewater (W&W) treatment
    facility loan and grant program in the 2005 President's Budget is $1.4
    billion. These funds are available to communities of 10,000 or less
    residents. The program finances W&W facilities through direct or
    guaranteed loans and grants. Applicant communities must be unable to
    finance their needs through their own resources or with commercial
    credit. Priority is given based on their median household income,
    poverty levels, and size of service population as determined by USDA.
    The community typically receives a grant/loan combination. The grant is
    usually for 35-45% of the project cost (it can be up to 75%). Loans are
    for 40 years with interest rates based on a three-tiered structure
    (poverty, intermediate, and market) depending on community income. The
    community facility programs are targeted to rural communities with fewer
    than 20,000 residents and have a program level of $527 million in 2005.
    USDA also provides grants, direct loans, and loan guarantees to assist
    rural businesses, including cooperatives, to increase employment and
    diversify the rural economy. In 2005, USDA proposes to provide $600
    million in loan guarantees to rural businesses (these loans serve
    communities of 50,000 or less).
      These community programs are all part of the Rural Community
    Advancement Program (RCAP). Under RCAP, States have increased
    flexibility within the three funding streams for Water and Wastewater,
    Community Facilities, and Business and Industry (B&I). USDA also
    provides loans through the Intermediary Relending Program (IRP), which
    provides loan funds at a 1 percent interest rate to an intermediary such
    as a State or local government agency that, in turn, provides funds for
    economic and community development projects in rural areas. In 2005,
    USDA expects to retain or create over 66,000 jobs through its business
    programs, which will be achieved primarily through the B&I guarantee and
    the IRP loan programs.

    Electric and Telecommunications Loans

      USDA's Rural Utilities Service (RUS) has programs that provide loans
    for rural electrification, telecommunications, distance learning,
    telemedicine, and broadband and grants for distance learning and
    telemedicine. The electric and telecommunications program makes new
    loans to maintain existing infrastructure and to modernize electric and
    telephone service in rural America. Historically, the Federal risk
    associated with the $40 billion loan portfolio in electric and telephone
    loans has been small, although several large defaults have occurred in
    the electric program.
      The Distance Learning and Telemedicine (DLT) provides loans and grants
    to improve distance learning and telemedicine services in rural areas
    and encourage students, teachers, medical professionals, and rural
    residents to use telecommunications, computer networks, and related
    advanced technologies. The USDA Broadband programs provide loans to
    provide broadband service to rural communities.
      The subsidy rates for several of the electric and telecommunication
    programs remain negative, though changes to the interest rate
    assumptions resulted in positive subsidy rates for the Electric Hardship
    and Municipal rate programs. Recent problems in the telecommunications
    industry have not had a significant impact on rural telecommunications
    cooperatives. The number of electric loans has been increasing due to
    large increases in loan level appropriated over the last several years.
    The average size for electric loans has also been increasing. The number
    and the size of telecommunications loans have remained steady. The
    subsidy rate for the DLT loan program increases in FY2005 from negative
    to positive due to a few defaults that were not included in the original
    assumptions. The Broadband subsidy rates increase slightly due to
    interest rate assumption changes.
      Providing funding and services to needy areas is of concern to USDA.
    Many rural cooperatives provide service to areas where there are high
    poverty rates. Based on PART findings, USDA will review its current
    method of issuing telecommunications loans, ```first in; first out,'' to
    determine if it allows for adequate support for areas with the highest
    priority needs. In addition, to ensure the electric and
    telecommunications programs' focus on rural areas, legislation will be
    proposed to require recertification of rural status for each electric
    and telecommunications borrower on the first loan request received in or
    after FY 2005 and on the first loan request received after each
    subsequent Census. Legislation will be sought to allow for the
    rescission of loans that are more than ten years old.
      RUS proposes to make $2.5 billion in direct and guaranteed electric
    loans in 2005, including provision for guaranteeing $100 million in
    electric loans made by private banks. The demand for loans to rural
    electric cooperatives has been increasing and is expected to increase
    further as borrowers replace many of the 40-year-old electric plants.
    With the $2.5 billion in loans, RUS borrowers are expected to upgrade
    225 rural electric systems, which will benefit over 3.4 million
    customers.
      USDA's RUS proposes to make $495 million in direct telecommunications
    loans in 2005. With the $495 million in loans, RUS borrowers are
    expected to fund over 50 telecommunication systems for advanced
    telecommunications services which will provide broadband and high-speed
    Internet access and benefit over 300 thousand rural customers.

    [[Page 89]]

      With the $25 million in DLT grants RUS borrowers are expected to
    provide distance learning facilities to 300 schools, libraries, and
    rural education centers and also provide telemedicine equipment to 150
    rural health care providers, benefiting millions of residents in rural
    America. Loan funds are not provided due to the positive subsidy rate
    and the lack of interest in DLT loans. The budget proposes converting
    the mandatory broadband funding into discretionary funding and provides
    discretionary funding that supports $331 million in broadband loans.

    Loans to Farm Operators

      Farm Service Agency (FSA) assists low-income family farmers in
    starting and maintaining viable farming operations. Emphasis is placed
    upon aiding beginning and socially disadvantaged farmers. FSA offers
    operating loans and ownership loans, both of which may be either direct
    or guaranteed loans. Operating loans provide credit to farmers and
    ranchers for annual production expenses and purchases of livestock,
    machinery, and equipment. Farm ownership loans assist producers in
    acquiring and developing their farming or ranching operations. As a
    condition of eligibility for direct loans, borrowers must be unable to
    obtain private credit at reasonable rates and terms. As FSA is the
    ``lender of last resort,'' default rates on FSA direct loans are
    generally higher than those on private-sector loans. However, in recent
    years the loss rate has decreased with a rate of 5.1 percent in 2003,
    compared to 5.6 percent in 2002.
      FSA guaranteed farm loans are made to more creditworthy borrowers who
    have access to private credit markets. Because the private loan
    originators must retain 10 percent of the risk, they exercise care in
    examining the repayment ability of borrowers. As a result, losses on
    guaranteed farm loans remain low with default rates of .71 percent in
    2003 as compared to .70 percent in 2002.
      The 2002 Farm Bill changed some of the requirements for managing
    inventory property. Property acquired through foreclosure on direct
    loans must now be sold at auction within 165, rather than 105 days of
    acquisition. The new rule allows more time to advertise and encourage
    participation from beginning farmers.
      The subsidy rates for these programs have been fluctuating over the
    past several years. These fluctuations are mainly due to the interest
    component of the subsidy rate. The default rates for these programs tend
    to be below ten percent. As shown above, both the direct and guaranteed
    loans have experienced a decreasing default rate.
      In fiscal year 2003, FSA provided loans and loan guarantees to
    approximately 32,000 family farmers totaling $3.94 billion. The number
    of loans provided by these programs has fluctuated over the past several
    years. The average size for farm ownership loans has been increasing.
    The majority of assistance provided in the operating loan program is to
    existing FSA farm borrowers. In the farm ownership program, new
    customers receive the bulk of the benefits furnished.
      In the last few years, the demand for FSA direct and guaranteed loans
    has been high due to crop/livestock price decreases and some regional
    production problems. In 2005, USDA's FSA proposes to make $3.8 billion
    in direct and guaranteed loans through discretionary programs.
      A PART evaluation of the guaranteed loan portfolio was conducted in
    2003. The review found that the program is well-managed and serves a
    clear purpose in helping farmers who have difficulty in demonstrating
    creditworthiness obtain credit at reasonable rates from private lenders.
    However, while the program has a low loss rate, it is unable to
    adequately demonstrate whether it is achieving the objective of
    improving the economic viability of U.S. farmers and ranchers. Over the
    next year, FSA will be conducting an in-depth review of its direct and
    guaranteed loan portfolios to assess program performance, including the
    effectiveness of targeted assistance and the ability of borrowers to
    graduate to private credit.

    The Farm Credit System and Farmer Mac

      The Farm Credit System (FCS or System) and the Federal Agricultural
    Mortgage Corporation (Farmer Mac) are Government-Sponsored Enterprises
    (GSEs) that enhance credit availability for the agricultural sector. The
    FCS provides production, equipment, and mortgage lending to farmers and
    ranchers, aquatic producers, their cooperatives, and related businesses,
    while Farmer Mac provides a secondary market for agricultural real
    estate and rural housing mortgages.
      The Nation's agricultural sector and, in turn, its lenders continue to
    exhibit stability in their income and balance sheets. This is due, in
    part, to government assistance payments being provided from 1998 through
    2003. Also, the low interest rate environment seen over the past two
    years has reduced interest expense for the capital-intensive
    agricultural sector and bolstered farmland values. Favorable growing
    conditions were widespread, and commodity prices generally rose in 2003,
    although weakness continued for some products. Farmland values increased
    moderately, up 5.0 percent in 2002, due to a combination of government
    payments, urban influences, and declining interest rates. Projections
    for 2003 see a smaller rise of 3.0 percent for farmland values
      Commercial banks maintained their predominant farm debt market share
    of 40 percent in 2002. The FCS trailed at a 29.8 percent share. The
    United States Department of Agriculture (USDA) direct farm loan programs
    market share was 3.7 percent, though it would more than double if
    adjusted for guaranteed loans issued through private institutional
    lenders. In 2003, USDA expects the market-share gap between commercial
    banks and the FCS to have narrowed marginally.

    [[Page 90]]

    The Farm Credit System

      During 2003, the financial condition of the System's banks and
    associations continued a 15-year trend of improving financial health and
    performance. Sound asset quality and strong income generation enabled
    FCS banks and associations to post record capital levels. As of
    September 30, 2003, capital increased 6.4 percent for the year and stood
    at $16.2 billion. These capital numbers exclude $2.0 billion of
    restricted capital held by the Farm Credit System Insurance Corporation
    (FCSIC). Loan volume has increased since 1989 to $91.3 billion in
    September 2003, which surpasses the high of $90.0 billion, set in
    December 2002. The rate of asset growth for the preceding three-year
    period (2000-2002) has been averaging 7.6 percent. However, the rate of
    capital accumulation has been greater resulting in total capital
    equaling 15.4 percent of total assets at yearend 2002 compared to 14.9
    percent at yearend 1999. Non-performing assets increased slightly to 1.4
    percent of the portfolio in September 2003 compared to 1.3 percent in
    December 2002. Competitive pressures and a falling interest rate
    environment have narrowed the FCS's net interest margin to 2.62 percent
    in September 2003 from 2.76 percent in 2002. The net interest margin is
    expected to remain stable in the near-term, given the expectations for a
    continued low interest rate environment into 2004. Consolidation
    continues to affect the structure of the FCS. In January 1995, there
    were nine banks and 232 associations; by September 2003, there were six
    banks and 99 associations.
      The FCSIC ensures the timely payment of interest and principal on FCS
    obligations. FCSIC's net assets, largely comprised of premiums paid by
    FCS institutions, supplement the System's capital and support the joint
    and several liability of all System banks for FCS obligations. On
    September 30, 2003, FCSIC's net assets totaling $1.7 billion were
    slightly below (1.98 percent) the statutory minimum of 2.0 percent of
    outstanding debt. In 2003, the premium rate was increased to bolster
    FCSIC's net assets to meet the expansion in the System's outstanding
    debt caused by strong growth in its asset base. The premium rate is
    slated to be reduced slightly in 2004.
      Improvement in the FCS's financial condition is also reflected in the
    examinations by the Farm Credit Administration (FCA), its Federal
    regulator. Each of the System institutions is rated under the FCA
    Financial Institution Rating System (FIRS) for capital, asset quality,
    management, earnings, liquidity, and sensitivity. At the beginning of
    1995, 197 institutions carried the best FIRS ratings of 1 or 2, 36 were
    rated 3, one institution was rated 4, and no institutions received the
    lowest rating of 5. In September 2003, all 105 banks and associations
    had ratings of 1 or 2 and no institution was under an enforcement
    action.
      Over the past 12 months, the System's loans outstanding have grown by
    $3.4 billion, or 3.9 percent, while over the past five years they have
    grown $25.2 billion, or 38.1 percent. The volume of lending secured by
    farmland increased 52.6 percent, while farm-operating loans have
    increased 32.1 percent since 1998. Total members served increased about
    2 percent during the past year. Agricultural producers represented the
    largest borrower group, with $72.8 billion including loans to rural
    homeowners and leases, or just under 80 percent of the dollar amount of
    loans outstanding. As required by law, all borrowers are also
    stockholder owners of System banks and associations. The System has more
    than 453,000 stockholders; about 83 percent of these are farmers with
    voting stock. Over half of the System's total loan volume outstanding
    (53.6 percent) is in long-term real estate loans, over one-quarter (26.2
    percent) is in short- and intermediate-term loans to agricultural
    producers, and 17 percent is to cooperatives. International loans
    (export financing) represent 3.2 percent of the System's loan portfolio.
    Young, beginning, and small farmers and ranchers loans represented 12.7,
    18.0, and 30.1-percent, respectively, of the total dollar volume
    outstanding in 2002, which is slightly higher than in 2001. These
    percentages cannot be summed given significant overlap in these
    categories. Providing credit and related services to young, beginning,
    and small farmers and ranchers is a legislated mandate and a high
    priority for the System.
      The System, while continuing to record strong earnings and capital
    growth, remains exposed to numerous risks, including concentration risk,
    changes in government assistance payments, the volatility of exports and
    crop prices, and lower non-farm earnings of farm households associated
    with weakness in the economy's employment sector.

    Farmer Mac

      Farmer Mac was established in 1987 to facilitate a secondary market
    for farm real estate and rural housing loans. Since the Agricultural
    Credit Act of 1987, there have been several amendments to Farmer Mac's
    chartering statute. Perhaps the most significant amending legislation
    for Farmer Mac was the Farm Credit System Reform Act of 1996 that
    transformed Farmer Mac from a guarantor of securities backed by loan
    pools into a direct purchaser of mortgages, enabling it to form pools to
    securitize. The 1996 Act increased Farmer Mac's ability to provide
    liquidity to agricultural mortgage lenders. Since the passage of the
    1996 Act, Farmer Mac's program activities and business have increased
    significantly.

    [[Page 91]]

      Farmer Mac continues to meet statutory minimum core capital and
    regulatory risk-based capital requirements. Farmer Mac's total program
    activity (loans purchased and guaranteed, and AgVantage bonds purchased,
    and real estate owned) as of September 30, 2003, totaled $5.6 billion.
    That volume represents growth of 8 percent over program activity at
    September 30, 2002. Of total program activity, $2.4 billion were on-
    balance sheet loans and agricultural mortgage-backed securities and $3.2
    billion were off-balance sheet obligations. Total assets were $4.2
    billion at the close of the third quarter, with non-program investments
    accounting for $1.6 billion of those assets. Farmer Mac's net income for
    the first three quarters of 2003 was $20 million, an increase of $1.56
    million, or 8.8 percent over the same period in 2002.

                          International Credit Programs

      Seven Federal agencies, the Department of Agriculture (USDA), the
    Department of Defense, the Department of State, the Department of the
    Treasury, the Agency for International Development (USAID), the Export-
    Import Bank, and the Overseas Private Investment Corporation (OPIC),
    provide direct loans, loan guarantees, and insurance to a variety of
    foreign private and sovereign borrowers. These programs are intended to
    level the playing field for U.S. exporters, deliver robust support for
    U.S. manufactured goods, stabilize international financial markets, and
    promote sustainable development.

    Leveling the Playing Field

      Federal export credit programs counter subsidies that foreign
    governments, largely in Europe and Japan, provide their exporters,
    usually through export credit agencies (ECAs). The U.S. Government has
    worked since the 1970's to constrain official credit support through a
    multilateral agreement in the Organization for Economic Cooperation and
    Development (OECD). This agreement has significantly constrained direct
    interest rate subsidies and tied-aid grants. Further negotiations
    resulted in a multilateral agreement that standardized the fees for
    sovereign lending across all ECAs beginning in April 1999. Fees for non-
    sovereign lending, however, continue to vary widely across ECAs and
    markets, thereby providing implicit subsidies.
      The Export-Import Bank attempts to strategically ``level the playing
    field'' and to fill gaps in the availability of private export credit.
    The Export-Import Bank provides export credits, in the form of direct
    loans or loan guarantees, to U.S. exporters who meet basic eligibility
    criteria and who request the Bank's assistance. USDA's ``GSM'' programs
    similarly help to level the playing field. Like programs of other
    agricultural exporting nations, GSM programs guarantee payment from
    countries and entities that want to import U.S. agricultural products
    but cannot easily obtain credit. The U.S. has been negotiating in the
    OECD the terms of agricultural export financing, the outcome of which
    could affect the GSM programs.

    Stabilizing International Financial Markets

      In today's global economy, the health and prosperity of the American
    economy depend importantly on the stability of the global financial
    system and the economic health of our major trading partners. The United
    States can contribute to orderly exchange arrangements and a stable
    system of exchange rates by providing resources on a multilateral basis
    through the IMF (discussed in other sections of the Budget), and through
    financial support provided by the Exchange Stabilization Fund (ESF).
      The ESF may provide ``bridge loans'' to other countries in times of
    short-term liquidity problems and financial crises. In the past,
    ``bridge loans'' from ESF provided dollars to a country over a short
    period before the disbursement of an IMF loan to the country. Also, a
    package of up to $20 billion of medium-term ESF financial support was
    made available to Mexico during its crisis in 1995. Such support was
    essential in helping to stabilize Mexican and global financial markets.
    Mexico paid back its borrowings under this package ahead of schedule in
    1997, and the United States earned almost $600 million more in interest
    than it would have if it dollars had not been lent. There was zero
    subsidy cost for the United States as defined under credit reform, as
    the medium-term credit carried interest rates reflecting an appropriate
    country risk premium.
      The United States also expressed a willingness to provide ESF support
    in response to the financial crises affecting some countries such as
    South Korea in 1997 and Brazil in 1998. It did not prove necessary to
    provide an ESF credit facility for Korea, but the United States agreed
    to guarantee through the ESF up to $5 billion of a $13.2 billion Bank
    for International Settlements credit facility for Brazil. In the event,
    the ESF guaranteed $3.3 billion in BIS credits to Brazil and earned
    $140.3 million in commissions. Such support helped to provide the
    international confidence needed by these countries to begin the
    stabilization process.

    Using Credit to Promote Sustainable Development

      Credit is an important tool in U.S. bilateral assistance to promote
    sustainable development. USAID's Development Credit Authority (DCA)
    allows USAID to use a variety of credit tools to support its development
    activities abroad. This unit encompasses newer DCA activities, such as
    municipal bond guarantees for local governments in developing countries,
    as well as USAID's traditional microenterprise and urban environmental
    credit programs. DCA provides non-sovereign loans and loan guarantees in
    targeted cases where credit serves more effectively than traditional
    grant mechanisms to achieve sustainable development. DCA is intended to
    mobilize host country private capital to fi

    [[Page 92]]

    nance sustainable development in line with USAID's strategic objectives.
    Through the use of partial loan guarantees and risk sharing with the
    private sector, DCA stimulates private-sector lending for financially
    viable development projects, thereby leveraging host-country capital and
    strengthening sub-national capital markets in the developing world.
    While there is clear demand for DCA's facilities in some emerging
    economies, the utilization rate for these facilities is still very low.
      OPIC also supports a mix of development, employment, and export goals
    by promoting U.S. direct investment in developing countries. OPIC
    pursues these goals through political risk insurance, direct loans, and
    guarantee products, which provide finance, as well as associated skills
    and technology transfers. These programs are intended to create more
    efficient financial markets, eventually encouraging the private sector
    to supplant OPIC finance in developing countries. OPIC has also created
    a number of investment funds that provide equity to local companies with
    strong development potential.

    Ongoing Coordination

      International credit programs are coordinated through two groups to
    ensure consistency in policy design and credit implementation. The Trade
    Promotion Coordinating Committee (TPCC) works within the Administration
    to develop a National Export Strategy to make the delivery of trade
    promotion support more effective and convenient for U.S. exporters.
      The Interagency Country Risk Assessment System (ICRAS) standardizes
    the way in which agencies budget for the cost associated with the risk
    of international lending. The cost of lending by the agencies is
    governed by proprietary U.S. government ratings, which correspond to a
    set of default estimates over a given maturity. The methodology
    establishes assumptions about default risks in international lending
    using averages of international sovereign bond market data. The strength
    of this method is its link to the market and an annual update that
    adjusts the default estimates to reflect the most recent risks observed
    in the market.
      For 2005, OMB updated the default estimates using the default estimate
    methodology introduced in FY 2003 and the most recent market data. The
    2003 default estimate methodology implemented a significant revision
    that uses more sophisticated financial analyses and comprehensive market
    data, and better isolates the expected cost of default implicit in
    interest rates charged by private investors to sovereign borrowers. All
    else being equal, this change expands the level of international lending
    an agency can support with a given appropriation. For example, the
    Export-Import Bank will be able to generally provide higher lending
    levels using lower appropriations in 2005.

    Adapting to Changing Market Conditions

      Overall, officially supported finance and transfers account for a tiny
    fraction of international capital flows. Furthermore, the private sector
    is continuously adapting its size and role in emerging markets finance
    to changing market conditions. In response, the Administration is
    working to adapt international lending at Export-Import Bank and OPIC to
    dynamic private sector finance. The Export-Import Bank, for example, is
    developing a sharper focus on lending that would otherwise not occur
    without Federal assistance. Measures under development include reducing
    risks, collecting fees from program users, and improving the focus on
    exporters who truly cannot access private export finance.
      OPIC in the past has focused relatively narrowly on providing
    financing and insurance services to large U.S. companies investing
    abroad. As a result, OPIC did not devote significant resources to its
    mission of promoting development through mobilizing private capital. In
    2003, OPIC implemented new development performance measures and goals
    that reflect the mandate to revitalize its core development mission.
      These changes at the Export-Import Bank and at OPIC will place more
    emphasis on correcting market imperfections as the private sector's
    ability to bear emerging market risks becomes larger, more
    sophisticated, and more efficient.

    Performance Assessment

      For FY 2005, the Administration used the Performance Assessment Rating
    Tool (PART) to rate OPIC's insurance and finance programs. The PART
    revealed the insurance program is generally well-managed and that it has
    instituted a meaningful policy to ensure it does not compete with
    private insurance companies. The PART found that the finance program
    could improve its credit function by ensuring the independence of the
    Credit Committee and the credit review process from the deal originating
    departments.

                             IV. INSURANCE PROGRAMS

                                Deposit Insurance

      Federal deposit insurance promotes stability in the U.S. financial
    system. Prior to the establishment of Federal deposit insurance,
    failures of some depository institutions often caused depositors to lose
    confidence in the banking system and rush to withdraw deposits. Such
    sudden withdrawals caused serious disruption to the economy. In 1933, in
    the midst of the Depression, the system of Federal deposit insurance was
    established to protect small depositors and prevent bank failures from
    causing widespread disruption in financial markets. The federal deposit
    insurance system came under serious strain in the late 1980s and early
    1990s when over 2,500 banks and thrifts failed. The Federal Government
    responded with a series of reforms designed

    [[Page 93]]

    to improve the safety and soundness of the banking system. These
    reforms, combined with more favorable economic conditions, helped to
    restore the health of depository institutions and the deposit insurance
    system.
      The Federal Deposit Insurance Corporation (FDIC) insures deposits in
    commercial banks and savings associations (thrifts) through separate
    insurance funds, the Bank Insurance Fund (BIF) and the Savings
    Association Insurance Fund (SAIF). The National Credit Union
    Administration (NCUA) administers the insurance fund for most credit
    unions (certain credit unions are privately insured and not covered by
    the fund). FDIC and NCUA insure deposits up to $100,000 per account.
    FDIC insures over $3.4 trillion of deposits at almost 8,000 commercial
    banks and 1,500 savings institutions. NCUA insures about 9,500 credit
    unions with $474 billion in insured shares.

    Current Industry and Insurance Fund Conditions

      Four BIF members with combined assets of $1.2 billion dollars failed
    during fiscal year 2003, while no SAIF members failed. In the last five
    years, assets associated with BIF failures have averaged $1.1 billion
    per year, while failures associated with SAIF averaged $465 million.
    During 2003, 8 federally insured credit unions with $25 million in
    assets failed (including assisted mergers). The FDIC currently
    classifies 116 institutions with $30 billion in assets as ``problem
    institutions,'' compared to 148 institutions with $42 billion in assets
    a year ago. By comparison, at the height of the banking crisis in 1989,
    failed assets rose to over $150 billion.
      In the third quarter ending September 30, 2003, banks and thrifts
    reported record-high earnings. In fiscal year 2003, the industry net
    income totaled $115 billion, an increase of 13 percent over fiscal year
    2002. The largest factor in the earnings increase is higher non-interest
    income, particularly growth in securitization income and gains on loan
    sales. Credit quality continues to improve and banks are reporting
    higher returns on assets. Despite the improving trends, prospects for
    higher interest rates cause concerns for the industry as increased
    interest rates usually reduce lending margins.
      In fiscal year 2003, the reserve ratio (ratio of insurance reserves to
    insured deposits) of BIF stayed above the 1.25-percent statutory target.
    As of September 30, 2003, BIF had estimated reserves of $33 billion, or
    1.31 percent of insured deposits. Factors that helped BIF stay above the
    statutory target in fiscal year 2003 include slower deposit growth,
    increases in unrealized gains on securities available for sale, and
    reductions to reserves previously set aside for future estimated losses.
    In 2003, FDIC developed a new model to estimate the amount of reserves
    needed for losses after it completed a study that found faults in its
    current methodology. FDIC continues to refine its new model as it looks
    to incorporate it in their reserve estimating process. The SAIF reserve
    ratio remained comfortably above the designated reserve ratio throughout
    the year. As of September 30, 2003, SAIF had reserves of $12 billion, or
    1.40 percent of insured deposits. Through June 30, 2004, the FDIC will
    continue to maintain deposit insurance premiums in a range from zero for
    the healthiest institutions to 27 cents per $100 of assessable deposits
    for the riskiest institutions. In May, the FDIC will set assessment
    rates for July through December of this year. Due to the strong
    financial condition of the industry and the insurance funds, less than
    10 percent of banks and thrifts paid insurance premiums in 2003.
      The National Credit Union Share Insurance Fund (NCUSIF) ended fiscal
    year 2003 with assets of over $6 billion and an equity ratio of 1.28
    percent, below the NCUA-set target ratio of 1.30 percent. Each insured
    credit union is required to deposit and maintain an amount equal to 1
    percent of its member share accounts in the fund. Premiums were waived
    during 2003 because sufficient investment income was generated. As the
    Fund's equity ratio did not exceed 1.30 percent, NCUA did not provide a
    dividend to credit unions in fiscal year 2003.
      As a result of consolidation, fewer large banks control an
    increasingly substantial share of banking assets. Thus, the failure of
    even one of these large institutions could strain the insurance fund.
    Banks are increasingly using sophisticated financial instruments such as
    asset-backed securities and financial derivatives, which could have
    unforeseen effects on risk levels. Whether or not these new instruments
    add to risk, they do complicate the work of regulators who must gauge
    each institution's financial health and the potential for deposit
    insurance losses that a troubled institution may represent.

    Federal Deposit Insurance Reform

      While the deposit insurance system is in good condition, the
    Administration supports reforms to make improvements in the operation
    and fairness of the deposit insurance system for banks and thrifts. In
    2003, the Treasury Department and federal banking regulatory agencies
    submitted to the U.S. Senate a draft bill that would accomplish this
    objective. Specifically, the proposal would merge the BIF and the SAIF,
    which offer an identical product. A single merged fund would be stronger
    and better diversified than either fund alone. A merged fund would
    prevent the possibility that institutions posing similar risks would pay
    significantly different premiums for the same product. Under the current
    system, the FDIC is required to maintain a ratio of insurance fund
    reserves to total insured deposits of 1.25 percent. If insurance fund
    reserves fall below the required ratio, the FDIC must charge either
    sufficient premiums to restore the reserve ratio to 1.25 percent within
    one year, or no less than 23 basis points if the reserve ratio remains
    below 1.25 percent for more than one year. The Administration's proposal
    would give the FDIC authority to adjust the ratio periodically within
    prescribed upper and lower bounds and greater discretion in determining
    how quickly it restores the ratio to target levels. This flexibility
    would help the

    [[Page 94]]

    banking industry to stabilize the premium costs over time and to avoid
    sharp premium increases when the economy might be under stress. Finally,
    the FDIC has been prohibited since 1996 from charging premiums to
    ``well-capitalized'' and well-run institutions as long as insurance fund
    reserves equal or exceed 1.25 percent of insured deposits. Therefore,
    less than 10 percent of banks and thrifts pay insurance premiums,
    allowing a large number of financial institutions to rapidly increase
    their insured deposits without any contribution to the insurance fund.
    The Administration proposal would repeal this prohibition to ensure that
    institutions with rapidly increasing insured deposits or greater risks
    appropriately compensate the insurance fund.

                               Pension Guarantees

      The Pension Benefit Guaranty Corporation (PBGC) insures most defined-
    benefit pension plans sponsored by private employers. PBGC pays the
    benefits guaranteed by law when a company with an underfunded pension
    plan becomes insolvent. PBGC's exposure to claims relates to the
    underfunding of pension plans, that is, to any amount by which vested
    future benefits exceed plan assets. In the near term, its loss exposure
    results from financially distressed firms with underfunded plans. In the
    longer term, additional loss exposure results from the possibility that
    currently healthy firms become distressed and currently well-funded
    plans become underfunded due to inadequate contributions or poor
    investment results.
      PBGC monitors troubled companies with underfunded plans and acts, in
    bankruptcies, to protect its beneficiaries and the future of the
    program. Such protections include, where necessary, initiating plan
    termination. Under its Early Warning Program, PBGC negotiates
    settlements with companies that improve pension security and reduce
    PBGC's future exposure to risk.
      PBGC's single-employer program ended 2002 at a deficit of $3.6
    billion, which deepened in 2003 to about $11.3 billion. The deficit has
    resulted from record losses on plan terminations in 2001 through 2003.
    In 2002 LTV, a steel company, terminated its plan with underfunding of
    nearly $2 billion, which then was PBGC's largest claim ever. But in
    December 2002, an even larger pension plan terminated. Bethlehem Steel's
    plan covered 95,000 workers and retirees and was underfunded by about
    $4.3 billion, of which PBGC is liable for about $3.6 billion. Other
    large underfunded terminations in 2003 included Columbia Hospital for
    Women, Consolidated Freightways, Geneva Steel, Hawaii Baking Company,
    National Steel, and US Airways' Pilots Plan. Since year's end, PBGC has
    terminated Kaiser Aluminum Salaried Plan, Pillowtex, and Weirton Steel.
      Moreover this ``snapshot'' measure of PBGC's deficit could hide
    significant risk of further losses. It includes the financial effects
    only of pension plans that have already terminated and of seriously
    underfunded large plans for which termination is considered
    ``probable.'' Additional risk and exposure may remain for the future
    because of economic uncertainties and significant underfunding in
    single-employer pension plans, which exceeded an estimated $350 billion
    at year end, compared to $50 billion in December 2000. Some of the
    companies with the most underfunded plans are in financially troubled
    industries (like airlines or the old-line steel companies), or are
    already in Chapter 11 bankruptcy proceedings.
      The smaller multiemployer program guarantees pension benefits of
    certain unionized plans offered by several employers in an industry. It
    ended 2003 with its first deficit in over 20 years, of about $261
    million. Underfunding in multiemployer plans approximated $100 billion
    at year end.
      PBGC is not in crisis--the agency has sufficient assets to meet its
    obligations for a number of years into the future--but it is clear that
    the financial integrity of the federal pension insurance system is at
    risk.
      Looking to the long term, in order to avoid benefit reductions,
    strengthen PBGC, and help stabilize the defined-benefit pension system,
    the 2005 Budget proposes legislative reforms to:
        Give employers two years of relief from current pension plan
              contribution requirements--now tied to 30-year Treasury bond
              interest rates--and base requirements on more appropriate
              corporate bond rates.
        After the two-year transition period, base pension funding
              requirements on a ``yield curve'' (commonly used in corporate
              finance), which would better tie funding requirements to the
              timing of the payout of retiree benefits.
        Make additional changes to restrict promises of added
              benefits by severely underfunded plans and to provide better
              information on pension finances to workers, retirees, and
              stockholders.
      Additionally, the Administration is developing a plan for
    comprehensive reform of the pension funding rules to: strengthen funding
    for workers' defined-benefit pensions; simplify funding rules; offer
    sponsors new, flexible approaches to finance their plans without the
    present yearly volatility; and make additional reforms to ensure PBGC's
    continued ability to safeguard pension benefits.

    [[Page 95]]

                               Disaster Insurance

    Flood Insurance

      The Federal Government provides flood insurance through the National
    Flood Insurance Program (NFIP), which is administered by the Emergency
    Preparedness and Response Directorate of the Department of Homeland
    Security (DHS). Flood insurance is available to homeowners and
    businesses in communities that have adopted and enforced appropriate
    flood plain management measures. Coverage is limited to buildings and
    their contents. By 2005, the program is projected to have approximately
    4.7 million policies from more than 19,000 communities with $699 billion
    of insurance in force.
      Prior to the creation of the program in 1968, many factors made it
    cost prohibitive for private insurance companies alone to make
    affordable flood insurance available. In response, the NFIP was
    established to make insurance coverage widely available. The NFIP
    requires building standards and other mitigation efforts to reduce
    losses, and operates a flood hazard mapping program to quantify the
    geographic risk of flooding. These efforts have made substantial
    progress.
      The number of policies in the program has grown significantly over
    time. The number of enrolled policies grew from 2.4 to 4.3 million
    between 1990 and 2002, and by about 34,000 policies in 2003. DHS is
    using three strategies to increase the number of flood insurance
    policies in force: lender compliance, program simplification, and
    expanded marketing. DHS is educating financial regulators about the
    mandatory flood insurance requirement for properties with mortgages from
    federally regulated lenders. The NFIP also has a multi-pronged strategy
    for reducing future flood damage. The NFIP offers mitigation insurance
    to allow flood victims to rebuild to code, thereby reducing future flood
    damage costs. Further, through the Community Rating System, DHS adjusts
    premium rates to encourage community and State mitigation activities
    beyond those required by the NFIP.
      Despite these efforts, the program faces financial challenges. The
    program's financing account, which is a cash fund, has sometimes had
    expenses greater than its revenue, preventing it from building
    sufficient long-term reserves. This is mostly because a large portion of
    the policyholders pay subsidized premiums. DHS charges subsidized
    premiums for properties built before a community adopted the NFIP
    building standards. Properties built subsequently are charged
    actuarially fair rates. The creators of the NFIP assumed that eventually
    the NFIP would become self-sustaining as older properties left the
    program. The share of subsidized properties in the program has fallen,
    but remains substantial; it was 70 percent in 1978 and is 28 percent
    today.
      Until the mid-1980s, Congress appropriated funds periodically to
    support subsidized premiums. However, the program has not received
    appropriations since 1986. During the 1990s, FEMA, which is now part of
    DHS, relied on Treasury borrowing to help finance its loss expenses (the
    NFIP may borrow up to $1.5 billion). As of October 31, 2002, the NFIP
    had repaid all of its outstanding debt.
      Although the program is generally well run, it receives some criticism
    about the low participation rate and the inclusion of subsidized
    properties, especially those that are repetitively flooded. The program
    has identified approximately 11,000 properties for mitigation action. To
    the extent they are available; funds will come from the Hazard
    Mitigation Grant Program, the Predisaster Mitigation Grant Program, and
    the Flood Mitigation Grant Program. There is also current legislation
    pending to address the problem of repetitive loss properties. An
    additional problem is the fairly low participation rate. Currently, less
    than half of the eligible properties in identified flood plains
    participate in this program. In comparison, the participation rate for
    private wind and hurricane insurance is nearly 90 percent in at-risk
    areas. Given that flood damage causes roughly $6 billion in property
    damage annually, DHS will have to evaluate its incentive structure to
    attract more participation in the program, while not encouraging misuse
    of the program.

    Crop Insurance

      Subsidized Federal crop insurance administered by USDA's Risk
    Management Agency (RMA) plays an important role in assisting farmers to
    manage yield and revenue shortfalls due to bad weather or other natural
    disasters. RMA continues to evaluate and, as appropriate, provide new
    products so that the Government can further reduce the need for ad-hoc
    disaster assistance payments to the agriculture community in bad years.
      The USDA crop insurance program is a cooperative effort between the
    Federal Government and the private insurance industry. Private insurance
    companies sell and service crop insurance policies. These companies rely
    to varying degrees on reinsurance provided by the Federal Government and
    the commercial reinsurance market to manage their individual risk
    portfolio. The Federal Government also reimburses private companies for
    the administrative expenses associated with providing crop insurance and
    reinsures the private companies for excess insurance losses on all
    policies. The Federal Government also subsidizes premiums for farmers.
    In crop year 2003, 215 million acres were insured, with an estimated
    $3.4 billion in total premiums collected, including $2 billion in
    premium subsidy.
      During FY 2004 RMA will be renegotiating the Standard Reinsurance
    Agreement (SRA). The SRA contains the operational and financial risk
    sharing terms between the Federal government and the private companies.
    The Agriculture Risk Protection Act of 2000 (ARPA) allowed these terms
    to be renegotiated once during the 2001 and 2005 reinsurance years. RMA
    is taking this opportunity to strengthen the document now

    [[Page 96]]

    to address such issues as company oversight and quality control. In
    addition, significant attention will be given to evaluating all the
    financial incentives, risk sharing scenarios and administrative cost
    reimbursement percentages to ensure that the companies and the Federal
    government are bearing an appropriate amount of the costs associated
    with the crop insurance program. RMA is seeking to finalize the new SRA
    by June of 2004.
      There are various types of insurance programs. The most basic type of
    coverage is Catastrophic Crop Insurance (CAT), which compensates the
    farmer for losses up to 50 percent of the individual's average yield at
    55 percent of the expected market price. The CAT premium is entirely
    subsidized, and farmers pay only a small administrative fee. Commercial
    insurance companies deliver the product to the producer in all states.
    Additional coverage is available to producers who wish to insure crops
    above the basic coverage. Premium rates for additional coverage depend
    on the level of coverage selected and vary from crop to crop and county
    to county. The additional levels of insurance coverage are more
    attractive to farmers due to availability of optional units, other
    policy provisions not available with CAT coverage, and the ability to
    obtain a level of protection that permits them to use crop insurance as
    loan collateral and to achieve greater financial security. Private
    companies sell and service the catastrophic portion of the crop
    insurance program, and also provide higher levels of coverage, which are
    also federally subsidized. Approximately 80 percent of eligible acres
    participated in one or more crop insurance programs in 2003.
      There are also a wide range of yield and revenue-based insurance
    products are available through the crop insurance program. Revenue
    insurance programs protect against loss of revenue stemming from low
    prices, poor yields, or a combination of both. These programs extend
    traditional multi-peril crop insurance protection by adding price
    variability to production history. Indemnities are due when any
    combination of yield and price results in revenue that is less than the
    revenue guarantee. The price component common to these plans uses the
    commodity futures market for price discovery.
      USDA also continues to expand coverage. In September 2001, RMA
    published an interim rule that allows RMA to reimburse developers of
    private crop insurance products for their research and development costs
    and maintenance costs.
      Two pilot insurance programs for Iowa swine producers to protect them
    from lower hog prices began in 2002. The Livestock Gross Margin (LGM)
    and the Livestock Risk Protection (LRP). The LRP program was expanded in
    August 2003 to 10 additional states.
      In April 2003, RMA announced two pilot programs that will extend
    insurance protection to fed and feeder cattle. They are designed to
    insure against declining market prices. Both offer coverage prices based
    on expected cash prices. The Federal Crop Insurance Corporation (FCIC)
    will subsidize 13 percent of the producer's gross premium under both
    programs. LRP-Feeder Cattle is available in 10 states. LRP-Fed Cattle is
    available to producers in three states.
      For more information and additional crop insurance program details,
    please reference RMA's web site: (www.rma.usda.gov).

                    Insurance against Security-Related Risks

      The Federal Government offers terrorism risk insurance and Airline War
    Risk Insurance on a temporary basis, and has created the smallpox injury
    compensation program. After the September 11 attacks, private insurers
    became reluctant to insure against security-related risks such as
    terrorism and war. Those events are so uncertain in terms of both the
    frequency of occurrence and the magnitude of potential loss that private
    insurers have difficulty estimating the expected loss. Furthermore,
    terrorism can produce a large loss that could wipe out private insurers'
    capital. These uncertainties make the private sector reluctant to
    provide security-related insurance. Thus, it is necessary for the
    Federal Government to insure against security-related risks, until the
    private sector learns enough to be comfortable about estimating those
    risks, to ensure the smooth functioning of the economy.

    Terrorism Risk Insurance

      On November 26, 2002, President Bush signed into law the Terrorism
    Risk Insurance Act of 2002. The Act was designed to address disruptions
    in economic activity caused by the withdrawal of many insurance
    companies from the marketplace for terrorism risk insurance in the
    aftermath of the terrorist attacks of September 11, 2001. Their
    withdrawal in the face of great uncertainty as to their risk exposure to
    future terrorist attacks led to a moratorium in construction projects,
    increased business costs for the insurance that was available, and
    substantial shifting of risk--from reinsurers to primary insurers, and
    from insurers to policyholders (e.g., investors, businesses, and
    property owners). Ultimately, these costs were borne by American workers
    and communities through decreased development and economic activity.
      The Act establishes a temporary Federal program that provides for a
    system of shared public and private compensation for insured commercial
    property and casualty losses arising from acts of terrorism. The program
    is administered by the Treasury Department and will sunset on December
    31, 2005.
      Under the Act, insurance companies included under the program must
    make available to their policyholders during the first two years of the
    program coverage for losses from acts of terrorism (as defined by the
    Act), and Treasury is required to determine whether to extend this
    requirement into the third and final year of the program. The Act also
    requires as a condition

    [[Page 97]]

    for Federal payment that insurance companies disclose to policyholders
    the premium charged for terrorism risk insurance and the Federal share
    of compensation under the program.
      In the event of a future terrorist attack on private businesses and
    others covered by this program, insurance companies will cover insured
    losses up to each company's deductible as specified in the Act. Insured
    losses above that amount in a given year would be shared between the
    insurance company and the Treasury, with Treasury covering 90 percent of
    the losses above the company's deductible. However, neither the Treasury
    nor any insurer would be liable for any amount exceeding the statutory
    annual cap of $100 billion in aggregate insured losses. The Act also
    provides authority for the Treasury to recoup Federal payments via
    surcharges on policyholders. In some circumstances this recoupment is
    mandatory, in other circumstances, as specified in the Act, its exercise
    is optional.
      Promptly after the Act was signed into law, Treasury issued a number
    of interim guidance notices to assist the insurance industry in
    complying with the requirements of the Act. The interim guidance notices
    were directly followed by the issuance of formal regulations to
    implement the Act. Treasury has also created a separate Terrorism Risk
    Insurance Program office to implement the Act, which includes setting up
    an infrastructure to handle potential claims under the Act.

    Airline War Risk Insurance

      After the September 11, 2001 attacks, private insurers cancelled third
    party liability war risk coverage for airlines and dramatically
    increased the cost of other war risk insurance. In response, the
    Department of Transportation (DOT) provided a short-term reimbursement
    to airlines for the increased cost of aviation hull and passenger
    liability war risk insurance under the authority provided in P.L. 107-
    42. Under Presidential Determination No. 01-29, the President delegated
    the authority to extend the duration of aviation insurance to the
    Secretary of Transportation. Due to the extended disruption in the
    marketplace, DOT also offered airlines third-party liability war risk
    insurance coverage at subsidized rates to replace coverage initially
    withdrawn by private insurers. DOT has continued to provide insurance
    coverage in 60-day increments since 2001.
      The Homeland Security Act of 2002 included airline war risk insurance
    legislation. This law extended the term of third party war risk coverage
    and expanded the scope of coverage to include war risk hull, passenger,
    crew, and property liability insurance. Under the law, the Secretary of
    Transportation was directed to extend insurance policies until August
    31, 2003. In addition, the law also limited the total premium for the
    three types of insurance to twice the premium rate charged for the third
    party liability insurance as of June 19, 2002. In 2003 the Department of
    Defense supplemental appropriation further extended the mandatory
    provision of insurance through August 31, 2004. Consequently, in
    December 2003 the President issued Presidential Determination 2004-13
    which authorizes the continued provision of insurance now in force
    through August 31, 2004 and the DOT expects to amend current policies to
    conform to that date. Recently, the basic authority of the insurance
    program was extended through December 31, 2008 by P.L. 108-176, Vision
    100--Century of Aviation Reauthorization Act.
      Currently 76 air carriers are insured by DOT. Coverage for individual
    carriers ranges from $80 million to $4 billion per carrier with the
    median insurance coverage at approximately $1.8 billion per occurrence.
    Premiums collected by the Government are deposited into the Aviation
    Insurance Revolving Fund. In FY 2003, the fund collected approximately
    $136 million in premiums for insurance provided by DOT. In FY 2004, it
    is anticipated that up to $125 million in premiums may be collected by
    DOT for the provision of insurance. At the end of FY 2003, the balance
    of the Aviation Insurance Revolving Fund used to pay claims was $218
    million. Any claims by the airlines that exceed the balance in the
    aviation insurance revolving fund would be paid by the Federal
    Government.

    Smallpox Injury Compensation

      The Administration has taken steps to insure the immediate
    mobilization of emergency response personnel in the event of a smallpox
    attack. The Smallpox Injury Compensation Program, set up under the
    Smallpox Emergency Personnel Protection Act of 2003, encourages
    vaccination of designated emergency personnel by providing benefits and/
    or compensation to certain persons harmed as a direct result of
    receiving smallpox countermeasures, including the smallpox vaccine. Only
    persons receiving the smallpox vaccine under the Department of Health
    and Human Services Declaration Regarding the Administration of Smallpox
    Countermeasures are eligible for benefits. Also, the Homeland Security
    Act of 2002 provided medical liability protection to doctors, drug
    manufacturers, and hospitals that administer smallpox vaccine and other
    countermeasures during an emergency declaration.

    [[Page 98]]

    [[Page 99]]

                        Table 7-1.  ESTIMATED FUTURE COST OF OUTSTANDING FEDERAL CREDIT PROGRAMS
                                                (in billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                          Estimated                     Estimated
                                                          Outstanding  Future Costs of  Outstanding  Future Costs of
                           Program                            2002           2002           2003           2003
                                                                       Outstanding \1\               Outstanding \1\
    ----------------------------------------------------------------------------------------------------------------
    Direct Loans \2\
      Federal Student Loan Programs.....................           99             14            102             10
      Farm Service Agency (excl.CCC), Rural Development,           45             11             44             11
       Rural Housing....................................
      Rural Utilities Service and Rural Telephone Bank..           32              2             32              3
      Housing and Urban Development.....................           12              2             13              3
      Agency for International Development..............            9              7              9              4
      Public Law 480....................................           11              2             11              7
      Export-Import Bank................................           12              4             11              4
      Commodity Credit Corporation......................            5              3              7              3
      Federal Communications Commission.................            5              *              5              1
      Disaster Assistance...............................            4              *              3              1
      Other Direct Loan Programs........................           14              *             12              *
                                                         -----------------------------------------------------------
        Total Direct Loans..............................          248             45            249             47
                                                         -----------------------------------------------------------
    Guaranteed Loans: \2\
      FHA Mutual Mortgage Insurance Fund................          467              3            407              2
      VA Mortgage.......................................          265              6            323              5
      Federal Family Education Loan Program.............          182             12            213             15
      FHA General/Special Risk Insurance Fund...........           96              5             89              4
      Small Business....................................           41              1             53              2
      Export-Import Bank................................           31              5             34              3
      International Assistance..........................           19              2             19              2
      Farm Service Agency and Rural Housing.............           23              *             24              1
      Commodity Credit Corporation......................            5              1              4              *
      Other Guaranteed Loan Programs....................           17              2             18              2
                                                         -----------------------------------------------------------
        Total Guaranteed Loans..........................        1,146             37          1,184             36
                                                         -----------------------------------------------------------
          Total Federal Credit..........................        1,394             82          1,433             83
    ----------------------------------------------------------------------------------------------------------------
    * Less than $500 million.
    \1\ Direct loan future costs are the financing account allowance for subsidy cost and the liquidating account
      allowance for estimated uncollectible principal and interest. Loan guarantee future costs are estimated
      liabilities for loan guarantees.
    \2\ Excludes loans and guarantees by deposit insurance agencies and programs not included under credit reform,
      such as CCC commodity price supports. Defaulted guaranteed loans which become loans receivable are accounted
      for as direct loans.

    [[Page 100]]

                                      Table 7-2.  REESTIMATES OF CREDIT SUBSIDIES ON LOANS DISBURSED BETWEEN 1992-2003 \1\
                                                     (Budget authority and outlays, in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                           Program                           1994     1995     1996     1997     1998     1999     2000     2001     2002     2003     2004
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                        DIRECT LOANS:

    Agriculture:
      Agriculture credit insurance fund..................      -72       28        2      -31       23  .......      331     -656      921       10     -701
      Farm storage facility loans........................  .......  .......  .......  .......  .......  .......  .......  .......       -1       -7       -8
      Apple loans........................................  .......  .......  .......  .......  .......  .......  .......  .......       -2        1  .......
      Emergency boll weevil loan.........................  .......  .......  .......  .......  .......  .......  .......  .......  .......        1        *
      Agricultural conservation..........................       -1  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......
      Distance learning and telemedicine.................  .......  .......  .......  .......  .......  .......  .......  .......        1       -1  .......
      Rural electrification and telecommunications loans.        *       61      -37       84  .......      -39  .......      -17      -42      101  .......
      Rural telephone bank...............................        1  .......  .......       10  .......       -9  .......       -1  .......       -3       -7
      Rural housing insurance fund.......................        2      152       46      -73  .......       71  .......       19      -29     -435  .......
      Rural economic development loans...................  .......  .......  .......        1  .......       -1        *  .......       -1       -1  .......
      Rural development loan program.....................  .......        1  .......  .......  .......       -6  .......  .......       -1       -3  .......
      Rural community advancement program \2\............  .......  .......  .......        8  .......        5  .......       37        3       -1  .......
      P.L. 480...........................................  .......  .......      -37       -1  .......  .......  .......      -23       65     -348       33
      P.L. 480 Title I food for progress credits.........  .......       84      -38  .......  .......  .......  .......  .......  .......     -112      -44

    Commerce:
      Fisheries finance..................................  .......  .......  .......  .......  .......  .......  .......      -19       -1       -3        1

    Defense:
      Military housing improvement fund..................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -1

    Education:
      Federal direct student loan program: \3\
        Volume reestimate................................  .......  .......  .......  .......  .......       22  .......       -6  .......       43  .......
        Other technical reestimate.......................  .......  .......        3      -83      172     -383   -2,158      560  .......    3,678    2,005
      College housing and academic facilities loans......  .......  .......  .......  .......  .......  .......  .......       -1  .......  .......  .......

    Homeland Security:
      Disaster assistance................................  .......  .......  .......  .......  .......  .......       47       36       -7       -6        *

    Interior:
      Bureau of Reclamation loans........................  .......  .......  .......  .......  .......  .......        3        3       -9      -14  .......
      Bureau of Indian Affairs direct loans..............  .......  .......  .......  .......  .......        1        5       -1       -1        2        *
      Assistance to American Samoa.......................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        *

    Transportation:
      High priority corridor loans.......................  .......  .......  .......  .......       -3  .......  .......  .......  .......  .......  .......
      Alameda corridor loan..............................  .......  .......  .......  .......  .......  .......      -58  .......  .......  .......      -50
      Transportation infrastructure finance and            .......  .......  .......  .......  .......  .......  .......       18  .......  .......       -4
       innovation........................................
      Railroad rehabilitation and improvement program....  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -5

    Treasury:
      Community development financial institutions fund..  .......  .......  .......  .......  .......  .......        1  .......  .......        *       -2

    Veterans Affairs:
      Veterans housing benefit program fund..............      -39       30       76      -72      465     -111      -52     -107     -697       17     -178
      Native American veteran housing....................  .......  .......  .......  .......  .......  .......  .......  .......  .......       -3        *
      Vocational rehabilitation loans....................  .......  .......  .......  .......  .......  .......  .......  .......  .......        *        *

    Environmental Protection Agency:
      Abatement, control and compliance..................  .......  .......  .......  .......  .......  .......  .......        3       -1        *       -3

    General Services Administration:
      Columbia hospital for women........................  .......  .......  .......  .......  .......  .......  .......  .......       -6  .......  .......

    International Assistance Programs:
      Foreign military financing.........................  .......  .......  .......       13        4        1      152     -166      119     -397      -64
      U.S. Agency for International Development:
        Micro and small enterprise development...........  .......  .......  .......  .......  .......  .......  .......  .......        *  .......        *
      Overseas Private Investment Corporation:
        OPIC direct loans................................  .......  .......  .......  .......  .......  .......  .......  .......  .......       -4      -21
      Debt reduction.....................................  .......  .......  .......  .......  .......  .......       36       -4  .......        *      -48

    Small Business Administration:
      Business loans.....................................  .......  .......  .......  .......  .......  .......  .......        1       -2        1  .......
      Disaster loans.....................................  .......  .......  .......  .......     -193      246     -398     -282      -14      266      624

    Other Independent Agencies:
      Export-Import Bank direct loans....................      -28      -16       37  .......  .......  .......     -177      157      117     -640     -353
      Federal Communications Commission spectrum auction.  .......  .......  .......  .......    4,592      980   -1,501     -804       92      346      380

    [[Page 101]]

                       LOAN GUARANTEES:

    Agriculture:
      Agriculture credit insurance fund..................        5       14       12      -51       96  .......      -31      205       40      -36      -32
      Agriculture resource conservation demonstration      .......  .......  .......  .......  .......  .......  .......        2  .......        1        *
       project...........................................
      Commodity Credit Corporation export guarantees.....        3      103     -426      343  .......  .......  .......   -1,410  .......      -13     -431
      Rural development insurance fund...................       49  .......  .......       -3  .......  .......  .......  .......  .......  .......  .......
      Rural housing insurance fund.......................        2       10        7      -10  .......      109  .......      152      -56       32  .......
      Rural community advancement program \2\............  .......  .......  .......      -10  .......       41  .......       63       17       91  .......

    Commerce:
      Fisheries finance..................................  .......  .......  .......  .......       -2  .......  .......       -3       -1        3        *
      Emergency steel guaranteed loans...................  .......  .......  .......  .......  .......  .......  .......  .......  .......       50        *
      Emergency oil and gas guaranteed loans.............  .......  .......  .......  .......  .......  .......  .......        *        *        *        *

    Defense:
      Military housing improvement fund..................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -2
      Defense export loan guarantee......................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -4

    Education:
      Federal family education loan program: \3\
        Volume reestimate................................  .......  .......      535       99  .......      -13      -60      -42  .......      277  .......
        Other technical reestimate.......................       97      421       60  .......  .......     -140      667   -3,484  .......   -2,483   -3,278

    Health and Human Services:
      Heath center loan guarantees.......................  .......  .......  .......  .......  .......  .......        3  .......        *        *        *
      Health education assistance loans..................  .......  .......  .......  .......  .......  .......  .......  .......  .......       -5      -37

    Housing and Urban Development:
      Indian housing loan guarantee......................  .......  .......  .......  .......  .......  .......  .......       -6        *       -1        *
      Title VI Indian guarantees.........................  .......  .......  .......  .......  .......  .......  .......  .......  .......       -1        1
      Community development loan guarantees..............  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       19
      FHA-mutual mortgage insurance......................  .......  .......  .......     -340  .......    3,789  .......    2,413   -1,308    1,100    5,947
      FHA-general and special risk.......................     -175  .......     -110      -25      743       79  .......     -217     -403       77      351

    Interior:
      Bureau of Indian Affairs guaranteed loans..........  .......  .......  .......       31  .......  .......  .......      -14       -1       -2       -1

    Transportation:
      Maritime guaranteed loans (title XI)...............  .......  .......  .......  .......  .......      -71       30      -15      187       27      -16
      Minority business resource center..................  .......  .......  .......  .......  .......  .......  .......  .......        1  .......        *

    Treasury:
      Air transportation stabilization program...........  .......  .......  .......  .......  .......  .......  .......  .......  .......      113     -199

    Veterans Affairs:
      Veterans housing benefit fund program..............     -447      167      334     -706       38      492      229     -770     -163     -184   -1,547

    International Assistance Programs:
      U.S. Agency for International Development:
        Development credit authority.....................  .......  .......  .......  .......  .......  .......  .......  .......       -1  .......        *
        Micro and small enterprise development...........  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        4
        Urban and environmental credit...................       -2       -1       -7  .......      -14  .......  .......  .......       -4      -15       48
        Assistance to the new independent states of the    .......  .......  .......  .......  .......  .......  .......  .......      -34  .......  .......
         former Soviet Union \4\.........................
        Loan guarantees to Israel........................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......      -76
      Overseas Private Investment Corporation:
        OPIC guaranteed loans............................  .......  .......  .......  .......  .......  .......  .......  .......        5       77       60

    Small Business Administration:
      Business loans.....................................  .......  .......      257      -16     -279     -545     -235     -528     -226      304    1,750

    Other Independent Agencies:
      Export-Import Bank guarantees......................      -11      -59       13  .......  .......  .......     -191   -1,520     -417   -2,042   -1,031
                                                          --------------------------------------------------------------------------------------------------
        Total............................................     -616      995      727     -832    5,642    4,518   -3,641   -6,427   -1,860     -142    3,083
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * Less than $500,000.
    \1\ Excludes interest on reestimates. Additional information on credit reform subsidy rates is contained in the Federal Credit Supplement.
    \2\ Includes rural water and waste disposal, rural community facilities, and rural business and industry programs.
    \3\ Volume reestimates in mandatory loan guarantee programs represent a change in volume of loans disbursed in the prior years. These estimates are the
      result of guarantee programs where data from loan issuers on actual disbursements of loans are not received until after the close of the fiscal year.
    \4\ Closing reestimate executed in fiscal year 2002.

    [[Page 102]]

                                       Table 7-3.  DIRECT LOAN SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2003-2005
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2003 Actual                    2004 Enacted                  2005 Proposed
                                                                --------------------------------------------------------------------------------------------
                         Agency and Program                                 Subsidy                        Subsidy                        Subsidy
                                                                  Subsidy    budget     Loan     Subsidy    budget     Loan     Subsidy    budget     Loan
                                                                 rate \1\  authority   levels   rate \1\  authority   levels   rate \1\  authority   levels
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Agriculture:
      Agricultural credit insurance fund.......................     14.71        155     1,054     13.10        109       832      8.11         74       912
      Farm storage facility loans..............................      1.28          2       147      0.46  .........        82     -2.44         -2        82
      Rural community advancement program......................     10.00        104     1,040      1.96         30     1,532      7.85        102     1,300
      Rural electrification and telecommunications loans.......     -0.85        -38     4,454     -1.73        -76     4,404     -1.15        -35     3,035
      Rural telephone bank.....................................      1.38          2       168     -4.32         -7       174  ........  .........  ........
      Distance learning, telemedicine, and broadband program...      1.30          1        77      2.30         49     2,131      2.75          8       291
      Farm labor...............................................     49.02         30        61     42.73         18        42     47.06         20        42
      Rural housing insurance fund.............................     22.47        269     1,197     12.11        184     1,520     13.48        164     1,217
      Rural development loan fund..............................     48.26         19        40     43.27         17        40     46.38         16        34
      Rural economic development loans.........................     21.36          3        15     18.61          3        15     18.79          5        25
      Public law 480 title I...................................     62.84         51        81     78.90         30        38     86.42         26        30

    Commerce:
      Fisheries finance........................................     -5.52         -8       145     -2.44         -4       164    -13.33         -4        30

    Defense--Military:
      Family housing improvement fund..........................     21.71         28       129     69.23        153       221     34.22        181       529

    Education:
      College housing and academic facilities loans............  ........  .........       269  ........  .........       269  ........  .........       170
      Federal direct student loan program......................     -1.50       -318    21,205     -1.19       -250    21,013     -2.93       -648    22,287

    Homeland Security:
      Disaster assistance direct loan..........................     -4.10         -1        25     -2.02         -1        25     -2.60         -1        25

    Housing and Urban Development:
      FHA-mutual mortgage insurance............................  ........  .........        50  ........  .........        50  ........  .........        50
      FHA-general and special risk.............................  ........  .........        50  ........  .........        50  ........  .........        50

    State:
      Repatriation loans.......................................     80.00          1         1     70.75          1         1     69.73          1         1

    Transportation:
      Federal-aid highways.....................................      7.10         10       140      5.96        127     2,400      5.94        131     2,400

    Treasury:
      Community development financial institutions fund........     32.85          1         4     34.37          4        11     36.52          4        11

    Veterans Affairs:
      Vocational rehabilitation and employment administration..      1.50  .........         3      1.33  .........         4      1.14  .........         4
      Housing..................................................     -1.54         -7       566     -0.44         -5     1,135     -4.49        -77     1,715

    International Assistance Programs:
      Foreign military financing loan..........................  ........  .........     3,800     -0.05  .........       550  ........  .........  ........
      Debt restructuring.......................................  ........        211  ........  ........         59  ........  ........        105  ........
      Overseas Private Investment Corporation..................      4.97         20       394     16.78         24       143     17.12         19       111

    Small Business Administration:
      Disaster loans...........................................     15.21        117       769     11.72         56       758     12.86         79       614
      Business loans...........................................     13.05          4        29      9.55          2        20     10.25  .........  ........

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................      1.72          1        58     34.00         17        50     34.00         17        50
                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A        657    35,971       N/A        540    37,674       N/A        185    35,015
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    N/A = Not applicable.
    \1\  Additional information on credit subsidy rates is contained in the Federal Credit Supplement.

    [[Page 103]]

                                     Table 7-4.  LOAN GUARANTEE SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2003-2005
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2003 Actual                    2004 Enacted                  2005 Proposed
                                                                --------------------------------------------------------------------------------------------
                         Agency and Program                                 Subsidy                        Subsidy                        Subsidy
                                                                  Subsidy    budget     Loan     Subsidy    budget     Loan     Subsidy    budget     Loan
                                                                 rate \1\  authority   levels   rate \1\  authority   levels   rate \1\  authority   levels
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Agriculture:
      Agricultural credit insurance fund.......................      3.38         90     2,662      3.27         79     2,416      2.83         81     2,866
      Commodity Credit Corporation export loans................      4.10        170     4,146      6.96        289     4,155      6.82        309     4,528
      Rural community advancement program......................      3.28         35     1,067      2.99         25       837      3.28         29       885
      Rural electrification and telecommunications loans.......      0.08  .........  ........      0.06  .........        99      0.06  .........       100
      Distance learning, telemedicine, and broadband program...  ........  .........  ........      3.75          3        80      5.00          2        40
      Local television loan guarantee..........................  ........  .........  ........      8.46         44       520  ........  .........  ........
      Rural housing insurance fund.............................      1.22         39     3,186      1.64         46     2,808      1.31         37     2,825
      Rural business investment................................     20.00  .........  ........     20.00  .........  ........     20.00  .........  ........

    Commerce:
      Emergency steel guaranteed loan..........................     27.69         69       250  ........  .........  ........  ........  .........  ........

    Defense--Military:
      Procurement of ammunition, Army..........................      3.34          1        17      3.38          1        16  ........  .........  ........
      Family housing improvement fund..........................      3.70          7       189      1.54          4       259      9.65         14       145

    Education:
      Federal family education loan............................      9.57      6,411    66,976      9.19      6,501    70,760      9.47      7,050    71,349

    Health and Human Services:
      Health education assistance loans........................     15.76         16       100     16.48         25       150  ........  .........  ........
      Health resources and services............................      3.65          1         4      4.68          1        17      5.64          1        17

    Housing and Urban Development:
      Indian housing loan guarantee fund.......................      2.43          5       197      2.73          5       197      2.58          1        29
      Native Hawaiian housing loan guarantee fund..............      2.43          1        40      2.73          1        40      2.58          1        37
      Native American housing block grant......................     11.07          2        17     10.56          2        18     10.32          2        18
      Community development loan guarantees....................      2.30          6       275      2.30          6       275  ........  .........  ........
      FHA-mutual mortgage insurance............................     -2.53     -3,584   165,000     -2.47     -3,545   185,000     -1.73     -2,627   185,000
      FHA-general and special risk.............................     -1.02       -254    25,000     -1.17       -293    25,000     -0.69       -242    35,000

    Interior:
      Indian guaranteed loan...................................      6.91          5        72      6.13          5        84      6.76          5        86

    Transportation:
      Minority business resource center program................      2.69  .........         9      2.53  .........        18      2.08          1        18
      Federal-aid highways.....................................  ........  .........  ........      4.77         10       200      4.68          9       200
      Maritime guaranteed loan (title XI)......................      6.09         21       345      6.10         25       410      6.76         25       370

    Treasury:
      Air transportation stabilization \2\.....................     13.70        180     1,276     -8.93         -3        30  ........  .........  ........

    Veterans Affairs:
      Veterans housing benefit program.........................      0.83        547    66,074      0.58        275    47,312     -0.21        -86    41,829

    International Assistance Programs:
      Loan guarantees to Israel................................  ........  .........     1,600  ........  .........     3,460  ........  .........     3,650
      Development credit authority.............................      6.44         18       280      3.11         21       675      4.31         21       487
      Overseas Private Investment Corporation..................     -8.01        -57       712      1.81          5       276      0.49          3       615

    Small Business Administration:
      Business loans...........................................      0.77        118    15,318      0.38         79    20,986  ........  .........    29,000

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................      3.06        320    10,449      3.03        349    11,507      3.94        474    11,976

    Presidio Trust:
      Presidio Trust...........................................  ........  .........  ........      0.14  .........       200      0.05  .........  ........
                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A      4,167   365,261       N/A      3,960   377,805       N/A      5,110   391,070
                                                                --------------------------------------------------------------------------------------------
     ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS

    GNMA:
      Guarantees of mortgage-backed securities loan guarantee..     -0.33       -398   252,870     -0.27       -405   200,000     -0.23       -368   200,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    N/A = Not applicable.
    \1\  Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
    \2\ Numbers shown for 2004 include estimates for loan guarantees that have received either conditional or final approval. This presentation should not
      be construed as prejudging the outcome of the Air Transportation Stabilization Board's deliberations. The Board does not anticipate making any loan
      guarantees in 2005.

    [[Page 104]]

                                                 Table 7-5.  SUMMARY OF FEDERAL DIRECT LOANS AND LOAN GUARANTEES
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Actual                                                Estimate
                                               -------------------------------------------------------------------------------------------------------------
                                                   1996       1997       1998       1999       2000       2001       2002       2003       2004       2005
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Direct Loans:
      Obligations.............................       23.4       33.6       28.8       38.4       37.1       39.1       43.7       45.4       46.4       44.5
      Disbursements...........................       23.6       32.2       28.7       37.7       35.5       37.1       39.6       39.7       39.0       41.5
      New subsidy budget authority \2\........          *          *       -0.8        1.6       -0.4        0.3          *        0.7        0.5        0.2
      Reestimated subsidy budget authority \1\  .........  .........        7.3        1.0       -4.4       -1.8        0.5        2.9        2.3  .........
      Total subsidy budget authority \3\......        1.8        2.4        6.5        2.6       -4.8       -1.5        0.5        3.5        2.8        0.2

    Loan Guarantees:
      Commitments.............................      175.4      172.3      218.4      252.4      192.6      256.4      303.7      345.9      338.4      349.5
      Lender disbursements....................      143.9      144.7      199.5      224.7      180.8      212.9      271.4      331.3      318.1      333.5
      New subsidy budget authority \2\........          *          *        3.3          *        3.6        2.3        2.9        3.8        3.6        4.7
      Reestimated subsidy budget authority \1\  .........  .........       -0.7        4.3        0.3       -7.1       -2.4       -3.5        1.5  .........
      Total subsidy budget authority..........        4.0        3.6        2.6        4.3        3.9       -4.8        0.5        0.3        5.0        4.7
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * Less than $50 million.
    \1\ Includes interest on reestimate.
    \2\ Prior to 1998 new and reestimated subsidy budget authority were not reported separately.
    \3\ GNMA secondary guarantees of loans that are guaranteed by FHA, VA and RHS are excluded from the totals to avoid double-counting.

    [[Page 105]]

                     Table 7-6. DIRECT LOAN WRITE-OFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS
    ----------------------------------------------------------------------------------------------------------------
                                                        In millions of dollars       As a percentage of outstanding
                                                   --------------------------------             loans \1\
                  Agency and Program                                               ---------------------------------
                                                       2003       2004      2005       2003        2004       2005
                                                     actual     estimate  estimate   actual      estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
                 DIRECT LOAN WRITEOFFS

    Agriculture:
      Agricultural credit insurance fund..........        158        151       140        1.95       1.99       1.98
      Farm storage facility loans program.........          1          1  ........        0.54       0.44
      Rural community advancement program.........          5   ........  ........        0.07  .........  .........
      Rural electrification and telecommunications  ..........       109        98  ..........       0.34       0.29
       loans......................................
      Rural telephone bank........................  ..........  ........         3  ..........  .........       0.44
      Rural development insurance fund............          1          1         1        0.03       0.04       0.04
      Rural housing insurance fund................        153        142       135        0.57       0.54       0.53
      Rural development loan fund.................          1          1         1        0.25       0.24       0.23
      P.L.480.....................................         34   ........  ........        0.32  .........  .........
      Debt reduction (P.L.480)....................  ..........        29        37  ..........       6.44       6.85

    Commerce:
      Economic development revolving fund.........          1          1         1        3.84       4.54       5.55

    Education:
      Student financial assistance................          3          4         4        0.92       1.24       1.26

    Housing and Urban Development:
      Revolving fund (liquidating programs).......          1          1         1        8.33      16.66      25.00
      Guarantees of mortgage-backed securities....          3          4        21        2.91       3.47      16.53

    Interior:
      Indian direct loan..........................          2          2         2        3.92       4.44       5.12

    Labor:
      Pension Benefit Guaranty Corporation........          5         11        39  ..........  .........  .........

    State:
      Repatriation loans..........................  ..........         1  ........  ..........      33.33  .........

    Transportation:
      Railroad rehabilitation and improvement.....  ..........         2         4  ..........       0.85       0.98

    Treasury:
      Community development financial institutions  ..........  ........         1  ..........  .........       1.58
       fund.......................................

    Veterans Affairs:
      Veterans housing benefit program............         15         13        11        0.87       0.75       0.59

    International Assistance Programs:
      Military debt reduction.....................  ..........  ........        14  ..........  .........       5.83
      Debt reduction (AID)........................  ..........        19        13  ..........      10.61       7.64
      Overseas Private Investment Corporation.....  ..........         1         1  ..........       0.47       0.38

    Small Business Administration:
      Disaster loans..............................         47         43        43        1.39       1.35       1.18
      Business loans..............................         11         10         9        3.23       3.54       4.05

    Other Independent Agencies:
      Export-Import Bank..........................        570         48        45        5.17       0.47       0.48
      Debt reduction (ExIm Bank)..................         13         17        41        4.65       3.61       8.24
      Spectrum auction program....................         95   ........  ........        1.82  .........  .........
      Tennessee Valley Authority..................          1          1         1        2.08       1.81       1.63
                                                   -----------------------------------------------------------------
        Total, direct loan writeoffs..............      1,119        612       667        0.50       0.27       0.28
                                                   -----------------------------------------------------------------

       GUARANTEED LOAN TERMINATIONS FOR DEFAULT

    Agriculture:
      Agricultural credit insurance fund..........         92         77        80        0.92       0.73       0.72
      Commodity Credit Corporation export loans...        102        172       184        2.38       3.81       3.27
      Rural community advancement program.........         72         60        55        1.66       1.36       1.27
      Rural electrification and telecommunications  ..........         6         6  ..........       0.57       0.37
       loans......................................
      Rural development insurance fund............         27   ........  ........       41.53  .........  .........
      Rural housing insurance fund................        170        117       121        1.25       0.85       0.87

    Commerce:
      Emergency oil and gas guaranteed loan         ..........         1  ........  ..........     100.00  .........
       program....................................
      Emergency steel guaranteed loan program.....  ..........        32        12  ..........      15.53       5.74

    Defense--Military:
      Family housing improvement fund.............  ..........         3         4  ..........       0.78       1.06

    [[Page 106]]

    Education:
      Federal family education loan...............      3,509      4,708     5,334        1.77       2.08       2.12

    Health and Human Services:
      Health education assistance loans...........         56         58        58        2.42       2.43       2.44

    Housing and Urban Development:
      Indian housing loan guarantee...............  ..........         1         1  ..........       1.56       1.38
      Title VI Indian Federal guarantees program..  ..........         1         1  ..........       1.36       1.25
      FHA--Mutual mortgage insurance..............      7,410      4,681     4,533        1.69       1.08       0.90
      FHA--General and special risk...............      1,740      1,903     1,773        1.87       2.13       1.90

    Interior:
      Indian guaranteed loan......................          1          1         1        0.38       0.32       0.28

    Transportation:
      Maritime guaranteed loan (Title XI).........  ..........        30        35  ..........       0.81       0.87

    Treasury:
      Air transportation stabilization............  ..........       448        60  ..........      29.35       5.18

    Veterans Affairs:
      Veterans housing benefit program............      1,345      2,917     3,016        0.45       0.85       0.79

    International Assistance Programs:
      Foreign military financing..................  ..........         3        11  ..........       0.09       0.37
      Micro and small enterprise development......          3          1         1        7.69       1.81       1.33
      Urban and environmental credit program......         54         41        42        2.71       2.23       2.49
      Development credit authority................  ..........         1         1  ..........       1.11       0.56
      Overseas Private Investment Corporation.....         33         45        45        0.99       1.37       1.27

    Small Business Administration:
      Business loans..............................      1,255      2,325     1,272        2.65       4.19       2.03
      Pollution control equipment.................  ..........         1         1  ..........      16.66      33.33

    Other Independent Agencies:
      Export-Import Bank..........................        215        368       391        0.66       1.07       1.11
                                                   -----------------------------------------------------------------
        Total, guaranteed loan terminations for        16,084     18,001    17,038        0.95       1.02       0.87
         default..................................
                                                   -----------------------------------------------------------------
        Total, direct loan writeoffs and               17,203     18,613    17,705        0.90       0.94       0.81
         guaranteed loan terminations.............
                                                   =================================================================

      ADDENDUM: WRITEOFFS OF DEFAULTED GUARANTEED
         LOANS THAT RESULT IN LOANS RECEIVABLE

    Agriculture:
      Agricultural credit insurance fund..........          1          1         1       11.11      11.11      11.11

    Commerce:
      Fisheries finance...........................         13   ........  ........       28.26  .........  .........

    Education:
      Federal family education loan...............        213        196       198        1.16       1.08       1.05

    Health and Human Services:
      Health education assistance loans...........         26         24        24        2.93       2.68       2.65

    Housing and Urban Development:
      FHA--Mutual mortgage insurance..............          2   ........  ........        1.63  .........  .........
      FHA--General and special risk...............        309        362       354       10.61      11.06       9.43

    Interior:
      Indian guaranteed loan......................         18          3  ........       51.42      13.63  .........

    Treasury:
      Air transportation stabilization............  ..........  ........       383  ..........  .........     150.78

    Veterans Affairs:
      Veterans housing benefit program............         87         83        95        7.63       6.87       6.97

    International Assistance Programs:
      Urban and environmental credit program......         40   ........  ........        8.43  .........  .........

    Small Business Administration:
      Business loans..............................        543        302       574       28.10       9.98      14.33
                                                   -----------------------------------------------------------------
        Total, writeoffs of loans receivable......      1,252        971     1,629        3.93       2.83       4.46
    ----------------------------------------------------------------------------------------------------------------
    \1\ Average of loans outstanding for the year.

    [[Page 107]]

                          Table 7-7.  APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                   Estimate
                              Agency and Program                                2003     ---------------------------
                                                                              Actual          2004          2005
    ----------------------------------------------------------------------------------------------------------------
                            DIRECT LOAN OBLIGATIONS

    Agriculture:
      Agricultural credit insurance fund..................................         1,006           844           937
      Distance learning, telemedicine, and broadband......................           300           898           291
      Rural electrification and telecommunications........................         4,454         4,404         3,035
      Rural telephone bank................................................           172           174  ............
      Rural water and waste disposal direct loans.........................           789         1,032         1,000
      Rural housing insurance fund........................................         1,260         1,563         1,259
      Rural community facility direct loans...............................           255           500           300
      Rural economic development..........................................            15            15            25
      Rural development loan fund.........................................            40            40            34
      P.L. 480 direct credit..............................................            44            38            30

    Commerce:
      Fisheries finance...................................................            24            24            30

    Education:
      Historically black college and university capital financing.........           269           269           170

    Homeland Security:
      Disaster Assistance Direct Loan Financing Account...................            25            25            25

    Housing and Urban Development:
      FHA-general and special risk........................................            50            50            50
      FHA-mutual mortgage insurance.......................................            50            50            50

    Interior:
      Assistance to American Samoa........................................             1             1             1

    State:
      Repatriation loans..................................................             1             1             1

    Transportation:
      Transportation infrastructure finance and innovation program........         2,200         2,200         2,200
      Transportation infrastructure finance and innovation program line of           200           200           200
       credit.............................................................

    Treasury:
      Community development financial institutions fund...................            11            11            11

    Veterans Affairs:
      Native American and transitional housing............................  ............            50            30
      Vocational rehabilitation and education.............................             3             4             4

    International Assistance Programs:
      Foreign military financing..........................................         3,800           550  ............
      Military debt reduction.............................................  ............            32  ............

    Small Business Administration:
      Business loans......................................................            25            20  ............
                                                                           -----------------------------------------
        Total, limitations on direct loan obligations.....................        14,994        12,995         9,683
                                                                           -----------------------------------------

                          LOAN GUARANTEE COMMITMENTS

    Agriculture:
      Agricultural credit insurance fund..................................         2,766         2,401         2,866
      Rural electrification and telecommunications guaranteed loans.......  ............           100           100
      Rural water and waste water disposal guaranteed loans...............            75            75            75
      Distance learning and telemedicine..................................  ............  ............            40
      Rural housing insurance fund........................................         3,186         2,809         2,825
      Rural community facility guaranteed loans...........................           210           210           210
      Rural business and industry guaranteed loans........................           845           552           600

    Defense--Military:
      Arms initiative.....................................................            17            16  ............

    Health and Human Services:
      Health education assistance loans...................................           160           150  ............

    Housing and Urban Development:
      Indian housing loan guarantee fund..................................           197           197            29
      Title VI Indian Federal guarantees..................................            17            18            18
      Native Hawaiian housing loan guarantee fund.........................            40            40            37
      Community development loan guarantees...............................           273           273  ............

    [[Page 108]]

      FHA-general and special risk........................................        25,000        25,000        35,000
      FHA-mutual mortgage insurance.......................................       165,000       185,000       185,000

    Interior:
      Indian loan guarantee...............................................            72            84            86

    Transportation:
      Minority business resource center...................................            18            18            18
      Transportation infrastructure finance and innovation program loan              200           200           200
       guarantee..........................................................

    International Assistance Programs:
      Loan guarantees to Israel...........................................         3,000         3,000         3,000
      Development credit authority........................................  ............           700           700

    Small Business Administration:
      Business guarantee..................................................        15,318        20,986        29,000
                                                                           -----------------------------------------
        Total, limitations on loan guarantee commitments..................       216,394       241,829       259,804
                                                                           =========================================

          ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS

    Housing and Urban Development:
      Guarantees of mortgage-backed securities............................       200,000       200,000       200,000
                                                                           -----------------------------------------
        Total, limitations on secondary guaranteed loan commitments.......       200,000       200,000       200,000
    ----------------------------------------------------------------------------------------------------------------
    \1\ Data represents loan level limitations enacted or proposed to be enacted in appropriation acts. For
      information on actual and estimated loan levels supportable by new subsidy budget authority requested, see
      Tables 7-3 and 7-4.

    [[Page 109]]

      Table 7-8.  FACE VALUE OF GOVERNMENT-SPONSORED ENTERPRISE LENDING \2\
                            (In billions of dollars)
    ------------------------------------------------------------------------
                                                          Outstanding
                                                 ---------------------------
                                                      2002          2003
    ------------------------------------------------------------------------
        Government Sponsored Enterprises: \1\
    Fannie Mae\1\...............................         1,689         2,086
    Freddie Mac \2\.............................         1,255           N/A
    Federal Home Loan Banks \3\.................           524           758
    Sallie Mae \4\..............................  ............  ............
    Farm Credit System..........................            83            86
      Total \2\.................................         3,551           N/A
    ------------------------------------------------------------------------
    N/A = Not applicable.

    \1\ Net of purchases of federally guaranteed loans.
    \2\ 2003 financial data for Freddie Mac is not presented here because
      the company has not yet reported financial results for 2003. In
      addition, on November 21, 2003, Freddie Mac announced the results of
      its restatement of previously issued consolidated financial statements
      for the years 2000 and 2001 and the first three quarters of 2002 and
      the revision of fourth quarter and full-year consolidated financial
      statements for 2002 (collectively referred to as the ``restatement'').
      This restatement has changed the data provided last year in the 2004
      Budget. Restated data for 2002 has not yet been audited.
    \3\ The lending by the Federal Home Loan Banks measures their advances
      to member thrift and other financial institutions. In addition, their
      investment in private financial instruments at the end of 2003 was
      $186 billion, including federally guaranteed securities, GSE
      securities, and money market instruments. The change between 2002 and
      2003 is not comparable because of discontinuity in the data series.
    \4\ The face value and Federal costs of Federal Family Education Loans
      in the Student Loan Marketing Association's portfolio are included in
      the totals for that program under guaranteed loans in table 7-1.

    [[Page 110]]

      Table 7-9  LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
                                   (GSEs) 1,2
                            (In millions of dollars)
    ------------------------------------------------------------------------
                           Enterprise                              2003
    ------------------------------------------------------------------------
    Student Loan Marketing Association:
        Net change.........................................          -14,009
        Outstandings.......................................           27,923

    Federal National Mortgage Association:
      Portfolio programs:
        Net change.........................................          162,939
        Outstandings.......................................          922,672
      Mortgage-backed securities:
        Net change.........................................          220,989
        Outstandings.......................................        1,210,263

    Federal Home Loan Mortgage Corporation: \1\
      Portfolio programs:
        Net change.........................................              N/A
        Outstandings.......................................              N/A
      Mortgage-backed securities:
        Net change.........................................              N/A
        Outstandings.......................................              N/A

    Farm Credit System:
      Agricultural credit bank:
        Net change.........................................            2,997
        Outstandings.......................................           23,463
      Farm credit banks:
        Net change.........................................              188
        Outstandings.......................................           58,353
      Federal Agricultural Mortgage Corporation:
        Net change.........................................  ...............
        Outstandings.......................................            6,000

    Federal Home Loan Banks:
        Net change.........................................          232,687
        Outstandings.......................................          770,499

    Less guaranteed loans purchased by:
      Student Loan Marketing Association:
        Net change.........................................          -14,009
        Outstandings.......................................           27,923
      Federal National Mortgage Association:
        Net change.........................................          -12,843
        Outstandings.......................................           47,300
      Other:
        Net change \3\.....................................              N/A
        Outstandings \1\...................................           13,897

                           BORROWING

    Student Loan Marketing Association:
        Net change.........................................          -18,899
        Outstandings.......................................           26,821

    Federal National Mortgage Association:
      Portfolio programs:
        Net change.........................................          175,479
        Outstandings.......................................          975,734
      Mortgage-backed securities:
        Net change.........................................          220,989
        Outstandings.......................................        1,210,263

    Federal Home Loan Mortgage Corporation: \1\
      Portfolio programs:
        Net change.........................................              N/A
        Outstandings.......................................              N/A
      Mortgage-backed securities:
        Net change.........................................              N/A
        Outstandings.......................................              N/A

    Farm Credit System:
      Agricultural credit bank:
        Net change.........................................            3,938
        Outstandings.......................................           26,451

    [[Page 111]]

      Farm credit banks:
        Net change.........................................            4,255
        Outstandings.......................................           68,049
      Federal Agricultural Mortgage Corporation:
        Net change.........................................              764
        Outstandings.......................................            3,838

    Federal Home Loan Banks:
        Net change.........................................           49,325
        Outstandings.......................................          716,886

                           DEDUCTIONS

    Less borrowing from other GSEs:
        Net change \3\.....................................              N/A
        Outstandings \1\...................................           78,370
    Less purchase of Federal debt securities:
        Net change \3\.....................................              N/A
        Outstandings \1\...................................            3,094
    Less borrowing to purchase loans guaranteed by:
      Student Loan Marketing Association:
        Net change.........................................          -14,009
        Outstandings.......................................           27,923
      Federal National Mortgage Association:
        Net change.........................................          -12,843
        Outstandings.......................................           47,300
      Other:
        Net change \3\.....................................              N/A
        Outstandings \1\...................................           13,897
    ------------------------------------------------------------------------
    N/A = Not applicable.

    The estimates of borrowing and lending were developed by the GSEs based
      on certain assumptions that are subject to periodic review and
      revision and do not represent official GSE forecasts of future
      activity, nor are they reviewed by the President. The data for all
      years include programs of mortgage-backed securities. In cases where a
      GSE owns securities issued by the same GSE, including mortgage-backed
      securities, the borrowing and lending data for that GSE are adjusted
      to remove double-counting.

    \1\ Financial data for Freddie Mac is not presented here because the
      company has not yet reported financial results for 2003. In addition,
      on November 21, 2003, Freddie Mac announced the results of its
      restatement of previously issued consolidated financial statements for
      the years 2000 and 2001 and the first three quarters of 2002 and the
      revision of fourth quarter and full-year consolidated financial
      statements for 2002 (collectively referred to as the ``restatement'').
      This restatement has changed the data provided last year in the 2004
      Budget. Restated data for 2002 has not yet been audited.
    \2\ Totals and subtotals have not been calculated because a substantial
      portion of the total, Freddie Mac, is subject to the above-described
      restatement.
    \3\ Not calculated due to discontinuity in the data series.