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