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

    [[Page 85]]

                             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 2004, there were $219
    billion in Federal direct loans outstanding and $1,231 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 GSE
    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
    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 were gauged by 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 discusses Federal credit programs and GSEs
              in four sectors: housing, education, business and community
              development, and exports. The discussions focus on program
              objectives, recent developments, performance, and future plans
              for each program.
        The final section reviews 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

      In most cases, private lending and insurance companies efficiently
    meet societal demands by allocating resources to the most productive
    uses. Market imperfections, however, can cause inadequate provision of
    credit or insurance in some sectors. Federal credit and insurance
    programs improve economic efficiency if they effectively fill the gaps
    created by market imperfections. On the other hand, Federal credit and
    insurance programs that have little to do with correcting market
    imperfections may be ineffective, or can even be counter-productive;
    they may simply do what the private sector would have done in their
    absence, or interfere with what the private sector would have done
    better. Federal credit and insurance programs also help disadvantaged
    groups. This role alone, however, may not be enough to justify credit
    and insurance programs. For the purpose of helping disadvantaged groups,
    direct subsidies are generally more effective and less distortionary.
      Market imperfections that can justify Federal intervention include
    insufficient information, limited ability to secure resources, imperfect
    competition, and externalities.
      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.
      Limited Ability to Secure Resources. The ability of private entities
    to absorb losses is more limited than

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    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. Private entities also face
    some liquidity constraints. Small lenders operating in a local market,
    for example, 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. If the lack of competition forces some borrowers to pay
    excessively high interest on loans, Government credit programs aiming to
    increase the availability of credit and lower the borrowing cost in
    those markets may improve economic efficiency.
      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 optimal in activities that generate positive externalities
    and more in activities that generate negative externalities. Federal
    programs can address externalities by influencing individuals'
    incentives.

    Effects of Changing Financial Markets

      Financial markets have become much more efficient, thanks to
    technological advances and financial services deregulation. By
    facilitating the gathering and processing of information and lowering
    transaction costs, technological advances have significantly contributed
    to improving the screening of credit and insurance applicants, enhancing
    liquidity, refining risk management, and spurring competition.
    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.
      These changes have reduced market imperfections, and hence 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. As a result, the
    private market is more willing and able to serve the populations
    traditionally targeted by Federal programs. The benefits of
    technological advances and deregulation, however, have been uneven
    across sectors and populations. To remain effective, therefore, Federal
    credit and insurance programs need to focus more narrowly on those
    sectors that have been less affected by financial evolution and those
    populations that still have difficulty in obtaining credit from private
    lenders. The Federal Government also needs to pay more attention to new
    challenges introduced by financial evolution and other economic
    developments. Even those changes that are beneficial overall often bring
    new risks and challenges.
      The Federal role of alleviating the information problem is generally
    not as important as it once was. Nowadays, lenders and insurers have
    easy access to large databases, powerful computing devices, and
    sophisticated analytical models. This advancement in communication and
    information processing technology enables lenders to evaluate the risk
    of borrowers more objectively and accurately. As a result, creditworthy
    borrowers are less likely to be turned down, while high-risk borrowers
    are less likely to be approved for credit. The improvement, however, may
    be uneven across sectors. The prevalence of credit scoring (an automated
    process that converts relevant borrower characteristics into a numerical
    score indicating creditworthiness) is a good sign that the information
    problem is not serious. Credit scoring is widely applied to home
    mortgages and consumer loans, but for small business loans and
    agricultural loans, its application is largely limited to small loans.
    Credit scoring is still difficult to apply to some borrowers with unique
    characteristics that are difficult to standardize.
      Financial evolution has also alleviated resource constraints faced by
    private entities. Advanced financial instruments have enabled lenders
    and insurers to manage risks more effectively and secure needed funds
    more easily. Thus, it is less likely that a large potential loss
    discourages an insurer from offering an actuarially fair contract or
    that the lack of liquid funds prevents a lender from lending to
    creditworthy borrowers. 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. The extent of risk
    sharing in this way, however, 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, thanks to
    financial deregulation and improved communication technology. Financial
    deregulation removed geographic and industry barriers to competition. As
    a result, major financial holding companies offer both banking and
    insurance products nationwide. Internet-based financial services have
    lowered the cost of financial transactions and reduced the importance of
    physical location. These developments have been particularly

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    more beneficial to small and geographically isolated customers, as lower
    transaction costs make it easier to offer good prices to small
    customers. In addition, there are more financing alternatives for both
    commercial and individual borrowers that used to rely heavily on banks.
    Many 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. Venture capital has become a much more important financing
    source for small businesses. Finance companies have gained market shares
    both in business and consumer financing.
      Problems related to externalities may persist because the price
    mechanisms that drive the private market ignore the value of
    externalities. Externalities, however, are a general market failure,
    rather than a financial market failure. Thus, credit and insurance
    programs are not necessarily the best means to address externalities,
    and their effectiveness should be compared with other forms of
    Government intervention, such as tax incentives and grants. In
    particular, if a credit program was initially intended to address
    multiple problems including externalities, and those other problems have
    been alleviated, then there may be a better way to address the remaining
    externalities.
      Overall, the financial market has become more efficient and safer.
    Financial evolution and other economic developments, however, are often
    accompanied by new risks. In addition, security-related risks
    unexpectedly emerged in recent years, prompting Government intervention.
    Federal agencies need to be vigilant to identify and manage new risks to
    the Budget. For example, financial derivatives enable their users either
    to decrease or to increase risk exposure. If some beneficiaries of
    Federal programs use financial derivatives to take more risk, the costs
    of Federal programs, especially insurance programs, can rise sharply.
    The sheer size of some financial institutions has also created a new
    risk. While well-diversified institutions are generally safer, even a
    single failure of a large private institution or a GSE, such as Fannie
    Mae, Freddie Mac, and Federal Home Loan Banks could shake the entire
    financial market. A more visible risk today is the Pension Benefit
    Guaranty Corporation (PBGC) of the Department of Labor. PBGC is facing
    serious financial challenges due to unfavorable economic conditions in
    recent years and to flaws in program structure.
      The September 11 attacks have increased security-related risks. The
    Federal Government had to intervene, due to the reluctance of private
    insurers to offer sufficient coverage. Managing insurance programs
    covering security-related risks is challenging because 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 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.

    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. The
    overall rating (effective, moderately effective, adequate, ineffective,
    or results not demonstrated) is determined based on the numerical scores
    and some other factors.

                                                 SUMMARY OF PART SCORES
    ----------------------------------------------------------------------------------------------------------------
                                                                          Purpose
                                                                            and     Strategic    Program    Program
                                                                           Design    Planning  Management   Results
    ----------------------------------------------------------------------------------------------------------------

    Credit and Insurance Programs
      Average..........................................................      0.773       0681       0.853      0.541
      Standard Deviation...............................................      0.207      0.222       0.215      0.165

    Other Programs (all others excluding credit and insurance programs)
      Average..........................................................      0.865      0.723       0.805      0.463
      Standard Deviation...............................................       0185      0.246       0.185      0.269
    ----------------------------------------------------------------------------------------------------------------

      There are 23 credit programs (defined as those involving repayment
    obligations) and 3 insurance programs among 607 programs that have been
    rated by the PART. For the group as a whole, credit and insurance
    programs have fairly similar PART scores to those for other programs
    (see Table ``Summary of PART Scores''). When appropriately weighted,
    higher scores for credit and insurance programs in two categories are
    roughly offset by lower scores in the other two categories. The overall
    ratings for credit and insurance programs, however, are more clustered
    around the middle; the rating of ``adequate'' is much more common for
    credit and insurance programs (48 percent, compared with 25 percent for
    other programs), while the ratings of ``effective'' (4 percent, compared
    with 15 percent for other programs) and ``results not demonstrated''

    [[Page 88]]

    (15 percent, compared with 30 percent for other programs) are rarer. The
    clustering around the middle suggests that most credit and insurance
    programs make useful contributions, but need to improve their
    effectiveness.
      Across categories, credit and insurance programs show some
    similarities to other types of programs. For most programs that have
    been rated by the PART, 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
    results.
      The PART indicates that most credit and insurance programs have clear
    purposes. Many 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 flawed designs limiting their
    effectiveness and efficiency. Flawed designs are generally correctable.
    If some programs have become redundant or duplicative of the private
    sector's activities due to financial evolution, however, those programs
    need to be reviewed carefully. They may need to be refocused on
    activities that have been affected less by financial evolution, or to be
    discontinued.
      In the program management category, while most credit and insurance
    programs are strong in basic financial and accounting practices, such as
    spending funds for intended purposes, some programs show weaknesses in
    more sophisticated financial management, such as cost control. Overall,
    credit and insurance programs are somewhat better in financial
    management than other programs. Given that these programs deal with
    highly complex financial problems, however, credit and insurance
    programs may still need to make significant improvements and show
    superior performance in financial management.
      Program results, the most important category of performance, are a
    weak area for credit and insurance programs, as well as for some other
    programs assessed by the PART. A particularly troubling indication from
    detailed analyses is that many credit and insurance programs show
    deficiencies in 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. Most
    credit programs are also intended to address imperfections in financial
    markets. These common features are discussed in relation to 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. Understanding common features
    should help to interpret PART results and to devise adequate steps to
    improve performance.
      Program purpose and design. Program purposes vary widely across credit
    programs. They include increasing homeownership, increasing the number
    of 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, changes in financial markets may have
    significantly affected the usefulness of some credit programs. Examining
    the effect of financial evolution may be a critical part of achieving
    effective reforms.
      Credit programs share many critical elements of design. They try to
    correct imperfections in financial markets by making credit available to
    those borrowers who would not be able to obtain credit at reasonable
    cost without government assistance. To target the right borrowers, the
    program design needs to takes into account various factors, such as
    borrowers' incentives, accessibility, the state of financial markets,
    and general economic conditions. Credit programs also need to deal with
    many complexities, such as screening borrowers, servicing loans, and
    collecting defaulted loans. Given these complexities, most credit
    programs may benefit from the private sector's expertise. To be
    effective, however, partnership with the private sector should be
    designed such that the private partner's profit is closely tied to its
    contribution to increasing the program's effectiveness and efficiency.
    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.
      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
    maximum efficiency, program managers need to 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 find themselves serving a
    narrower pool of riskier customers and need to adjust their policies and
    cost estimates accordingly. Quickly adopting new technologies is also
    important, because financial institutions are increasingly applying
    advanced technologies to risk management. Falling behind, Federal credit
    and insurance programs can be left with much riskier customers as
    private entities attract better-risk customers away from Federal
    programs.
      Program management. Credit programs face some unique challenges. To
    assess how credit programs manage the challenges, the PART adds two
    extra items for credit programs; one item addresses managing risks and
    the other addresses estimating the program's cost and risk. Credit
    programs share similar risks as does the lending business. To manage
    those risks effectively,

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    program managers need to monitor the credit quality of loans and
    practice tight financial management. For credit programs, accurately
    estimating the program cost is a critical element of effective
    management. The cashflow is uncertain for credit programs; some loans
    default, while some others are prepaid. Thus, the program cost must be
    estimated based on the expected default, prepayment, and recovery rates.
    An inaccurate estimation would result in inadequate budgeting and
    incorrect program evaluation.
      Some other management issues are more important, though not unique,
    for credit programs than they are for other programs. Data collection,
    for example, is critical for effective risk management and accurate cost
    estimation. Effective risk management requires accurate and timely
    information on loan performance. The key ingredients of predicting loan
    performance are loan performance histories and detailed data on borrower
    and lender characteristics.
      Program Results. The main difficulty in evaluating program performance
    is measuring the net outcome of the program (improvement in the intended
    outcome net of what would have occurred in the absence of the program).
    Suppose that an education program is intended to increase the number of
    college graduates. Although it is straightforward to measure the number
    of college graduates who were assisted by the program, it is difficult
    to tell how many of those would not have obtained a college degree
    without the program's assistance. Credit programs face an additional
    difficulty of estimating the program cost accurately. In evaluating
    programs, the outcome must be weighed against the cost. In the above
    example, the ultimate measure of effectiveness is not the net number of
    college graduates produced by the program but the net number per Federal
    dollar spent on the program. Thus, an inaccurate cost estimation would
    lead to incorrect program evaluation; an underestimation
    (overestimation) of the cost would make the program appear unduly
    effective (ineffective). Results for credit programs need to be
    interpreted in conjunction with the accuracy of cost estimation.
      The net outcome of a credit program can change quickly because it
    depends on the state of financial markets, which are very dynamic. 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. Thus, the effect of financial evolution
    needs to be analyzed carefully. A sub-par performance by a credit
    program could be related to financial market developments; the program
    might have failed to adapt to rapid changes in financial markets, or its
    function might have become obsolete due to financial evolution. The
    program should be restructured in the former case, and discontinued in
    the latter case.
    ------------------------------------------------------------------------

                                           PART Cross-Cut for Credit Programs

    As one of the world's largest lenders, with a portfolio of nearly $1.5 trillion in direct loans and loan

    At the same time, the Government must ensure that it is effectively serving its intended borrowers. A number of
     credit program PART scores indicate that many agencies lack the data, processes, or overall understanding of
     the credit lifecycle (origination, loan servicing/lender monitoring, liquidation, and debt collection) to
     achieve these dual, and occasionally conflicting, goals.

    Over the next year, OMB will conduct a PART cross-cut examining the major credit agencies' programs. This effort
     will be supported by a Credit Council comprised of OMB and agency representatives. The Council will identify
     agency and private sector best practices that can be implemented across the major credit agencies, leading to
     higher program and management efficiencies, budgetary savings, and improved PART scores.

    ------------------------------------------------------------------------

                          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.

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    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 two and a quarter years since the goal was announced,
    over 1.9 million minority families have become homeowners. HUD's Federal
    Housing Administration (FHA) accounted for over 400,000 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 traditional financial resources or
    credit history to qualify for a home mortgage in the conventional
    marketplace. In 2004, FHA insured $107 billion in mortgages for almost
    900 thousand households. Over 70 percent of these were people buying
    their first homes, many of whom were minorities.
      For 2006, 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 Incentives
    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 program was evaluated under the PART. The assessment found that
    the program is meeting its statutory objective to serve underserved
    borrowers while maintaining an adequate capital reserve. In 2004, 73
    percent of FHA-insured loans were to first-time homeowners, and 37
    percent were to minority homebuyers. However, the program lacks
    quantifiable annual and long-term performance goals which measure FHA's
    ability to achieve its statutory mission. In addition, the program's
    credit model does not accurately predict losses to the insurance fund,
    nor can FHA demonstrate its ability to reduce fraud in the program.
      In response to these findings, in 2006 FHA will establish performance
    goals for the percentage of FHA Single Family endorsements for first-
    time and minority homeowners, and performance goals for fraud detection
    and prevention. FHA will also continue development of a credit model
    that more accurately and reliably predicts claims costs.

    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 2004, VA provided
    $35 billion in guarantees to assist 270,571 borrowers.
      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. VA provided 109,493
    zero down payment loans in 2004.
      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 44
    percent of its 2004 interventions, and its goal is to achieve at least a
    47 percent success rate in 2006.

    Rural Housing Service

      The U.S. Department of Agriculture'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 (115 percent of
    median income or less) rural residents. The programs' emphasis is on
    reducing the number of rural residents living in substandard housing. In
    2004, over $4.5 billion in assistance was provided by RHS for
    homeownership loans and loan guarantees; $3.23 billion of guarantees
    went to 34,800 households, of which 30 percent went to very low- and
    low-income families (with income 80 percent or less than median area
    income).
      For the section 502 guaranteed loan program, the 2005 appropriation
    bill increased the guarantee fee on new loans to 2.0 percent. This was
    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. The guarantee fee for refinance loans remains 0.5 percent.
    The guarantee fees are expected to remain at the same rate in 2006.
    Funding in 2006 stands at $3 billion for purchase loans, and $225
    million for refinance loans.
      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 section 502 direct loans
    offer extraordinary assistance to lower-income homeowners by reducing
    the interest rate down to as low as 1 percent for such borrowers. The
    section 502 direct 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 direct program
    cost is balanced between interest subsidy and defaults. For 2006, RHS
    expects to provide $1.0 billion in loans with a subsidy cost of 11.39
    percent.
      RHS also offers multifamily rental housing loans, and loans and grants
    for farm labor housing. Direct loans are provided to private, public,
    and non-profit borrowers

    [[Page 91]]

    to construct, rehabilitate, and repair multi-family rental housing for
    very low- and low-income residents, either through general occupancy
    properties or elderly and handicapped housing. To help achieve
    affordable rents, the interest rate is subsidized to a level between 1
    and 2 percent. Many very low- and low-income residents' rents are
    further reduced to 30 percent of their adjusted income through rental
    assistance grants. During 2006, $641 million for Section 521 rental
    assistance will be directed primarily to continue existing commitments.
      RHS recently received a contracted study that addressed the
    preservation issues surrounding the over 40-year old program. A long-
    term initiative has been shaped to address the revitalization of the
    17,400-property portfolio. During 2006, $214 million will be directed to
    begin the revitalization initiative, primarily to transition existing
    residents in properties leaving the program. The $27 million loan
    program level for the direct rural rental housing will be used to
    address repair and rehabilitation needs of preservation worthy
    properties. Additionally, the farm labor housing combined grant and loan
    level will provide $56 million in 2006 for new construction as well as
    repair and rehabilitation. RHS also guarantees multifamily rental
    housing loans. RHS expects to be able to guarantee $200 million in loans
    for 2006, which is double the amount from 2005.

    Housing GSEs

      Fannie Mae and Freddie Mac were chartered by Congress to increase the
    liquidity of mortgages and to promote access to mortgage credit for
    groups that historically have been underserved by private markets.
    Fannie Mae and Freddie Mac do not participate directly in the
    origination of mortgages. They carry out their chartered mission
    primarily by purchasing residential mortgages or guaranteeing mortgage-
    backed securities (MBS) consisting of residential mortgages. The
    guaranteed MBS are held by investors, mortgage lenders, and increasingly
    by Fannie Mae and Freddie Mac themselves. Fannie Mae and Freddie Mac
    finance their acquisition of loans and MBS assets by issuing debt; both
    also charge fees to mortgage originators who exchange a pool of loans
    for MBS issued and guaranteed by one of the enterprises.
      As Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac
    have a unique status among private financial institutions. They are
    publicly held companies but were granted certain privileges to
    facilitate their chartered mission, including exemption from most state
    and local taxes and registration requirements with the Securities and
    Exchange Commission (SEC). Also, their debt and MBS may be held without
    limit by federally chartered depository institutions.
      Regulatory oversight of Fannie Mae and Freddie Mac is shared among
    multiple agencies across the Government. The Office of Federal Housing
    Enterprise Oversight (OFHEO), an independent agency in the Department of
    Housing and Urban Development (HUD), is the primary safety and soundness
    regulator of Fannie Mae and Freddie Mac. HUD is responsible for the
    establishment and enforcement of affordable housing goals for the
    enterprises, ensuring their compliance with fair housing laws and their
    charters, and reviewing new activities and programs in consultation with
    OFHEO. The Treasury Department has discretionary authority to approve or
    disapprove the issuance of the GSEs' debt, and the SEC now regulates
    Fannie Mae under the Securities Exchange Act of 1934. Freddie Mac has
    not yet registered under the 1934 Act, but has publicly committed to do
    so when able.
      The Federal Home Loan Bank System (FHLBS) was established by Congress
    to provide liquidity to home mortgage lenders who are members of the
    individual Banks. The System comprises 12 separate, regional Federal
    Home Loan Banks (FHLBs, or Banks), each of which is a member-owned
    cooperative. The Banks issue debt for which the Banks are jointly and
    severally liable, and use the proceeds principally to make advances
    (secured loans) to their members. Member institutions primarily secure
    advances with residential mortgages and other housing-related assets.
    Like Fannie Mae and Freddie Mac, the Banks have been granted special
    privileges as part of their Government charter, including exemption of
    their corporate earnings from Federal income tax and from State and
    local taxes. In addition, the Secretary of the Treasury has authority to
    purchase up to $4 billion of these entities' debt securities. In recent
    years, some FHLBs have begun to purchase mortgages from their members.
    At the end of 2003, the 12 FHLBs held about $115 billion of mortgages,
    equivalent to 7 percent of the combined total of $1.5 trillion held by
    Fannie Mae and Freddie Mac. In addition, as of 2003, the FHLBs held
    about $774 billion in debt, while Fannie Mae held $976 billion, and
    Freddie Mac held $757 billion.
      The Federal Housing Finance Board (FHFB) regulates the mission and the
    safety and soundness of the FHLBs. As it does with respect to Fannie Mae
    and Freddie Mac, the Treasury Department has discretionary authority
    over the issuance of FHLB debt. The FHFB recently required that the
    FHLBs register with the SEC, and registration is expected for most if
    not all of the FHLBs later this year.

    GSE Borrowing Advantage

      Their unique status enables all three housing GSEs to borrow at rates
    lower than investors would ordinarily accept, theoretically to pay
    higher prices to originating lenders for mortgages, and in the case of
    the FHLBs to make low-cost advances to member institutions. Although the
    prospectus for each GSE security clearly states that it is not backed by
    the U.S. Government, the misperception exists among many investors that
    the Government backs the GSEs. In 2004 the Congressional Budget Office
    estimated the implicit Federal subsidy to the three housing GSEs was $23
    billion during the previous year. A Federal Reserve study suggests

    [[Page 92]]

    that over one-half of the implicit subsidy to Fannie Mae and Freddie Mac
    accrues to the GSEs' shareholders.

    Risk

      As with all financial institutions, risk is inherent in the way the
    housing GSEs conduct their business. By assuming and managing some of
    the risks arising from mortgage lending, the GSEs generate some benefits
    for consumers and significant profits for their owners. However, the mix
    of benefits and risks varies depending on how the GSEs conduct their
    businesses.
      Credit Risk. By issuing and guaranteeing securities based on pools of
    mortgages they purchase from lenders, Fannie Mae and Freddie Mac assume
    some portion of credit risk, which enhances liquidity to the mortgage
    market and thereby reduces the cost of credit to borrowers. Fannie Mae
    and Freddie Mac control their credit risk by using underwriting
    standards to evaluate the mortgages they purchase for securitization.
    Their risk is further limited by statutory provisions that require
    private mortgage insurance or equivalent protection on high loan-to-
    value ratio mortgages. Credit losses for the enterprises, as a
    percentage of the face value of mortgages they purchased, averaged 5.4
    basis points for a fifteen-year period ending in 2002 and have been
    declining. Viewed in isolation, Fannie Mae and Freddie Mac's assumption
    of credit risk arising from guarantees of MBS held by other investors
    benefits the market and homebuyers while incurring a risk that is easily
    managed and well-understood.
      Interest Rate Risk. A more challenging form of risk arises from the
    effect that interest rate movements can have on portfolios of mortgages
    and mortgage-backed securities. Interest rate risk arises from the
    changing market values of the GSEs' interest-sensitive assets and
    liabilities. Interest rate movements can cause the interest margins
    between their mortgage and other assets and their liabilities to grow or
    shrink, potentially changing the mark-to-market value of their equity
    capital and estimated future earnings dramatically in a short period.
    Historically, the FHLBs assumed interest rate risk by issuing debt and
    using the proceeds to make loans, often of comparable maturities, to
    member institutions to support their mortgage lending and other
    investments; this risk is somewhat mitigated since they often require
    prepayment penalties on advances to member institutions. Much more
    recently, however, some of the Banks have created mortgage purchase
    programs that assume interest rate risk for pools of mortgages.
      Fannie Mae, and more recently Freddie Mac, have built large portfolios
    of mortgages and repurchased MBS. However, by choosing to borrow
    substantially in order to build large retained portfolios of mortgages
    and mortgage-backed securities, they assume a different, more
    challenging set of risks and increase the complexity of their
    operations. Their ability to repurchase large volumes of their own MBS
    is driven by their ability to finance these mortgages with lower-cost
    debt than other investors, thanks to market misperceptions of a unique
    status for the enterprises that allow them to borrow at lower rates.
    Federal Reserve economists have found no evidence that these repurchases
    provide any additional benefit to borrowers. They clearly provide an
    opportunity for the GSEs to increase their earnings, however.

    [[Page 93]]

      At the end of 2003, Fannie Mae's retained portfolio as a percentage of
    its MBS outstanding (held by others) was 69.4 percent, or almost $900
    billion; Freddie Mac's retained portfolio as a percentage of MBS
    outstanding was 78.1 percent, or over $600 billion. In periods of
    declining interest rates, mortgage refinancings increase, so higher-
    yielding mortgages prepay, exposing holders of these mortgages or
    securities based on them to the risk of having to reinvest these funds
    at lower rates. As Federal Reserve Chairman Greenspan has noted, Fannie
    Mae and Freddie Mac have chosen not to offset the interest rate risk
    arising from their portfolio operations by increasing capital but to
    attempt to manage that risk by issuing callable debt and by purchasing
    derivative financial instruments, such as interest rate swaps and
    options on swaps. For example, they might hedge fixed-rate mortgages,
    which drop in value when interest rates increase, using derivative
    instruments that increase in value under the same scenario. The
    techniques necessary to manage interest rate risk and its potential
    effect on earnings are complex, and their management becomes
    increasingly difficult with increases in the size and complexity of the
    portfolio to be managed. Chairman Greenspan has also noted that the
    sophistication of the operations required to hedge prepayment risk with
    little capital places an enormous burden on these institutions.
      Like other financial institutions, the housing GSEs attempt to limit
    their interest rate exposure and the effect of interest rate movements
    on their earnings. Chairman Greenspan has suggested statutory limits on
    the dollar amount of the debt held by Fannie Mae and Freddie Mac
    relative to the dollar amounts of mortgages securitized and held by
    other investors, and limiting the ability of the FHLBs to hold mortgages
    and mortgage-backed securities directly, as additional ways to manage
    the interest rate risk of the GSEs.
      Operations risk. Recent events reinforced concerns over the risks
    posed by the GSEs and their existing regulatory framework. These events
    have illustrated how the burden of managing interest rate risk mixed
    with management deficiencies can lead to operational failings. In 2003,
    Freddie Mac reported that it had understated its earnings by $5 billion
    over three years, and eventually acknowledged substantial issues with
    accounting, management practices, and internal controls. OFHEO
    subsequently assessed substantial financial penalties on the company,
    and its senior management was replaced. A year-long investigation into
    the accounting, internal controls, and management practices at Fannie
    Mae by OFHEO led to findings of inappropriate accounting procedures and
    practices, internal control deficiencies, and questionable management
    oversight. The SEC concurred in the finding of inappropriate accounting
    practices and directed that Fannie restate its earnings for 2001-2004.
    These findings led Fannie Mae to replace its Chairman and CEO, and its
    CFO. The Enterprise estimated it would be forced to recognize $9 billion
    in losses, reducing its capital below the regulatory minimum
    requirement. During the same period, two of the twelve FHLBs entered
    into written agreements with FHFB that required review of operational
    practices and controls, announcing that their accounting practices
    needed revision and, in one instance, that earnings required
    restatement.
      These developments now reveal some of the ways that the assumption of
    large-scale interest rate risk complicates the operational challenges
    facing the GSEs. The techniques necessary to manage interest rate risk
    and its potential effect on earnings are complex, and their management
    becomes increasingly difficult with increases in the size and complexity
    of the portfolio to be managed. While other large financial institutions
    may face similar challenges, the management of interest rate risk and
    operations risk is a particular challenge for the GSEs, given their
    size, regulatory structure, and the lack of full market discipline.
      The rules governing accounting for derivatives likewise are complex.
    Interpreting and applying the accounting rules have posed challenges to
    companies that use derivatives. Out of concern that firms were using
    inconsistent methods to account for the use of derivatives to hedge
    interest rate risk and the potential that their use could obscure a
    company's true position or misrepresent earnings, in 1998 the Financial
    Accounting Standards Board (FASB) promulgated the rule known as FAS 133;
    it became effective in 2000. In part, this rule requires companies, with
    narrow exceptions, to reflect on their balance sheets the amount that
    derivatives rise or fall in value, even if derivatives contracts are
    still open and gains or losses are not yet locked in.
      In 2004, OFHEO found, and the SEC concurred, that Fannie did not
    adequately document its hedges and routinely violated FAS 133 in a
    number of ways. For example, Fannie Mae, in its treatment of hedges when
    it changed financial strategies and, with no new testing or proof of
    effectiveness, took derivatives that were initially paired with one
    liability, and paired them with another. The SEC also found that Fannie
    Mae failed to comply in material respects with FAS 133. At OFHEO's
    behest, Fannie Mae agreed to cease all hedge accounting that did not
    conform with FAS 133 by the first quarter of CY 2005, and to ensure
    going forward that all hedge accounting complies with this requirement.
    Fannie Mae has already stated that this correction will reduce its
    capital and its earnings by $9 billion from 2001 through mid-2004. This
    leaves Fannie Mae below the minimum regulatory capital requirement and
    subjects it to further regulatory actions. This follows upon the events
    of 2003, when Freddie Mac discovered substantial accounting and internal
    control issues, including issues with the application of FAS 133,
    leading to replacement of senior management and restatement of its
    financial statements over the 2000-2003 timeframe. The SEC and the
    Department of Justice have continued to investigate both Fannie Mae and
    Freddie Mac.
      During the same period, the FHFB announced a written agreement with
    the FHLB of Chicago which re

    [[Page 94]]

    sulted in a review of the Bank's accounting practices, changes to
    certain accounting methods under FAS 133, and subsequently, a delay in
    the Bank's issuance of its third quarter 2004 financial statements.
      The failure of Fannie Mae and Freddie Mac and, to a lesser extent, the
    FHLBs to account for the use of derivatives and hedges consistent with
    Generally Accepted Accounting Principles (GAAP) prompted their
    regulators to investigate for the presence of control deficiencies and
    weaknesses in corporate governance, which they have identified. Fannie
    Mae and Freddie Mac were cited within a nine-month period for serious
    and systemic operational control deficiencies that contributed in part
    to the need for massive earnings restatements. The cited deficiencies
    included management cultures that stressed earnings stability at the
    expense of other considerations, ineffective processes for developing
    accounting policies, and absence of independent internal controls for
    review of certain transactions. These developments highlight the risks
    inherent in the GSEs' operations, risks that because of their size and
    relationships with other institutions could have far-reaching effects
    should one of them falter.
      Systemic Risk. The risks undertaken by the GSEs, if not properly
    managed, may pose a threat to their solvency. Under some circumstances,
    they also may threaten the stability or solvency of other financial
    institutions and the economy. Current Federal law explicitly exempts the
    securities of the GSEs from the statutory limitation on commercial
    banks' investment in the ``investment securities'' of individual firms.
    In a February 2003 study conducted by OFHEO utilizing FDIC data, over
    2,000 commercial banks held at least 51 percent of their capital in the
    form of debt issued by Fannie Mae; and almost 1,000 commercial banks
    held at least 51 percent of their capital in the form of debt issued by
    Freddie Mac.
      Should a financial crisis affecting the GSEs and other financial
    actors develop, the market's misperception of Government backing of GSE
    securities could affect its course and resolution. A September 2004
    Federal Reserve Bank of Atlanta study indicated concern that severe
    stress to one of the GSEs might contribute to weakness in other
    financial institutions that hold significant GSE obligations, especially
    if the path to resolution of the crisis and the potential for Government
    intervention are misunderstood.
      The potential for systemic risk arising from the GSEs' size and their
    central role in mortgage markets combined with the difficulty of
    managing the risks inherent in a large mortgage portfolio raise
    fundamental questions about the value they add through their support for
    mortgage lending and reduced costs to borrowers relative to the risks
    their current operations pose. Some research by Federal Reserve
    economists suggests that GSE securitization activities have a relatively
    small effect on mortgage interest rates--just a few dollars a month on
    an average mortgage--and that their practice of holding mortgages in
    portfolio has almost no effect on mortgage costs. Instead of being
    leaders in increasing historically underserved groups' access to credit,
    the GSEs have actually trailed the market averages in a number of
    dimensions. The Administration has sought to narrow the gap by lessening
    the risks posed by the GSEs and increasing the benefits they offer to
    the public.

    Enhancing Safety and Soundness

      Events of the past year reinforced concerns over the risks posed by
    the GSEs and highlighted the need for meaningful GSE reform. A
    strengthened regulator would have the in-house expertise to monitor
    accounting methodology and to detect any problems, as well as the
    authority and expertise to monitor regulatory standards for the
    development and implementation of systems and controls. A strong
    regulator would also hold the authority to place a failing entity into
    receivership similar to that held by the other financial safety and
    soundness regulators.
      The Administration intends that any proposed new regulatory framework
    for the GSEs follows the principles for regulation of financial
    institutions established by the international Basel Committee,
    principles accepted throughout the world as requirements for first-class
    regulation. As described in the President's FY 2005 Budget, these
    principles involve increasing market discipline, strengthening
    supervision, and ensuring appropriate capital requirements.
      Market Discipline. Chief among the factors that guide a company in its
    decision-making is the discipline imposed by the market. Investors can
    discipline the GSEs to the extent that they have adequate information
    about their risks and financial condition. Current market discipline is
    hindered by a misperception that the Federal Government would back GSE
    securities in the event of a GSE default, and because GSE investors do
    not enjoy the same level of disclosure, or oversight of disclosures, as
    investors in other public companies. Ironically, at the times when
    investors would most benefit from detailed information about the
    enterprises' finances, they are left without adequate information for
    months or years.
      The Administration in 2002 called upon the three housing GSEs to
    register voluntarily their equity securities under the 1934 Securities
    Exchange Act. In June 2004, the FHFB adopted a final rule that will
    require each FHLB to register a class of its stock by June 30, 2005,
    leading to improved disclosures. Fannie Mae voluntarily registered and
    began filing disclosures with the SEC in 2003. However, because of its
    recent accounting problems, Fannie Mae is no longer able to provide
    these disclosures. Freddie Mac does not anticipate being in compliance
    with SEC standards before the second quarter of 2006. Since the GSEs are
    not subject to the same market discipline as other public companies,
    market discipline by itself is not always sufficient to ensure safety
    and soundness.
      Supervision. An effective financial regulator must possess authorities
    commensurate with its responsibilities and capabilities. The
    Administration determined

    [[Page 95]]

    that the safety and soundness regulators of the housing GSEs lack
    sufficient powers and stature to meet their responsibilities. The
    President's 2005 Budget reflected, therefore, that both OFHEO, regulator
    of Fannie Mae and Freddie Mac, and the FHFB, regulator of the FHLBS,
    should be replaced with a new, consolidated regulatory regime, empowered
    with expanded enforcement authority, receivership authority, and access
    to its funding independent of the annual appropriations process.
      A new regulator, like other Federal regulators of financial
    institutions, 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. It would have
    authority to review their ongoing business activities and reject new
    ones if they would be inconsistent with their charter or prudential
    operations or incompatible with the public interest. HUD would continue
    to be consulted on new activities in order to ensure that the GSEs are
    in compliance with their charters and that the GSEs carry out their
    public mission.
      Currently, the means by which the failure of a GSE could be resolved
    differs between Fannie Mae and Freddie Mac, on the one hand, and the
    FHLBs, on the other. In the case of a failed FHLB, the FHFB has power to
    liquidate such institution, subject to certain limitations relating to
    the whole number of Banks in the system. OFHEO, on the other hand, lacks
    the power to place an entity into bankruptcy or receivership.
      The Federal banking regulators have broad powers to place a failed
    institution into receivership, and to conduct the orderly wind-down of a
    failed bank in such a way that systemic disruption is minimized. Giving
    such uniform powers to a Federal regulator of GSEs could likewise help
    prevent dislocation in financial markets in the event of the insolvency
    of such an institution. Further, such powers would address any
    misperception that the GSEs are backed by the Government. By providing
    clarity to the markets that the GSEs (and their creditors) are subject
    to the same business risks as are other corporate entities, an even
    greater level of market discipline might be brought to bear on the GSEs'
    operations. In general, this type of market discipline has proven very
    effective in ensuring that businesses operate in a prudential, and safe
    and sound manner.
      Capital requirements. Because neither investors nor regulators can
    predict all 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
    unknown 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 unambiguous authority to
    adjust both risk-based and minimum capital requirements.

    Affordable Housing Mission

      One of the public purposes of the GSEs is to promote access to
    mortgage credit for low- and moderate income families. By law, HUD
    establishes annual affordable housing goals for Fannie Mae and Freddie
    Mac. In 2004, HUD established the affordable housing goals for Fannie
    Mae and Freddie Mac for 2005 through 2008. The low and moderate income
    goal will increase from 50 percent (of the minimum share of housing
    units financed by a GSE's mortgage purchases in a particular year) in
    2004 to 56 percent by 2008; the underserved areas goal will increase
    from 36 percent in 2004 to 39 percent by 2008; and the special
    affordable housing goal will increase from 20 percent in 2004 to 27
    percent by 2008.
      The table below shows how Fannie Mae and Freddie Mac have trailed the
    marketplace in lending to first-time minority homebuyers in the 2001-
    2003 timeframe. It is likely that, as a result of these new, higher
    goals, they will need to improve their efforts to reach out to low-
    income and minority first-time homebuyers.

          PERCENTAGE OF FANNIE MAE AND FREDDIE MAC LOANS TO FIRST-TIME MINORITY HOMEBUYERS COMPARED TO THE FULL
                                           MARKETPLACE, 2001-2003 AVERAGES \1\
    ----------------------------------------------------------------------------------------------------------------
                                                                          Fannie    Freddie              Full Market
                                                                           Mac        Mac     Both GSEs      \2\
    ----------------------------------------------------------------------------------------------------------------
    All Race/Ethnicity Groups.........................................      25.7%      26.1%      25.9%        39.1%

    African American and Hispanic.....................................       4.7%       3.5%       4.2%         9.0%

    All Minorities....................................................       7.5%       6.1%       6.9%        12.3%
    ----------------------------------------------------------------------------------------------------------------
     Source: Department of Housing and Urban Development.
    \1\ The first-time homebuyer definition for the market analysis is homebuyers who have never owned a home. The
      definition for the GSEs is purchasers who have not owned a home within the past three years. The percentages
      show first-time homebuyer mortgages by race/ethnicity category as a share of all home purchase mortgages
      purchased by the GSE or originated in the market.
    \2\ ``Market'' means conventional, conforming home purchase loans.

      With their growth as a share of the mortgage marketplace, Fannie Mae
    and Freddie Mac have faced increased market competition in the
    acquisition of mortgages and MBS; the increase in affordable housing
    goals and subgoals may mean that Fannie Mae and Freddie Mac must be more
    innovative or aggressive in purchasing loans that meet the goals
    classifications. They can do this in part by using a larger portion of
    the subsidy they enjoy as a result of their Government ties to support
    purchases of goals-qualifying loans.
      Part of the Administration's proposal for a strengthened regulatory
    framework would provide HUD with the authority to penalize Fannie Mae
    and Freedie Mac if they fail to reach the affordable housing goals.
    Current law does not permit the Secretary of HUD to impose timely and
    appropriate penalties for a GSE's failure to reach a goal.
      The FHLBs address their affordable housing obligations in a different
    fashion. For instance, by statute,

    [[Page 96]]

    each FHLB is assessed ten percent of its net income for support of
    affordable housing. This assessment enables each FHLB member to provide
    subsidized and other low-cost funding to create affordable rental and
    homeownership opportunities, and support for commercial and economic
    development activities that benefit low- and moderate-income
    neighborhoods.
      With their large subsidy, and with their substantial market share, the
    GSEs should lead the market in creating homeownership opportunities for
    less advantaged Americans. However, 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. One purpose of a stronger regulatory approach is to
    ensure that all three housing GSEs fulfill their charter obligations.

                       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), created
    in 1972 as a GSE to develop the secondary market for guaranteed student
    loans, has now been privatized.

    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 2006, over 9 million borrowers will receive over 15.1 million loans
    totaling over $95 billion. Of this amount, more than $62 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, 35 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 2006, FFEL lenders will make over 11.5 million loans
    totaling over $72 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 2006, the Direct
    Loan program will generate almost 3.6 million loans with a total value
    of nearly $23 billion, including over $7 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 Administration is strongly committed to the lender-based FFEL
    program and expects it to continue as the primary source of loans to
    students in the years ahead. In addition, the Administration will
    continue to maintain a DL program to ensure that no eligible student is
    denied access to student loans in the event a student or school cannot
    find a suitable lender.
      However, problems in the structures of the current student loan
    programs prevent them from meeting current policy and program
    objectives. Specifically, the Federal Government assumes almost all of
    the risk for the loans, while federal subsidies to intermediaries
    lenders and guaranty agencies are set high enough to allow the less
    efficient ones to generate a profit. These problems lead to unnecessary
    costs for taxpayers and prevent the program from achieving the
    efficiencies the market is designed to provide.
      The 2006 Budget proposes a package of reforms to both the FFEL and DL
    loan programs to achieve significant cost savings and improve
    effectiveness. These reforms will link subsidy payments for lenders and
    guaranty agencies more closely to their costs and will modify interest
    rates for borrowers who are no longer in school and have just
    consolidated their loans. The Budget achieves $34 billion in savings
    over ten years by cutting unnecessary subsidies and payments to lenders,
    state guaranty agencies, and loan consolidators, and by placing a larger
    share of the loan risks on lenders. These savings will be used to
    increase the Pell Grant maximum award, pay off the current $4 billion
    Pell shortfall, and improve benefits to students in school by increasing
    loan limits for first year students and extending the current favorable
    interest rate framework.

    Sallie Mae

      The Student Loan Marketing Association (Sallie Mae) was created as a
    shareholder-owned government sponsored enterprise (GSE) by the Education
    Amendments of 1972 to expand funds available for student loans by
    providing liquidity to lenders engaged in the Federal Family Education
    Loan Program (FFELP), formerly the

    [[Page 97]]

    guaranteed student loan program (GSLP). Sallie Mae was reorganized in
    1997 pursuant to the authority granted by the Student Loan Marketing
    Association Reorganization Act of 1996. Under the Reorganization Act,
    the GSE became a wholly owned subsidiary of SLM Corporation and was
    required to be wound down and liquidated by January 30, 2008. On June
    30, 2004, the SLM Corporation first purchased FFELP student loans
    through non-GSE affiliates and, as a result, the GSE was required by
    statute to terminate purchases of FFELP student loans. Accordingly, the
    GSE is no longer a source of liquidity for SLM Corporation for the
    purchase of student loans, and the GSE-related financing activities have
    primarily been limited to refinancing the remainder of its assets
    through non-GSE sources. As of September 2004, the Company had
    substantially completed the wind-down of the GSE and, on November 1,
    2004, SLM Corporation sent notices to the Secretary of Education and the
    Secretary of the Treasury that it intended to wind-down and dissolve the
    GSE on December 31, 2004 or as soon as practicable thereafter, three
    years in advance of the statutory deadline. The dissolution was
    completed on December 29, 2004.
      All GSE debt that remains outstanding upon completion of these wind-
    down activities will be defeased through the creation of a fully
    collateralized trust. The collateral, consisting of cash and financial
    instruments backed by the full faith and credit of the U.S. government,
    will generate cash flows that provide for the interest and principal
    obligations of the defeased debt.

             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) 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 2006 Budget requests $307 million, including administrative funds,
    for SBA to leverage more than $25 billion in financing for small
    businesses and disaster victims. The 7(a) General Business Loan program
    will support $16.5 billion in guaranteed loans while the 504 Certified
    Development Company program will support $5.5 billion in guaranteed
    loans. SBA will supplement the capital of Small Business Investment
    Companies (SBICs) with $3 billion in long-term loans for venture capital
    investments in small businesses.
      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 2004, while the number of small
    businesses served has grown from 43,748 to 81,133 during the same time
    period.

      2) Improving program and risk management

      Improving management by measuring and mitigating risks in SBA's $57
    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 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
    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
    estimate more accurately the cost of subsidizing small businesses.
    During 2003 and 2004, SBA followed through on its commitment to improve
    its accuracy in estimating the cost of its major credit programs by
    developing loan-level credit and reestimate models for the Section 504,
    Disaster, 7(a), and Secondary Market Guarantee programs. The 2006 Budget
    reflects net upward reestimates of the lifetime expected taxpayer costs
    for outstanding loans--of $408 million for the 7(a) program, $123
    million for the Section 504 program, $267 million for Disaster Loans,
    and $922 million for SBIC Participating Securities. A net downward
    reestimate of $60 million is also reflected for the SBIC Debentures
    program. The 2006 upward trend in reestimates generally reflects
    technical corrections to credit subsidy models (e.g., the 7(a) subsidy
    model failed to account for purchased interest on defaulted loans),
    higher interest rates and the agency's shift from

    [[Page 98]]

    the traditional approach (based on historical account activity) to the
    balances approach for performing reestimates. In adopting the balances
    approach, SBA uncovered that its historical records did not reconcile to
    the credit programs' asset and liability balances currently recorded
    with Treasury. SBA is working to improve its financial record keeping to
    mitigate future accounting discrepancies.
      Total budgetary cost increases over the past 3 years totaled $4.0
    billion ($3.1 billion in reestimates and $0.9 billion for interest on
    the reestimates) for existing SBA-guaranteed loans and $1.7 billion
    ($1.1 billion for reestimates and the remainder for interest on
    reestimates) for existing direct loans. While most of these budgetary
    cost increases related to the weak performance of the SBIC Participating
    Securities program and Disaster Loan asset sales, the agency's two
    largest business programs also generated significant budgetary cost
    increases for taxpayers. Over the three-year period, the net budgetary
    cost increase was $636 million for outstanding 7(a) guarantees ($330
    million in reestimates) and $180 million ($87 million in reestimates)
    for outstanding Section 504 guarantees.
      The 2006 Budget supports $3 billion in guaranteed venture capital
    investments for small businesses through the SBIC Debentures program,
    which provides credit financing to small business investment companies.
    However, the 2006 budget does not support new guaranteed investments for
    the Participating Securities program. Over ten years of operations, the
    Participating Securities program has realized and projected losses of
    approximately $2.2 billion out of $6.2 billion in disbursements. These
    losses reflect a structurally flawed program in which the Federal
    Government contributes up to two-thirds of investment capital but only
    receives up to ten percent of profits. Further, as the Program
    Assessment Rating Tool (PART) analysis revealed, SBICs do not have
    incentives to repay capital expeditiously, extending the Government's
    risk exposure. Rather than make new investments through this program,
    SBA will continue to improve efforts to monitor and mitigate risk in
    approximately $9 billion in commitments in the program's portfolio. The
    program had already ceased making new guaranteed investments on October
    1, 2004 because sufficient borrower fees to cover the program's costs
    were not enacted.

      3) Operating more efficiently

      To operate more efficiently, SBA is piloting an automated loan
    origination system for the Disaster Loan program. 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 2004, SBA implemented new
    procedures for Section 504 loan processing. Results have been positive
    with the average loan processing time reduced from four weeks to only a
    few days. In 2005, SBA will streamline its 7(a) loan origination
    functions. Similarly, SBA is also centralizing its loan liquidation
    functions for the Section 504 program and requiring intermediaries to
    assume increased liquidation responsibilities.

    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 2006 President's Budget is $1.5
    billion. These funds are available to communities of 10,000 or fewer
    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 percent of the project cost (it can be up to 75
    percent). 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 2006. USDA also provides grants, direct loans, and loan
    guarantees to assist rural businesses, including cooperatives, to
    increase employment and diversify the rural economy. In 2006, USDA
    proposes to provide $899 million in loan guarantees to rural businesses
    (these loans serve communities of 50,000 or less).
      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 2006, USDA expects to retain or create over 74,784 jobs
    through its business programs, which will be achieved primarily through
    the Business and Industry guarantee and the IRP loan programs.

    Electric and Telecommunications Loans

      USDA's Rural Utilities Service (RUS) programs provide loans for rural
    electrification, telecommunications, distance learning, telemedicine,
    and broadband, and also provide grants for distance learning and
    telemedicine. See the Budget Appendix for more information on these
    programs.
      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 is reviewing its current

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    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, USDA will require
    recertification of rural status for each electric and telecommunications
    borrower on the first loan request received in or after FY 2006 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.
      The Budget includes $2.5 billion in direct electric loans, $670
    million in direct telecommunications loans, $359 million in broadband
    loans and $25 million in DLT grants. The budget proposes blocking the
    mandatory broadband funding and providing discretionary funding. 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. RUS electric borrowers are expected to upgrade
    225 rural electric systems, which will benefit over 3.4 million
    customers. The telecommunications 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. DLT grants are expected to support
    the provision of distance learning facilities to 150 schools, libraries,
    and rural education centers and also to provide telemedicine equipment
    to 150 rural health care providers, benefiting millions of residents in
    rural America.
      The Administration proposes to establish the process and terms to
    implement a dissolution of the Rural Telephone Bank (RTB). Dissolution
    will allow the RTB to close as the demand for loans has been fulfilled
    through other sources. In addition, the stock holders will obtain a cash
    payout for their stock while removing this cumbersome program from the
    Government. This proposal avoids the privatization of a bank that will
    either fail or need continued Government support to remain in operation.

    Loans to Farmers

      The Farm Service Agency (FSA) assists low-income family farmers in
    starting and maintaining viable farming operations. Emphasis is placed
    on 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 to 3.6 percent in 2004, compared to
    4.7 percent in 2003. 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
    0.69 percent in 2004, as compared to 0.71 percent in 2003. 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.
      In 2004, FSA provided loans and loan guarantees to approximately
    26,000 family farmers totaling $3.1 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. The demand for FSA
    direct and guaranteed loans continues to be high due to crop/livestock
    price decreases and some regional production problems. In 2006, USDA's
    FSA proposes to make $3.8 billion in direct and guaranteed loans through
    discretionary programs.
      A PART evaluation conducted in 2004 showed that the FSA's direct loan
    program functions well in general. To improve program effectiveness
    further, FSA is 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 results of this review will assist FSA
    in improving the delivery of its services and the economic viability of
    farmers and ranchers.

    The Farm Credit System and Farmer Mac

      The Farm Credit System (FCS or System) and the Federal Agricultural
    Mortgage Corporation (FarmerMac) 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, related businesses, and
    rural homeowners, while Farmer Mac provides a secondary market for
    agricultural real estate and rural housing mortgages.

    The Farm Credit System

      During 2004, the financial condition of the System's banks and
    associations continued a 15-year trend of improving financial health and
    performance. As of September 30, 2004, capital increased 11.1 percent
    for the year and stood at $18.0 billion. These capital numbers exclude
    $2.1 billion of restricted capital held by the Farm Credit System
    Insurance Corporation (FCSIC). Loan volume has increased since 1989 to
    $94.9 billion in September 2004. The rate of asset growth for the
    preceding three-year period (2001-2003) has been averaging 7.4 percent.
    However, the rate of capital accumulation has been greater, resulting in
    total capital (in

    [[Page 100]]

    cluding restricted capital) equaling 16.2 percent of total assets at
    year-end 2003, compared to 15.3 percent at year-end 2000. Nonperforming
    loans decreased significantly to 0.88 percent of total loans in
    September 2004, compared to 1.38 percent in September 2003. Competitive
    pressures, higher balances of lower yielding investments, and a low
    interest rate environment have narrowed the FCS's year-to-date net
    interest margin to 2.52 percent for September 2004 from 2.62 percent in
    2003. The current interest rate environment and strong competition in
    the lending markets are likely to continue placing pressure on the net
    interest margin. Consolidation continues to affect the structure of the
    FCS. In January 1995, there were nine banks and 232 associations; by
    September 2004, there were five banks and 97 associations.
      The FCSIC ensures the timely payment of principal and interest on FCS
    obligations. FCSIC manages the Insurance Fund which
    supplements the System's capital and supports the joint and several
    liability of the System banks. On September 30, 2004 the Insurance
    Fund's net assets totaled $1.9 billion, of which $40 million was
    allocated to the Allocated Insurance Reserve Accounts (AIRAs) held for
    the System banks and the Financial Assistance Corporation's
    stockholders. Not including the AIRAs, the Insurance Fund was at 2.01
    percent of adjusted insured debt obligations of the System banks,
    slightly above the statutory minimum of 2 percent.
      Improvement in the FCS's financial condition is also reflected in the
    examinations by the Farm Credit Administration (FCA), its 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, no institutions were rated 5, and 26
    institutions were under enforcement action. In September 2004, all 102
    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
    $3.6 billion, or 3.9 percent, while over the past five years they have
    grown $25.2 billion, or 36.2 percent. The volume of lending secured by
    farmland increased 51.5 percent, while farm-operating loans have
    increased 34.7 percent since 1999. Agricultural producers represented
    the largest borrower group, with $76.9 billion including loans to rural
    homeowners and leases, or 81.1 percent of the dollar amount of loans
    outstanding. International loans (export financing) represent 3.0
    percent of the System's loan portfolio. Loans to young, beginning, and
    small farmers and ranchers represented 12.9, 18.7, and 31.8 percent,
    respectively, of the total dollar volume outstanding in 2003, which is
    slightly higher than in 2002. 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 a variety of risks, including concentration
    risk, possible changes to government programs, the volatility of
    agricultural exports and commodity prices, animal and plant diseases,
    and concerns about future off-farm employment prospects, given the
    trends in job outsourcing and global competition.

    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.
      Farmer Mac continues to meet core capital and regulatory risk-based
    capital requirements. Farmer Mac's total program activity (loans
    purchased and guaranteed, and AgVantage bonds purchased) as of September
    30, 2004, totaled $5.5 billion. That volume represents 1.8 percent
    reduction from program activity at September 30, 2003. Of total program
    activity, $2.2 billion were on-balance sheet loans and agricultural
    mortgage-backed securities and $3.3 billion were off-balance sheet
    obligations. Total assets were $3.8 billion at the close of the calendar
    third quarter, with non-program investments accounting for $1.4 billion
    of those assets. Farmer Mac's net income to common stockholders for the
    first three quarters of 2004 was $18.4 million, a decrease of $1.74
    million, or 8.7 percent from the same period in 2003.

                          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 agen

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    cies (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 without the lending. 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 (BIS) 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 finance 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

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    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 2006, 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 provide generally higher lending
    levels using lower appropriations in 2006.

    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.

                             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 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
    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 $3.6 trillion
    of deposits at 7,660 commercial banks and 1,365 savings institutions.
    NCUA insures about 9,113 credit unions with $495 billion in insured
    shares.

    Current Industry and Insurance Fund Conditions

      The bank industry continues to earn record profits. In the quarter
    ending September 30, 2004, banks reported record-high earnings for the
    sixth time in the last seven quarters. In fiscal year 2004, industry net
    income totaled $122 billion, an increase of 7 percent over fiscal year
    2003. The quality of loans continues to improve as net charge-offs fell
    to a four-year low. Despite the improving trends, some risks remain.
    Rising interest rates, for example, might cause stresses in certain
    real-estate markets and strains on banks in some regions.
      Only four BIF members and one SAIF member with a combined $175 million
    dollars in assets failed during fiscal year 2004. In comparison, in the
    last five years, assets associated with BIF failures have averaged $857
    million per year, while failures associated with SAIF averaged $455
    million. At the height of the banking crisis in 1989, failed assets rose
    to over $150 billion in one year. The FDIC currently classifies 95
    institutions with $25 billion in assets as ``problem institutions,''
    compared to 116 institutions with $30 billion in assets a year ago.
      In fiscal year 2004, the reserve ratio (ratio of insurance reserves to
    insured deposits) of BIF stayed above the 1.25-percent statutory target.
    As of September 30, 2004, BIF had estimated reserves of $34 billion, or
    1.32 percent of insured deposits. Factors that helped BIF stay above the
    statutory target in fiscal year 2004 include fewer bank failures, slow
    growth of insured deposits, and increases in unrealized gains on
    securities available for sale. The SAIF reserve ratio also remained
    above the designated reserve ratio throughout the year.

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    As of September 30, 2004, SAIF had reserves of $12.5 billion, or 1.33
    percent of insured deposits. Through June 30, 2005, 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 2004.
      During 2004, 22 Federally insured credit unions with $120 million in
    assets failed (including assisted mergers). In comparison, in 2003, 8
    Federally insured credit unions with $25 million in assets failed. The
    National Credit Union Share Insurance Fund (NCUSIF) ended fiscal year
    2004 with assets of $6.3 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
    2004 because the ratio stayed above 1.25 percent. As the Fund's equity
    ratio did not exceed 1.30 percent, NCUA did not provide a dividend to
    credit unions in fiscal year 2004.
      The Federal banking regulators (the Federal Deposit Insurance
    Corporation, the Office of the Comptroller of the Currency, the Office
    of Thrift Supervision, and the Federal Reserve) are planning a
    rulemaking that would implement the new Basel Capital Accord (Basel II).
    The original Basel Capital Accord is an international agreement
    establishing a uniform capital standard across nations. It adopted a
    risk-based capital requirement that applies differing risk weights to a
    few broad categories of assets. Basel II proposes several ways to
    improve the risk-based capital requirement, including refining risk
    categories and applying sophisticated models calculating the risk of
    various assets. U.S. regulators are considering implementing the model-
    based capital requirement for the largest banks (about 20) that have
    complex financial structures and expertise to apply sophisticated
    models. The new capital requirement would be a major change because
    those banks hold the overwhelming majority of U.S. banking assets.
      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 Congress a proposal that would accomplish this objective.
    Specifically, the proposal would merge the BIF and the SAIF. A single
    merged fund would be stronger and better diversified than either fund
    alone and would prevent the possibility that institutions posing similar
    risks would again 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 1.25 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 reduce potential pro-cyclical
    effects by stabilizing industry costs over time and avoiding sharp
    premium increases when the economy may 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 increase their
    insured deposits rapidly 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 pro

    [[Page 104]]

    tections include, where necessary, initiating plan termination. Under
    its Early Warning Program, PBGC negotiates settlements with companies
    that reduce losses in the event the plan terminates.
      PBGC's single-employer program suffered record annual losses from
    underfunded plan terminations in 2001 through 2004. As a result of these
    record losses, the program's deficit at FY 2004 year-end stood at $23.3
    billion, compared to $11.2 billion a year earlier and a $9.7 billion
    surplus at FY 2000 year-end. Large underfunded terminations include: in
    FY 2002, LTV, a steel company, with a claim of nearly $2 billion, which
    was PBGC's largest to date; in FY 2003, Bethlehem Steel, with a claim of
    about $3.6 billion, National Steel, and US Airways' Pilots Plan; and in
    FY 2004, Kaiser Aluminum's Salaried Plan, Pillowtex, and Weirton Steel.
    More important in FY 2004 than claims for completed terminations was the
    increase in claims for ``probable'' terminations to $16.9 billion from
    $5.2 billion in FY 2003.
      Additional risk and exposure may remain for the future because of
    economic uncertainties and significant underfunding in single-employer
    pension plans, which exceed an estimated $450 billion at fiscal year-
    end, compared to $350 billion at the end of FY 2003 and $50 billion at
    the end of December 2000. PBGC's exposure to ``reasonably possible''
    terminations, the amount of unfunded vested benefits in pension plans
    sponsored by companies at greater risk of default, stood at $96 billion
    at the end of December 2003, up from $82 billion a year earlier.
      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. The deficit fell to $236 million in 2004. However, estimated
    underfunding in multiemployer plans approximated $150 billion at year-
    end, up from over $100 billion at the end of FY 2003.
      With assets of $39 billion, the agency can meet its obligations for a
    number of years into the future, but, with $62 billion of liabilities in
    the single-employer program, it is clear that the financial integrity of
    the federal pension insurance program is at risk.
      Looking to the long term, to avoid benefit reductions, strengthen
    PBGC, and help stabilize the defined-benefit pension system, the 2006
    Budget proposes legislative reforms to:

        Require employers to fully fund their plans by making up
              their funding shortfall over a reasonable period of time and
              give companies added flexibility to contribute more in good
              economic times.
        Require that funding be based on a more accurate measure of
              liabilities and establish appropriate funding targets based on
              a plan's risk of termination.
        Update the variable-rate premium to reflect the new funding
              targets and provide for the PBGC Board to reexamine it
              periodically to cover the cost of expected claims and to
              improve PBGC's financial position; and adjust the flat-rate
              premium to reflect the growth in worker wages.
        Require employers to forego benefit increases if the sponsor
              is financially weak or has a significantly underfunded pension
              plan.
        Require plans to provide timely information on the true
              financial health of pension plans to workers and make such
              information publicly available to other stakeholders.

      The Administration's comprehensive reforms will strengthen funding for
    workers' defined-benefit pensions; provide more accurate information
    about pension liabilities and plan underfunding; and ensure PBGC's
    continued ability to safeguard pension benefits for 44 million
    Americans.

                               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
    4.9 million policies from more than 19,000 communities with $828 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 85,000 policies in 2004, bringing
    the policy total to 4.5 million. 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 that are located in flood plains and have
    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.

    [[Page 105]]

      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. The Flood Insurance Reform Act of
    2004 defines the criteria that qualify these repetitively-damaged
    properties for special mitigation. The legislation also extended the
    NFIP's authority through September 30, 2008. 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
    is in the process of evaluating 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, 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
    on reinsurance provided by the Federal Government and also by the
    commercial reinsurance market to manage their individual risk portfolio.
    The Federal Government 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.
    The Agricultural Risk Protection Act of 2000 (ARPA) increased premium
    subsidy levels to encourage farmers to purchase higher and more
    effective levels of coverage.
      RMA renegotiated the Standard Reinsurance Agreement (SRA) in 2004. The
    SRA contains the operational and financial risk sharing terms between
    the Federal Government and the private companies. The ARPA allowed these
    terms to be renegotiated once between the 2001 and 2005 reinsurance
    years. RMA utilized this opportunity to strengthen the document to
    address such issues as company oversight and quality control. As a
    result of these negotiations, company administrative expense
    reimbursements were reduced by approximately 3 percent, and a 5 percent
    net book quota share was introduced to better balance profit potential
    between the companies and the Federal Government. The new SRA is
    expected to generate annual program cost savings of approximately $36
    million.
      In addition to these changes, the 2006 Budget includes a legislative
    proposal that would require any farmer that receives a Federal commodity
    payment for his/her crop to buy crop insurance at a minimum coverage
    level of 50/100. This proposal is intended to ensure farmers have
    adequate protection in the event of a natural disaster without resorting
    to ad hoc disaster assistance. Additionally, the Administration's
    proposal will lower the imputed premium on Catastrophic Crop Insurance
    (CAT) by 25 percent and charge an administrative fee on CAT equal to the
    greater of $100 or 25 percent of the (restated) imputed CAT premium,
    subject to a maximum fee of $5,000. The proposal will also reduce
    premium subsidies by 5 percentage points on policies with a coverage
    level of 70 percent or below (75 percent for Group Risk Protection
    (GRP)) and by 2 percentage point on policies with a coverage level of 75
    percent or above (80 percent for GRP). Plus the proposal reduces the A&O
    reimbursement on all buy-up coverage by 2 percentage points and
    increases the net book quota share to 22 percent, but provides a ceding
    commision to the companies of 2 percent. These changes are expected to
    be in effect in 2007 and will save $140 million a year.
      There are various types of insurance programs. The most basic type of
    coverage is CAT, which compensates the farmer for losses in excess of 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 an 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 CAT coverage level.
    Premium rates for additional coverage depend on the level of coverage
    selected and vary from

    [[Page 106]]

    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 82 percent of eligible acres
    participated in one or more crop insurance programs in 2004.
      For producers purchasing the additional levels of insurance, there are
    a wide range of yield- and revenue-based insurance products available
    through the Federal 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. Revenue products have gained wide acceptance among
    producers and have played an integral role in providing more effective
    risk management options for the nation's agricultural producers. In crop
    year 2004, these revenue products accounted for over 52 percent of all
    policies earning premium, 59 percent of net insured acres, and 55
    percent of total program liability.
      USDA also continues to expand coverage. In 2004, a sugar beet stage
    removal pilot program was introduced. In addition, approval was given to
    a pilot program of crop insurance for Silage Sorghum in two states and
    to make Adjusted Gross Revenue-Lite available in five additional states,
    both effective for the 2005 crop year. USDA also expanded the
    availability of the Livestock Risk Protection plan of insurance to
    additional states and for additional types of livestock. Further, RMA
    has issued 4 contracts for development of new risk management tools for
    pasture, rangeland and forage. ARPA directed FCIC to establish the
    development of a pasture, rangeland and forage program as one of its
    highest research and development priorities. RMA continues to pursue a
    number of avenues to increase program participation among underserved
    states and commodities.
      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 smooth
    functioning of our economy that the Federal Government insure against
    some security-related risks until the private sector learns enough to be
    comfortable about estimating those risks.

    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 established 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 is scheduled to 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 was required to determine whether to extend this
    requirement into the third and final year of the program. On June 18,
    2004, the Secretary of the Treasury announced his decision to extend the
    ``make available'' requirement through the third and final year. The Act
    also requires as a condition 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 terrorist attack on private businesses and others
    covered by this program, insurance companies will cover 100 percent of
    the insured losses up to each insurance company's deductible as
    specified in the Act. Insured losses above that amount would then be
    shared between the insurance company and the Treasury, with Treasury
    covering 90 percent of the losses above the insurance 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. At that point, the Act explains that
    Congress will determine

    [[Page 107]]

    the procedures and source of any further payments. The Act also provides
    authority for the Treasury to recoup Federal payments via surcharges on
    policyholders. Certain recoupment is mandatory, based on insurance
    marketplace aggregate annual retention amounts specified in the enabling
    statute. In other circumstances, the Act authorizes optional recoupment.
      Treasury has created a separate Terrorism Risk Insurance Program
    office to implement the Act, which has included setting up an
    infrastructure to handle potential claims under the Act. In order to be
    ready to make payments under the Act, Treasury has: 1) finalized all of
    the regulations necessary for the submission and payment of potential
    claims under the Act; 2) contracted with a claims management contractor
    and an auditor to assist with the processing and verification of
    potential claims; and 3) established a web-based claims facility. The
    Act also requires Treasury to conduct a study on the effectiveness of
    the program and to report the results to the Congress by June 30, 2005.
    Treasury has been conducting a comprehensive survey of insurers,
    reinsurers, and policyholders as part of that study.

    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. 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. Under
    Presidential Determination No. 01-29, the President delegated the
    authority to extend the duration of aviation insurance to the Secretary
    of Transportation. Starting in 2001, insurance coverage was initially
    provided in 60-day increments, but Presidential Determination Nos. 2004-
    9 and 2005-15 subsequently extended the allowable period of insurance up
    to one year.
      The Homeland Security Act of 2002 included airline war risk insurance
    legislation. This law mandated an extended term for third-party war risk
    coverage and expanded the scope of coverage to include war risk hull,
    passenger and 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. The
    2003 Department of Defense supplemental appropriation (P.L. 108-11), the
    Century of Aviation Reauthorization Act (P.L. 108-176, Vision 100), and
    the Consolidated Appropriations Act of 2005 (P.L. 108-447) ultimately
    extended the mandatory provision of insurance through August 31, 2005.
    Consequently, in December 2004, the President issued Presidential
    Determination 2005-15, authorizing the continued provision of insurance
    now in force through August 31, 2005, and the DOT issued policies to
    conform to that date. The basic authority of the insurance program
    extends through March 30, 2008
      Currently 75 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 2004, the fund collected approximately $180
    million in premiums for insurance provided by DOT. In 2005, it is
    anticipated that $109 million in premiums will be collected by DOT for
    the provision of insurance. At the end of 2004, the balance of the
    Aviation Insurance Revolving Fund available for future claim payments
    was $401 million. The Federal Government would pay any claims by the
    airlines that exceed the balance in the aviation insurance revolving
    fund.

    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 108]]

    [[Page 109]]

                        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                            2003           2003           2004           2004
                                                                       Outstanding \1\               Outstanding \1\
    ----------------------------------------------------------------------------------------------------------------
    Direct Loans: \2\
      Federal Student Loan Programs.....................          102              10           107               8
      Farm Service Agency (excl. CCC), Rural                       44              11            43              10
       Development, Rural Housing.......................
      Rural Utilities Service and Rural Telephone Bank..           32               3            32               3
      Housing and Urban Development.....................           13               3            13               3
      Agency for International Development..............            9               4             8               3
      Public Law 480....................................           11               7             9               5
      Export-Import Bank................................           11               4            11               5
      Commodity Credit Corporation......................            7               3             7               3
      Federal Communications Commission.................            5               1             4               4
      Disaster Assistance...............................            3               1             3               1
      Other Direct Loan Programs........................           12  ...............           13               2
                                                         -----------------------------------------------------------
        Total Direct Loans..............................          249              47           250              47
                                                         -----------------------------------------------------------
    Guaranteed Loans: \2\
      FHA Mutual Mortgage Insurance Fund................          407               2           384               1
      VA Mortgage.......................................          323               5           351               4
      Federal Family Education Loan Program.............          213              15           245              23
      FHA General/Special Risk Insurance Fund...........           89               4            91               4
      Government National Mortgage Association (GNMA)     ...........               *   ...........               *
       \3\..............................................
      Small Business....................................           53               2            57               2
      Export-Import Bank................................           34               3            36               2
      International Assistance..........................           19               2            21               2
      Farm Service Agency and Rural Housing.............           24               1            24               1
      Commodity Credit Corporation......................            4               *             4               *
      Air Transportation Stabilization Program..........            2               1             2               1
      Other Guaranteed Loan Programs....................           16               1            17               3
                                                         -----------------------------------------------------------
        Total Guaranteed Loans..........................        1,184              36         1,232              43
                                                         -----------------------------------------------------------
          Total Federal Credit..........................        1,907              83         1,935              90
    ----------------------------------------------------------------------------------------------------------------
     *$500 million or less.
    \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.
    \3\ GNMA outstandings are excluded from the totals because they are secondary guarantees on loans guaranteed by
      FHA, VA and RHS.

    [[Page 110]]

                                      Table 7-2.  REESTIMATES OF CREDIT SUBSIDIES ON LOANS DISBURSED BETWEEN 1992-2004 \1\
                                                     (Budget authority and outlays, in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                       Program                      1994     1995     1996     1997     1998     1999     2000     2001     2002     2003     2004     2005
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                    DIRECT LOANS:

    Agriculture:
      Agriculture credit insurance fund.........      -72       28        2      -31       23  .......      331     -656      921       10     -701     -147
      Farm storage facility loans...............  .......  .......  .......  .......  .......  .......  .......  .......       -1       -7       -8        7
      Apple loans...............................  .......  .......  .......  .......  .......  .......  .......  .......       -2        1  .......        *
      Emergency boll weevil loan................  .......  .......  .......  .......  .......  .......  .......  .......  .......        1        *  .......
      Agricultural conservation.................       -1  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......
      Distance learning and telemedicine........  .......  .......  .......  .......  .......  .......  .......  .......        1       -1       -1  .......
      Rural electrification and                         *       61      -37       84  .......      -39  .......      -17      -42      101      265  .......
       telecommunications loans.................
      Rural telephone bank \1\..................        1  .......  .......       10  .......       -9  .......       -1  .......       -3       -7  .......
      Rural housing insurance fund \2\..........        2      152       46      -73  .......       71  .......       19      -29     -435      -64  .......
      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      -84       -1
      P.L. 480..................................  .......  .......      -37       -1  .......  .......  .......      -23       65     -348       33      -43
      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.........  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        *

    Education:
      Federal direct student loan program: \3\
        Volume reestimate.......................  .......  .......  .......  .......  .......       22  .......       -6  .......       43  .......      -14
        Other technical reestimate..............  .......  .......        3      -83      172     -383   -2,158      560  .......    3,678    1,999      683
      College housing and academic facilities     .......  .......  .......  .......  .......  .......  .......       -1  .......  .......  .......  .......
       loans....................................

    Homeland Security:
      Disaster assistance.......................  .......  .......  .......  .......  .......  .......       47       36       -7       -6        *        5

    Interior:
      Bureau of Reclamation loans...............  .......  .......  .......  .......  .......  .......        3        3       -9      -14  .......      -15
      Bureau of Indian Affairs direct loans.....  .......  .......  .......  .......  .......        1        5       -1       -1        2        *        *
      Assistance to American Samoa..............  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        *        *

    State:
      Repatriation Loans........................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -2

    Transportation:
      High priority corridor loans..............  .......  .......  .......  .......       -3  .......  .......  .......  .......  .......  .......  .......
      Alameda corridor loan.....................  .......  .......  .......  .......  .......  .......      -58  .......  .......  .......      -12  .......
      Transportation infrastructure finance and   .......  .......  .......  .......  .......  .......  .......  .......  .......       -4  .......        3
       innovation...............................
      Railroad rehabilitation and improvement     .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -5       -9
       program..................................

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

    Veterans Affairs:
      Veterans housing benefit program fund.....      -39       30       76      -72      465     -111      -52     -107     -697       17     -178      986
      Native American veteran housing...........  .......  .......  .......  .......  .......  .......  .......  .......  .......       -3        *        *
      Vocational Rehabilitation Loans...........  .......  .......  .......  .......  .......  .......  .......  .......  .......        *        *        *

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

    International Assistance Programs:
      Foreign military financing................  .......  .......  .......       13        4        1      152     -166      119     -397      -64      -41
      U.S. Agency for International Development:
        Micro and small enterprise development..  .......  .......  .......  .......  .......  .......  .......  .......        *  .......        *  .......
      Overseas Private Investment Corporation:
        OPIC direct loans.......................  .......  .......  .......  .......  .......  .......  .......  .......  .......       -4      -21        3
      Debt reduction............................  .......  .......  .......  .......  .......  .......       36       -4  .......        *      -47     -104

    Small Business Administration:
      Business loans............................  .......  .......  .......  .......  .......  .......  .......        1       -2        1       25  .......
      Disaster loans............................  .......  .......  .......  .......     -193      246     -398     -282      -14      266      589      195

    Other Independent Agencies:
      Export-Import Bank direct loans...........      -28      -16       37  .......  .......  .......     -177      157      117     -640     -305      111
      Federal Communications Commission spectrum  .......  .......  .......  .......    4,592      980   -1,501     -804       92      346      380      732
       auction..................................

                   LOAN GUARANTEES

    Agriculture:
      Agriculture credit insurance fund.........        5       14       12      -51       96  .......      -31      205       40      -36      -33      -22

    [[Page 111]]

      Agriculture resource conservation           .......  .......  .......  .......  .......  .......  .......        2  .......        1       -1        *
       demonstration project....................
      Commodity Credit Corporation export               3      103     -426      343  .......  .......  .......   -1,410  .......      -13     -230     -205
       guarantees...............................
      Rural development insurance fund..........       49  .......  .......       -3  .......  .......  .......  .......  .......  .......  .......  .......
      Rural housing insurance fund..............        2       10        7      -10  .......      109  .......      152      -56       32       50  .......
      Rural community advancement program \2\...  .......  .......  .......      -10  .......       41  .......       63       17       91       15  .......

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

    Defense:
      Military housing improvement fund.........  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -3       -1
      Defense export loan guarantee.............  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -5

    Education:
      Federal family education loan program: \3\
        Volume reestimate.......................  .......  .......      535       99  .......      -13      -60      -42  .......      277  .......     -420
        Other technical reestimate..............       97      421       60  .......  .......     -140      667   -3,484  .......   -2,483   -3,278    1,321

    Health and Human Services:
      Heath center loan guarantees..............  .......  .......  .......  .......  .......  .......        3  .......        *        *  .......        1
      Health education assistance loans.........  .......  .......  .......  .......  .......  .......  .......  .......  .......       -5      -37      -33

    Housing and Urban Development:
      Indian housing loan guarantee.............  .......  .......  .......  .......  .......  .......  .......       -6        *       -1        *       -4
      Title VI Indian guarantees................  .......  .......  .......  .......  .......  .......  .......  .......  .......       -1        1        4
      Community development loan guarantees.....  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       19      -10
      FHA-mutual mortgage insurance.............  .......  .......  .......     -340  .......    3,789  .......    2,413   -1,308    1,100    5,947    1,980
      FHA-general and special risk..............     -175  .......     -110      -25      743       79  .......     -217     -403       77      352      507

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

    Transportation:
      Maritime guaranteed loans (title XI)......  .......  .......  .......  .......  .......      -71       30      -15      187       27      -16        4
      Minority business resource center.........  .......  .......  .......  .......  .......  .......  .......  .......        1  .......        *        *

    Treasury:
      Air transportation stabilization program..  .......  .......  .......  .......  .......  .......  .......  .......  .......      113     -199      292

    Veterans Affairs:
      Veterans housing benefit fund program.....     -447      167      334     -706       38      492      229     -770     -163     -184   -1,515     -462

    International Assistance Programs:
      U.S. Agency for International Development:
        Development credit authority............  .......  .......  .......  .......  .......  .......  .......  .......       -1  .......        1       -3
        Micro and small enterprise development..  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        2       -2
        Urban and environmental credit..........       -2       -1       -7  .......      -14  .......  .......  .......       -4      -15       48       -2
        Loan Guarantees to Israel...............  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......      -76     -111
      Overseas Private Investment Corporation:
        OPIC guaranteed loans...................  .......  .......  .......  .......  .......  .......  .......  .......        5       77       60     -213

    Small Business Administration:
      Business loans............................  .......  .......      257      -16     -279     -545     -235     -528     -226      304    1,750    1,034

    Other Independent Agencies:
      Export-Import Bank guarantees.............      -11      -59       13  .......  .......  .......     -191   -1,520     -417   -2,042   -1,133     -655
                                                 -----------------------------------------------------------------------------------------------------------
        Total...................................     -616      995      727     -832    5,642    4,518   -3,641   -6,427   -1,832     -142    3,469    5,349
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * $500,000 or less.
     \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.

    [[Page 112]]

                                       Table 7-3.  DIRECT LOAN SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2004-2006
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2004 Actual                    2005 Enacted                  2006 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.......................     13.32        117       881      7.40         70       955      7.14         67       937
      Farm storage facility loans..............................      1.22          1        63     -2.44         -2        83     -1.34         -1        67
      Rural community advancement program......................      1.88         27     1,395      7.50        107     1,425      6.09         79     1,300
      Rural electrification and telecommunications loans.......     -1.60        -70     4,345     -1.28        -44     3,440     -0.18         -6     3,189
      Rural telephone bank.....................................     -4.32         -7       170     -1.83         -3       175  ........  .........  ........
      Distance learning, telemedicine, and broadband program...      2.09         13       633      2.07         13       596      2.68          8       328
      Farm labor...............................................     42.73         15        36     47.06         18        38     44.59         19        42
      Rural housing insurance fund.............................     12.25        185     1,509     14.68        193     1,314     12.55        136     1,085
      Rural development loan fund..............................     43.27         17        40     46.38         16        34     43.02         15        34
      Rural economic development loans.........................     18.76          3        15     18.79          5        25     19.97          5        25
      Public law 480 title I...................................     58.08         23        39     55.98         27        48     55.40         24        43

    Commerce:
      Fisheries finance........................................     -6.31         -4        64     -6.01        -11       185     -5.02         -2        24

    Defense--Military:
      Defense family housing improvement fund..................     33.73         56       166     33.95         71       209     25.34        145       572

    Education:
      College housing and academic facilities loans............  ........  .........        55  ........  .........        70  ........  .........        50
      Loans for short-term training............................  ........  .........  ........  ........  .........  ........     -1.56         -1        85
      Federal direct student loan program......................     -0.61       -135    21,979     -0.53       -131    24,480     -3.51       -861    24,530

    Homeland Security:
      Disaster assistance direct loans.........................  ........  .........  ........     -2.60         -1        25     -0.19  .........        25

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

    State:
      Repatriation loans.......................................     70.75          1         1     69.73          1         1     64.99          1         1
      Loan for renovation of UN Headquarters...................  ........  .........  ........      0.47          6     1,200  ........  .........  ........

    Transportation:
      Federal-aid highways.....................................  ........  .........  ........      5.94        142     2,400      6.18        149     2,400
      Railroad rehabilitation and improvement program..........  ........  .........       263  ........  .........       250  ........  .........  ........

    Treasury:
      Community development financial institutions fund........     34.37          2         5     36.52          2         5  ........  .........  ........

    Veterans Affairs:
      Vocational rehabilitation and employment administration..      1.33  .........         3      1.14  .........         4      1.59  .........         4
      Housing..................................................      0.83          1       127     -2.71        -25       941     -2.61        -44     1,696

    International Assistance Programs:
      Debt restructuring.......................................  ........         28  ........  ........        338  ........  ........  .........  ........
      Overseas Private Investment Corporation..................      3.03          6       198     10.67         19       178     10.27         19       185

    Small Business Administration:
      Disaster loans...........................................     11.72         79       668     12.86        514     3,982     14.64         83       810
      Business loans...........................................      9.55          2        23     10.25          1        10  ........  .........  ........

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................     11.40         22       193     34.00         17        50     34.00         17        50

                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A        382    32,921       N/A      1,343    42,223       N/A       -148    37,582
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    N/A = Not applicable.
    \1\ Additional information on credit subsidy rates is contained in the Federal Credit Supplement.

    [[Page 113]]

                                      Table 7-4. LOAN GUARANTEE SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2004-2006
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2004 Actual                    2005 Enacted                  2006 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.......................      3.10         75     2,402      2.91         80     2,763      2.66         76     2,866
      Commodity Credit Corporation export loans................     10.58        457     4,318      6.83        309     4,528      8.93        393     4,396
      Rural community advancement program......................      3.75         46     1,217      3.36         29       885      3.74         44     1,184
      Rural electrification and telecommunications loans.......  ........  .........  ........      0.01  .........     1,100  ........  .........  ........
      Distance learning, telemedicine, and broadband program...  ........  .........  ........  ........  .........  ........      3.82          1        30
      Rural housing insurance fund.............................      1.68         54     3,333      1.09         37     3,381      1.33         52     3,881
      Rural business investment................................  ........  .........  ........      8.05  .........        60  ........  .........  ........
      Renewable energy.........................................  ........  .........  ........      1.87         11       615      1.75          5       286

    Defense--Military:
      Arms initiative..........................................      3.00  .........         4      4.10          1        28     20.00          1         5

    Education:
      Loans for short-term training............................  ........  .........  ........  ........  .........  ........      5.71         11       198
      Federal family education loans...........................     11.40      9,602    84,219     11.96     10,111    84,548      8.22      6,556    79,754

    Health and Human Services:
      Health education assistance loans........................     16.48         25        46  ........  .........  ........  ........  .........  ........
      Health resources and services............................     12.58          2        13      5.35          1        17      5.40          1        17

    Housing and Urban Development:
      Indian housing loan guarantee fund.......................      2.73          5       197      2.58          5       145      2.42          3        99
      Native Hawaiian Housing Loan Guarantee Fund..............      2.73          1        40      2.58          1        37      2.42          1        35
      Native American housing block grant......................     10.56          2        17     10.32          2        18     12.26          5        38
      Community development loan guarantees....................      2.30          6       287      2.30          6       275  ........  .........  ........
      FHA-mutual mortgage insurance............................     -2.47     -2,660   107,699     -1.82     -2,121   185,000  -1.70 \2     -1,867   185,000
                                                                                                                                      \
      FHA-general and special risk.............................     -1.00       -276    29,000     -0.51       -180    35,000     -0.98       -341    35,000

    Interior:
      Indian guaranteed loans..................................      6.13          5        84      6.76          5        85      4.75          6       119

    Transportation:
      Minority business resource center program................      2.53  .........         8      2.08  .........        18      1.85          1        18
      Federal-aid highways.....................................  ........  .........  ........      4.68          9       200      3.67          7       200
      Maritime guaranteed loan (title XI)......................      7.65         13       174     27.54         39       140  ........  .........  ........

    Treasury:
      Air transportation stabilization program.................     -8.93         -3        30  ........  .........  ........  ........  .........  ........

    Veterans Affairs:
      Housing..................................................      0.54        200    35,613     -0.28       -125    44,206     -0.22       -105    47,208

    International Assistance Programs:
      Loan guarantees to Israel................................  ........  .........     1,750  ........  .........     3,000  ........  .........     2,360
      Microenterprise and small enterprise development.........  ........          1  ........  ........  .........  ........  ........  .........  ........
      Development credit authority.............................      3.11         10       351      4.31         21       487      3.90         21       539
      Overseas Private Investment Corporation..................      0.27        -96     1,647     -3.42        -45     1,300     -4.38        -62     1,400

    Small Business Administration:
      General business loans...................................      0.38         91    23,972  ........  .........    34,253  ........  .........    37,000

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................      1.88        172    13,128      2.80        288    13,761      2.91        291    13,761

    Presidio Trust:
      Presidio Trust...........................................  ........  .........  ........      0.08  .........        20      0.08  .........        50
                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A      7,732   309,549       N/A      8,484   415,870       N/A      5,100   415,444
                                                                --------------------------------------------------------------------------------------------
     ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS

    GNMA:
      Guarantees of mortgage-backed securities.................     -0.27       -405   146,066     -0.23       -368   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\ Rate includes effects of legislative proposals. For more details, see the Federal Credit Supplement.

    [[Page 114]]

                                                 Table 7-5.  SUMMARY OF FEDERAL DIRECT LOANS AND LOAN GUARANTEES
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Actual                                                Estimate
                                               -------------------------------------------------------------------------------------------------------------
                                                   1997       1998       1999       2000       2002       2002       2003       2004       2005       2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Direct Loans:
      Obligations.............................       33.6       28.8       38.4       37.1       39.1       43.7       45.4       42.0       56.0       47.6
      Disbursements...........................       32.2       28.7       37.7       35.5       37.1       39.6       39.7       38.7       47.9       44.2
      New subsidy budget authority\1\.........          *       -0.8        1.6       -0.4        0.3          *        0.7        0.4        1.3       -0.1
      Reestimated subsidy budget authority\2\.  .........        7.3        1.0       -4.4       -1.8        0.5        2.9        2.6          4  .........
      Total subsidy budget authority..........        2.4        6.5        2.6       -4.8       -1.5        0.5        3.5        3.0        5.1       -0.1

    Loan Guarantees:
      Commitments.............................      282.3      348.4      415.9      298.1      418.0      482.6      561.8      450.2      494.4      489.1
      Lender disbursements....................      254.7      337.9      388.2      286.3      366.7      446.2      247.2      429.0      468.0      459.0
      New subsidy budget authority\1\.........          *        3.3          *        3.6        2.3        2.9        3.8        7.3        8.1        4.7
      Reestimated subsidy budget authority\2\.  .........       -0.7        4.3        0.3       -7.1       -2.4       -3.5        2.0        2.9  .........
      Total subsidy budget authority..........        3.6        2.6        4.3        3.9       -4.8        0.5        0.3        9.3       11.0        4.7
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * $500 million or less.
    \1\ Prior to 1998 new and reestimated subsidy budget authority were not reported separately.
    \2\ Includes interest on reestimate.

    [[Page 115]]

                     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                                                -------------------------------
                                                         2004       2005      2006       2004       2005      2006
                                                       actual     estimate  estimate   actual     estimate  estimate
    ----------------------------------------------------------------------------------------------------------------
                  DIRECT LOAN WRITEOFFS

    Agriculture:
      Agricultural credit insurance fund............        147        129       126       1.69       1.59      1.65
      Commodity Credit Corporation fund.............         18   ........  ........       0.16   ........  ........
      Rural community advancement program...........         13         11        14       0.16       0.12      0.14
      Rural telephone bank..........................  ..........         3         3  ..........      0.30      0.31
      Rural development insurance fund..............          2          1         1       0.08       0.04      0.05
      Rural housing insurance fund..................        121        126       121       0.44       0.47      0.46
      P.L.480.......................................        934   ........  ........       9.11   ........  ........
      Debt reduction (P.L.480)......................        154         11  ........      22.48       1.85  ........

    Commerce:
      Economic development revolving fund...........          2          1         1       8.33       7.14     10.00

    Education:
      Student financial assistance..................          6          7         7       1.84       2.16      2.16
      Perkins loan assets...........................  ..........  ........        51  ..........  ........  ........
      Federal direct student loan program...........        256        350       396       0.24       0.31      0.39

    Homeland Security:
      Disaster assistance direct loan program.......         13        127  ........       9.09      81.93  ........

    Housing and Urban Development:
      Revolving fund (liquidating programs).........  ..........         1         1  ..........     16.66     25.00
      Guarantees of mortgage-backed securities......         99         30        28      79.83      50.84     45.16

    Interior:
      Indian direct loan............................         11          2         2      22.44       6.25      7.69

    Labor:
      Pension Benefit Guaranty Corporation..........         10         31        90        100        100       100

    Transportation:
      Railroad rehabilitation and improvement.......          2          4         6       0.54       0.65      1.03

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

    Veterans Affairs:
      Veterans housing benefit program..............         13          8         8       0.72       0.39      0.28

    International Assistance Programs:
      Military debt reduction.......................  ..........        11  ........  ..........      4.34  ........
      Debt reduction (AID)..........................          8          7  ........       3.37       0.93  ........
      Overseas Private Investment Corporation.......  ..........         8         8  ..........      1.40      1.34

    Small Business Administration:
      Disaster loans................................         53         44        61       1.53       0.73      0.89
      Business loans................................          6          9         6       1.80       3.22      2.69

    Other Independent Agencies:
      Export-Import Bank............................         27         67        71       0.24       0.65      0.76
      Debt reduction (ExIm Bank)....................          5        121  ........       0.45      11.04  ........
      Spectrum auction program......................         50   ........     3,422       0.97   ........     88.76
      Tennessee Valley Authority....................  ..........         1  ........  ..........      1.40  ........
                                                     ---------------------------------------------------------------
        Total, direct loan writeoffs................      1,950      1,111     4,423       0.65       0.28      1.49
                                                     ---------------------------------------------------------------

        GUARANTEED LOAN TERMINATIONS FOR DEFAULT

    Agriculture:
      Agricultural credit insurance fund............         94         83        83       0.74       0.63      0.63
      Commodity Credit Corporation export loans.....        130        160       160       1.97       1.83      1.82
      Rural community advancement program...........        119        147       174       2.16       2.94      3.57
      Rural electrification and telecommunications    ..........         6         6  ..........      0.38      0.39
       loans........................................
      Rural housing insurance fund..................        122        134       146       0.72       0.80      0.86

    Commerce:
      Emergency steel guaranteed loan program.......  ..........        12         8  ..........      7.69      6.89

    [[Page 116]]

    Defense--Military:
      Family housing improvement fund...............  ..........         4         4  ..........      1.65      1.70

    Education:
      Federal family education loan.................      3,679      4,992     5,837       1.28       1.55      1.67

    Health and Human Services:
      Health education assistance loans.............         58         41        40       2.32       1.69      1.69

    Housing and Urban Development:
      Indian housing loan guarantee.................  ..........         1         4  ..........      0.67      2.48
      Title VI Indian Federal guarantees program....  ..........         1         2  ..........      1.06      1.85
      FHA--Mutual mortgage insurance................      7,390      6,056     5,484       1.43       1.21      1.01
      FHA--General and special risk.................      1,790      2,052     1,731       1.57       1.84      1.50
      Guarantees of mortgage-backed securities......        260         70       600       0.04       0.01      0.09

    Interior:
      Indian guaranteed loan........................          1          1         1       0.26       0.24      0.23

    Transportation:
      Maritime guaranteed loan (Title XI)...........  ..........        50        35  ..........      1.41      1.06

    Treasury:
      Air transportation stabilization program......  ..........       923         8  ..........     54.19      1.19

    Veterans Affairs:
      Veterans housing benefit program..............      1,374      2,763     2,816       0.38       0.69      0.64

    International Assistance Programs:
      Foreign military financing....................  ..........         3        10  ..........      0.09      0.38
      Micro and small enterprise development........          3          1         1       6.00       1.31      2.00
      Urban and environmental credit program........         34         22        26       1.78       1.19      1.52
      Development credit authority..................  ..........         2         3  ..........      0.87      0.90
      Overseas Private Investment Corporation.......         78         57        58       1.77       1.43      1.39

    Small Business Administration:
      General business loans........................      1,378      1,308     1,272       2.04       1.66      1.43
      Pollution control equipment...................  ..........         1  ........  ..........     16.66  ........

    Other Independent Agencies:
      Export-Import Bank............................        360        440       494       0.81       0.93      0.99
                                                     ---------------------------------------------------------------
        Total, guaranteed loan terminations for          16,870     19,330    19,003       0.80       0.89      0.82
         default....................................
                                                     ---------------------------------------------------------------
        Total, direct loan writeoffs and guaranteed      18,820     20,441    23,426       0.79       0.83      0.89
         loan terminations..........................
                                                     ===============================================================

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

    Agriculture:
      Agricultural credit insurance fund............  ..........         1         1  ..........      5.88      5.88

    Education:
      Federal family education loan.................        286        259       233       1.38       1.19      1.02

    Health and Human Services:
      Health education assistance loans.............         24         24        24       2.54       2.56      2.59

    Housing and Urban Development:
      FHA--Mutual mortgage insurance................          1   ........  ........       0.10   ........  ........
      FHA--General and special risk.................        310        383         6       7.01       7.56      0.10

    Interior:
      Indian guaranteed loan........................         10          1         1      40.00       7.14      9.09

    Treasury:
      Air transportation stabilization program......  ..........  ........       617  ..........  ........     66.27

    Veterans Affairs:
      Veterans housing benefit program..............         83        120       148       5.87       6.14      6.26

    [[Page 117]]

    International Assistance Programs:
      Overseas Private Investment Corporation.......  ..........        29         3  ..........     12.18      1.18

    Small Business Administration:
      General business loans........................        249        262       280       7.51       6.30      5.90
                                                     ---------------------------------------------------------------
        Total, writeoffs of loans receivable........        963      1,079     1,313       2.42       2.46      2.75
    ----------------------------------------------------------------------------------------------------------------
    \1\ For direct loans and loan guarantees, outstanding loans equal start-of-year outstanding balance plus new
      disbursements. For loans receivable, outstanding loans equal start-of-year outstanding balance plus
      terminations for default resulting in loans receivable.

    [[Page 118]]

                          Table 7-7. APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS \1\
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   2004         2005         2006
                                Agency and Program                              Enacted      Enacted      Proposed
    ----------------------------------------------------------------------------------------------------------------
                             DIRECT LOAN OBLIGATIONS

    Agriculture:
      P.L. 480 direct credit.................................................           39           48           43

    Commerce:
      Fisheries finance......................................................           64          185           24

    Education:
      Historically black college and university capital financing............          229          229          162
      Loans for short-term training..........................................  ...........  ...........           85

    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

    State:
      Repatriation loans.....................................................            1            1            1
      Loan for renovation of UN Headquarters.................................  ...........        1,200  ...........

    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  ...........

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

    International Assistance Programs:
      Military debt reduction................................................           31  ...........  ...........

    Small Business Administration:
      Business loans.........................................................           23           10  ...........
                                                                              --------------------------------------
        Total, limitations on direct loan obligations........................        2,926        4,263        2,874
                                                                              --------------------------------------

                            LOAN GUARANTEE COMMITMENTS

    Agriculture:
      Agricultural credit insurance fund.....................................        2,402        2,763        2,866
      Rural business investment program guarantee............................  ...........           60  ...........

    Defense--Military:
      Arms initiative........................................................            4           28            5

    Education:
      Loans for short-term training..........................................  ...........  ...........          198

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

    Housing and Urban Development:
      Indian housing loan guarantee fund.....................................          197          145           99
      Title VI Indian Federal guarantees.....................................           17           18           38
      Native Hawaiian Housing Loan Guarantee Fund............................           40           37           35
      Community development loan guarantees..................................          275          275  ...........
      FHA-general and special risk...........................................       29,000       35,000       35,000
      FHA-mutual mortgage insurance..........................................      185,000      185,000      185,000

    Interior:
      Indian loans...........................................................           84           85          119

    Transportation:
      Minority business resource center......................................           18           18           18
      Transportation infrastructure finance and innovation program loan                200          200          200
       guarantee.............................................................
      Maritime guaranteed loan (title XI)....................................          174          140  ...........

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

    [[Page 119]]

    Small Business Administration:
      General business loans.................................................       23,972       34,253       37,000
                                                                              --------------------------------------
        Total, limitations on loan guarantee commitments.....................      244,533      261,022      261,278
                                                                              ======================================

            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 120]]

      Table 7-8.  FACE VALUE OF GOVERNMENT-SPONSORED ENTERPRISE LENDING \1\
                            (In billions of dollars)
    ------------------------------------------------------------------------
                                                             Outstanding
                                                       ---------------------
                                                           2003       2004
    ------------------------------------------------------------------------

             Government Sponsored Enterprises

    Fannie Mae \2\....................................        N/A        N/A
    Freddie Mac \3\...................................      1,393        N/A
    Federal Home Loan Banks \4\.......................        N/A        N/A
    Sallie Mae \5\....................................  .........  .........
    Farm Credit System................................         86         87
                                                       ---------------------
      Total...........................................        N/A        N/A
    ------------------------------------------------------------------------
    N/A = Not available.
    \1\ Net of purchases of federally guaranteed loans.
    \2\ Financial data for Fannie Mae is not presented here because Fannie
      Mae announced in December 2004 that it would have to restate financial
      results for fiscal years 2001-2004.
    \3\ 2003 figure derived from Freddie Mac 2003 Annual Report. While
      financial data for 2003 is presented here, Freddie Mac announced on
      November 1, 2004 that it would report full-year audited results for
      2004 by March 31, 2005.
    \4\ Financial data for the Federal Home Loan Banks are not presented
      here because the Federal Home Loan Banks announced through their
      Office of Finance in December 2004 that the consolidated financial
      statements of the Federal Home Loan Banks for 2002 and 2003, and the
      first two quarters of 2004 will need to be restated.
    \5\ 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 121]]

      Table 7-9  LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
                                     (GSEs)
                            (In millions of dollars)
    ------------------------------------------------------------------------
                           Enterprise                              2004
    ------------------------------------------------------------------------

                            LENDING

    Student Loan Marketing Association
      Net change...........................................          -27,787
      Outstandings.........................................              136

    Federal National Mortgage Association: \1\
      Portfolio programs:
        Net change.........................................              N/A
        Outstandings.......................................              N/A
    Mortgage-backed securities:
      Net change...........................................              N/A
      Outstandings.........................................              N/A

    Federal Home Loan Mortgage Corporation:\2\
      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.........................................            (193)
        Outstandings.......................................           23,270
      Farm credit banks:
        Net change.........................................            2,409
        Outstandings.......................................           60,762
      Federal Agricultural Mortgage Corporation:
        Net change.........................................            (451)
        Outstandings.......................................            5,549

    Federal Home Loan Banks:\3\
      Net change...........................................              N/A
      Outstandings.........................................              N/A

    Less guaranteed loans purchased by:
      Student Loan Marketing Association:
        Net change.........................................         (27,787)
        Outstandings.......................................              136
      Federal National Mortgage Association: \1\
        Net change.........................................              N/A
        Outstandings.......................................              N/A
      Other:
        Net change \4\.....................................              N/A
        Outstandings \4\...................................              N/A

                           BORROWING

    Student Loan Marketing Association:
      Net Change...........................................         (24,763)
      Outstandings.........................................            2,058

    Federal National Mortgage Association:\1\
      Portfolio programs:
        Net Change.........................................              N/A
        Outstandings.......................................              N/A
      Mortgage-backed securities:
        Net Change.........................................              N/A
        Outstandings.......................................              N/A

    Federal Home Loan Mortgage Corporation:\2\
      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.........................................              175

    [[Page 122]]

        Outstandings.......................................           26,626
      Farm credit banks:
        Net Change.........................................            3,763
        Outstandings.......................................           71,812
      Federal Agricultural Mortgage Corporation:
        Net Change.........................................            (414)
        Outstandings.......................................            3,424

    Federal Home Loan Banks:\3\
      Net Change...........................................              N/A
      Outstandings.........................................              N/A

                           DEDUCTIONS

    Less borrowing from other GSEs:\4\
      Net Change...........................................              N/A
      Outstandings.........................................              N/A
    Less purchase of Federal debt securities:\4\
      Net Change...........................................              N/A
      Outstandings.........................................              N/A
    Less borrowing to purchase loans guaranteed by:
      Student Loan Marketing Association:
        Net Change.........................................         (27,787)
        Outstandings.......................................              136
      Federal National Mortgage Association: \1\
        Net Change.........................................              N/A
        Outstandings.......................................              N/A
      Other: \4\
        Net Change.........................................              N/A
        Outstandings.......................................              N/A
    ------------------------------------------------------------------------
    N/A = Not available.

    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 Fannie Mae is not presented here because Fannie
      Mae announced in December 2004 that it would have to restate financial
      results for fiscal years 2001-2004.

    \2\ Financial data for Freddie Mac is not presented here because Freddie
      Mac announced on November 1, 2004 that it would report full-year
      audited results for 2004 by March 31, 2005.

    \3\ Financial data for the Federal Home Loan Banks are not presented
      here because the Federal Home Loan Banks announced through their
      Office of Finance in December 2004 that the consolidated financial
      statements of the Federal Home Loan Banks for 2002 and 2003, and the
      first two quarters of 2004 will need to be restated.

    \4\ Totals and subtotals have not been calculated because a substantial
      portion of the total is subject to the above-described restatements.