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



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                         7. CREDIT AND INSURANCE

  Federal credit programs offer direct loans and loan guarantees for a 
wide range of activities, primarily housing, education, business and 
community development, and exports. At the end of 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''

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(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.
 
 

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                      III.  CREDIT IN FOUR SECTORS

                    Housing Credit Programs and GSEs

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


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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

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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

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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

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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

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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.