[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
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Purpose
and Strategic Program Program
Design Planning Management Results
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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
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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.
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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
[[Page 92]]
that over one-half of the implicit subsidy to Fannie Mae and Freddie Mac
accrues to the GSEs' shareholders.
Risk
As with all financial institutions, risk is inherent in the way the
housing GSEs conduct their business. By assuming and managing some of
the risks arising from mortgage lending, the GSEs generate some benefits
for consumers and significant profits for their owners. However, the mix
of benefits and risks varies depending on how the GSEs conduct their
businesses.
Credit Risk. By issuing and guaranteeing securities based on pools of
mortgages they purchase from lenders, Fannie Mae and Freddie Mac assume
some portion of credit risk, which enhances liquidity to the mortgage
market and thereby reduces the cost of credit to borrowers. Fannie Mae
and Freddie Mac control their credit risk by using underwriting
standards to evaluate the mortgages they purchase for securitization.
Their risk is further limited by statutory provisions that require
private mortgage insurance or equivalent protection on high loan-to-
value ratio mortgages. Credit losses for the enterprises, as a
percentage of the face value of mortgages they purchased, averaged 5.4
basis points for a fifteen-year period ending in 2002 and have been
declining. Viewed in isolation, Fannie Mae and Freddie Mac's assumption
of credit risk arising from guarantees of MBS held by other investors
benefits the market and homebuyers while incurring a risk that is easily
managed and well-understood.
Interest Rate Risk. A more challenging form of risk arises from the
effect that interest rate movements can have on portfolios of mortgages
and mortgage-backed securities. Interest rate risk arises from the
changing market values of the GSEs' interest-sensitive assets and
liabilities. Interest rate movements can cause the interest margins
between their mortgage and other assets and their liabilities to grow or
shrink, potentially changing the mark-to-market value of their equity
capital and estimated future earnings dramatically in a short period.
Historically, the FHLBs assumed interest rate risk by issuing debt and
using the proceeds to make loans, often of comparable maturities, to
member institutions to support their mortgage lending and other
investments; this risk is somewhat mitigated since they often require
prepayment penalties on advances to member institutions. Much more
recently, however, some of the Banks have created mortgage purchase
programs that assume interest rate risk for pools of mortgages.
Fannie Mae, and more recently Freddie Mac, have built large portfolios
of mortgages and repurchased MBS. However, by choosing to borrow
substantially in order to build large retained portfolios of mortgages
and mortgage-backed securities, they assume a different, more
challenging set of risks and increase the complexity of their
operations. Their ability to repurchase large volumes of their own MBS
is driven by their ability to finance these mortgages with lower-cost
debt than other investors, thanks to market misperceptions of a unique
status for the enterprises that allow them to borrow at lower rates.
Federal Reserve economists have found no evidence that these repurchases
provide any additional benefit to borrowers. They clearly provide an
opportunity for the GSEs to increase their earnings, however.
[[Page 93]]
At the end of 2003, Fannie Mae's retained portfolio as a percentage of
its MBS outstanding (held by others) was 69.4 percent, or almost $900
billion; Freddie Mac's retained portfolio as a percentage of MBS
outstanding was 78.1 percent, or over $600 billion. In periods of
declining interest rates, mortgage refinancings increase, so higher-
yielding mortgages prepay, exposing holders of these mortgages or
securities based on them to the risk of having to reinvest these funds
at lower rates. As Federal Reserve Chairman Greenspan has noted, Fannie
Mae and Freddie Mac have chosen not to offset the interest rate risk
arising from their portfolio operations by increasing capital but to
attempt to manage that risk by issuing callable debt and by purchasing
derivative financial instruments, such as interest rate swaps and
options on swaps. For example, they might hedge fixed-rate mortgages,
which drop in value when interest rates increase, using derivative
instruments that increase in value under the same scenario. The
techniques necessary to manage interest rate risk and its potential
effect on earnings are complex, and their management becomes
increasingly difficult with increases in the size and complexity of the
portfolio to be managed. Chairman Greenspan has also noted that the
sophistication of the operations required to hedge prepayment risk with
little capital places an enormous burden on these institutions.
Like other financial institutions, the housing GSEs attempt to limit
their interest rate exposure and the effect of interest rate movements
on their earnings. Chairman Greenspan has suggested statutory limits on
the dollar amount of the debt held by Fannie Mae and Freddie Mac
relative to the dollar amounts of mortgages securitized and held by
other investors, and limiting the ability of the FHLBs to hold mortgages
and mortgage-backed securities directly, as additional ways to manage
the interest rate risk of the GSEs.
Operations risk. Recent events reinforced concerns over the risks
posed by the GSEs and their existing regulatory framework. These events
have illustrated how the burden of managing interest rate risk mixed
with management deficiencies can lead to operational failings. In 2003,
Freddie Mac reported that it had understated its earnings by $5 billion
over three years, and eventually acknowledged substantial issues with
accounting, management practices, and internal controls. OFHEO
subsequently assessed substantial financial penalties on the company,
and its senior management was replaced. A year-long investigation into
the accounting, internal controls, and management practices at Fannie
Mae by OFHEO led to findings of inappropriate accounting procedures and
practices, internal control deficiencies, and questionable management
oversight. The SEC concurred in the finding of inappropriate accounting
practices and directed that Fannie restate its earnings for 2001-2004.
These findings led Fannie Mae to replace its Chairman and CEO, and its
CFO. The Enterprise estimated it would be forced to recognize $9 billion
in losses, reducing its capital below the regulatory minimum
requirement. During the same period, two of the twelve FHLBs entered
into written agreements with FHFB that required review of operational
practices and controls, announcing that their accounting practices
needed revision and, in one instance, that earnings required
restatement.
These developments now reveal some of the ways that the assumption of
large-scale interest rate risk complicates the operational challenges
facing the GSEs. The techniques necessary to manage interest rate risk
and its potential effect on earnings are complex, and their management
becomes increasingly difficult with increases in the size and complexity
of the portfolio to be managed. While other large financial institutions
may face similar challenges, the management of interest rate risk and
operations risk is a particular challenge for the GSEs, given their
size, regulatory structure, and the lack of full market discipline.
The rules governing accounting for derivatives likewise are complex.
Interpreting and applying the accounting rules have posed challenges to
companies that use derivatives. Out of concern that firms were using
inconsistent methods to account for the use of derivatives to hedge
interest rate risk and the potential that their use could obscure a
company's true position or misrepresent earnings, in 1998 the Financial
Accounting Standards Board (FASB) promulgated the rule known as FAS 133;
it became effective in 2000. In part, this rule requires companies, with
narrow exceptions, to reflect on their balance sheets the amount that
derivatives rise or fall in value, even if derivatives contracts are
still open and gains or losses are not yet locked in.
In 2004, OFHEO found, and the SEC concurred, that Fannie did not
adequately document its hedges and routinely violated FAS 133 in a
number of ways. For example, Fannie Mae, in its treatment of hedges when
it changed financial strategies and, with no new testing or proof of
effectiveness, took derivatives that were initially paired with one
liability, and paired them with another. The SEC also found that Fannie
Mae failed to comply in material respects with FAS 133. At OFHEO's
behest, Fannie Mae agreed to cease all hedge accounting that did not
conform with FAS 133 by the first quarter of CY 2005, and to ensure
going forward that all hedge accounting complies with this requirement.
Fannie Mae has already stated that this correction will reduce its
capital and its earnings by $9 billion from 2001 through mid-2004. This
leaves Fannie Mae below the minimum regulatory capital requirement and
subjects it to further regulatory actions. This follows upon the events
of 2003, when Freddie Mac discovered substantial accounting and internal
control issues, including issues with the application of FAS 133,
leading to replacement of senior management and restatement of its
financial statements over the 2000-2003 timeframe. The SEC and the
Department of Justice have continued to investigate both Fannie Mae and
Freddie Mac.
During the same period, the FHFB announced a written agreement with
the FHLB of Chicago which re
[[Page 94]]
sulted in a review of the Bank's accounting practices, changes to
certain accounting methods under FAS 133, and subsequently, a delay in
the Bank's issuance of its third quarter 2004 financial statements.
The failure of Fannie Mae and Freddie Mac and, to a lesser extent, the
FHLBs to account for the use of derivatives and hedges consistent with
Generally Accepted Accounting Principles (GAAP) prompted their
regulators to investigate for the presence of control deficiencies and
weaknesses in corporate governance, which they have identified. Fannie
Mae and Freddie Mac were cited within a nine-month period for serious
and systemic operational control deficiencies that contributed in part
to the need for massive earnings restatements. The cited deficiencies
included management cultures that stressed earnings stability at the
expense of other considerations, ineffective processes for developing
accounting policies, and absence of independent internal controls for
review of certain transactions. These developments highlight the risks
inherent in the GSEs' operations, risks that because of their size and
relationships with other institutions could have far-reaching effects
should one of them falter.
Systemic Risk. The risks undertaken by the GSEs, if not properly
managed, may pose a threat to their solvency. Under some circumstances,
they also may threaten the stability or solvency of other financial
institutions and the economy. Current Federal law explicitly exempts the
securities of the GSEs from the statutory limitation on commercial
banks' investment in the ``investment securities'' of individual firms.
In a February 2003 study conducted by OFHEO utilizing FDIC data, over
2,000 commercial banks held at least 51 percent of their capital in the
form of debt issued by Fannie Mae; and almost 1,000 commercial banks
held at least 51 percent of their capital in the form of debt issued by
Freddie Mac.
Should a financial crisis affecting the GSEs and other financial
actors develop, the market's misperception of Government backing of GSE
securities could affect its course and resolution. A September 2004
Federal Reserve Bank of Atlanta study indicated concern that severe
stress to one of the GSEs might contribute to weakness in other
financial institutions that hold significant GSE obligations, especially
if the path to resolution of the crisis and the potential for Government
intervention are misunderstood.
The potential for systemic risk arising from the GSEs' size and their
central role in mortgage markets combined with the difficulty of
managing the risks inherent in a large mortgage portfolio raise
fundamental questions about the value they add through their support for
mortgage lending and reduced costs to borrowers relative to the risks
their current operations pose. Some research by Federal Reserve
economists suggests that GSE securitization activities have a relatively
small effect on mortgage interest rates--just a few dollars a month on
an average mortgage--and that their practice of holding mortgages in
portfolio has almost no effect on mortgage costs. Instead of being
leaders in increasing historically underserved groups' access to credit,
the GSEs have actually trailed the market averages in a number of
dimensions. The Administration has sought to narrow the gap by lessening
the risks posed by the GSEs and increasing the benefits they offer to
the public.
Enhancing Safety and Soundness
Events of the past year reinforced concerns over the risks posed by
the GSEs and highlighted the need for meaningful GSE reform. A
strengthened regulator would have the in-house expertise to monitor
accounting methodology and to detect any problems, as well as the
authority and expertise to monitor regulatory standards for the
development and implementation of systems and controls. A strong
regulator would also hold the authority to place a failing entity into
receivership similar to that held by the other financial safety and
soundness regulators.
The Administration intends that any proposed new regulatory framework
for the GSEs follows the principles for regulation of financial
institutions established by the international Basel Committee,
principles accepted throughout the world as requirements for first-class
regulation. As described in the President's FY 2005 Budget, these
principles involve increasing market discipline, strengthening
supervision, and ensuring appropriate capital requirements.
Market Discipline. Chief among the factors that guide a company in its
decision-making is the discipline imposed by the market. Investors can
discipline the GSEs to the extent that they have adequate information
about their risks and financial condition. Current market discipline is
hindered by a misperception that the Federal Government would back GSE
securities in the event of a GSE default, and because GSE investors do
not enjoy the same level of disclosure, or oversight of disclosures, as
investors in other public companies. Ironically, at the times when
investors would most benefit from detailed information about the
enterprises' finances, they are left without adequate information for
months or years.
The Administration in 2002 called upon the three housing GSEs to
register voluntarily their equity securities under the 1934 Securities
Exchange Act. In June 2004, the FHFB adopted a final rule that will
require each FHLB to register a class of its stock by June 30, 2005,
leading to improved disclosures. Fannie Mae voluntarily registered and
began filing disclosures with the SEC in 2003. However, because of its
recent accounting problems, Fannie Mae is no longer able to provide
these disclosures. Freddie Mac does not anticipate being in compliance
with SEC standards before the second quarter of 2006. Since the GSEs are
not subject to the same market discipline as other public companies,
market discipline by itself is not always sufficient to ensure safety
and soundness.
Supervision. An effective financial regulator must possess authorities
commensurate with its responsibilities and capabilities. The
Administration determined
[[Page 95]]
that the safety and soundness regulators of the housing GSEs lack
sufficient powers and stature to meet their responsibilities. The
President's 2005 Budget reflected, therefore, that both OFHEO, regulator
of Fannie Mae and Freddie Mac, and the FHFB, regulator of the FHLBS,
should be replaced with a new, consolidated regulatory regime, empowered
with expanded enforcement authority, receivership authority, and access
to its funding independent of the annual appropriations process.
A new regulator, like other Federal regulators of financial
institutions, must have full authority together with accountability for
the prudential supervision of the enterprises, which includes the
authority to approve new activities of the enterprises. It would have
authority to review their ongoing business activities and reject new
ones if they would be inconsistent with their charter or prudential
operations or incompatible with the public interest. HUD would continue
to be consulted on new activities in order to ensure that the GSEs are
in compliance with their charters and that the GSEs carry out their
public mission.
Currently, the means by which the failure of a GSE could be resolved
differs between Fannie Mae and Freddie Mac, on the one hand, and the
FHLBs, on the other. In the case of a failed FHLB, the FHFB has power to
liquidate such institution, subject to certain limitations relating to
the whole number of Banks in the system. OFHEO, on the other hand, lacks
the power to place an entity into bankruptcy or receivership.
The Federal banking regulators have broad powers to place a failed
institution into receivership, and to conduct the orderly wind-down of a
failed bank in such a way that systemic disruption is minimized. Giving
such uniform powers to a Federal regulator of GSEs could likewise help
prevent dislocation in financial markets in the event of the insolvency
of such an institution. Further, such powers would address any
misperception that the GSEs are backed by the Government. By providing
clarity to the markets that the GSEs (and their creditors) are subject
to the same business risks as are other corporate entities, an even
greater level of market discipline might be brought to bear on the GSEs'
operations. In general, this type of market discipline has proven very
effective in ensuring that businesses operate in a prudential, and safe
and sound manner.
Capital requirements. Because neither investors nor regulators can
predict all possible errors by a company or unexpected economic changes,
requirements that ensure that the GSEs hold capital adequate to cushion
such shocks are essential. Capital requirements must be set with an eye
to both known risks and unknown or unquantifiable risks. Losses from
unknown risks can well exceed losses from measured risks, as shown by
the rapid depletion of capital in 1998 for the highly leveraged hedge
fund, Long-Term Capital Management. For this reason, it is essential
that the new regulator of the housing GSEs have unambiguous authority to
adjust both risk-based and minimum capital requirements.
Affordable Housing Mission
One of the public purposes of the GSEs is to promote access to
mortgage credit for low- and moderate income families. By law, HUD
establishes annual affordable housing goals for Fannie Mae and Freddie
Mac. In 2004, HUD established the affordable housing goals for Fannie
Mae and Freddie Mac for 2005 through 2008. The low and moderate income
goal will increase from 50 percent (of the minimum share of housing
units financed by a GSE's mortgage purchases in a particular year) in
2004 to 56 percent by 2008; the underserved areas goal will increase
from 36 percent in 2004 to 39 percent by 2008; and the special
affordable housing goal will increase from 20 percent in 2004 to 27
percent by 2008.
The table below shows how Fannie Mae and Freddie Mac have trailed the
marketplace in lending to first-time minority homebuyers in the 2001-
2003 timeframe. It is likely that, as a result of these new, higher
goals, they will need to improve their efforts to reach out to low-
income and minority first-time homebuyers.
PERCENTAGE OF FANNIE MAE AND FREDDIE MAC LOANS TO FIRST-TIME MINORITY HOMEBUYERS COMPARED TO THE FULL
MARKETPLACE, 2001-2003 AVERAGES \1\
----------------------------------------------------------------------------------------------------------------
Fannie Freddie Full Market
Mac Mac Both GSEs \2\
----------------------------------------------------------------------------------------------------------------
All Race/Ethnicity Groups......................................... 25.7% 26.1% 25.9% 39.1%
African American and Hispanic..................................... 4.7% 3.5% 4.2% 9.0%
All Minorities.................................................... 7.5% 6.1% 6.9% 12.3%
----------------------------------------------------------------------------------------------------------------
Source: Department of Housing and Urban Development.
\1\ The first-time homebuyer definition for the market analysis is homebuyers who have never owned a home. The
definition for the GSEs is purchasers who have not owned a home within the past three years. The percentages
show first-time homebuyer mortgages by race/ethnicity category as a share of all home purchase mortgages
purchased by the GSE or originated in the market.
\2\ ``Market'' means conventional, conforming home purchase loans.
With their growth as a share of the mortgage marketplace, Fannie Mae
and Freddie Mac have faced increased market competition in the
acquisition of mortgages and MBS; the increase in affordable housing
goals and subgoals may mean that Fannie Mae and Freddie Mac must be more
innovative or aggressive in purchasing loans that meet the goals
classifications. They can do this in part by using a larger portion of
the subsidy they enjoy as a result of their Government ties to support
purchases of goals-qualifying loans.
Part of the Administration's proposal for a strengthened regulatory
framework would provide HUD with the authority to penalize Fannie Mae
and Freedie Mac if they fail to reach the affordable housing goals.
Current law does not permit the Secretary of HUD to impose timely and
appropriate penalties for a GSE's failure to reach a goal.
The FHLBs address their affordable housing obligations in a different
fashion. For instance, by statute,
[[Page 96]]
each FHLB is assessed ten percent of its net income for support of
affordable housing. This assessment enables each FHLB member to provide
subsidized and other low-cost funding to create affordable rental and
homeownership opportunities, and support for commercial and economic
development activities that benefit low- and moderate-income
neighborhoods.
With their large subsidy, and with their substantial market share, the
GSEs should lead the market in creating homeownership opportunities for
less advantaged Americans. However, HUD has conducted analyses showing
that private lenders operating without the benefits and subsidies
enjoyed by the GSEs contribute more to affordable housing than do Fannie
Mae and Freddie Mac. One purpose of a stronger regulatory approach is to
ensure that all three housing GSEs fulfill their charter obligations.
Education Credit Programs and GSEs
The Federal Government guarantees loans through intermediary agencies
and makes direct loans to students to encourage post-secondary
education. The Student Loan Marketing Association (Sallie Mae), created
in 1972 as a GSE to develop the secondary market for guaranteed student
loans, has now been privatized.
Student Loans
The Department of Education helps finance student loans through two
major programs: the Federal Family Education Loan (FFEL) program and the
William D. Ford Federal Direct Student Loan (Direct Loan) program.
Eligible institutions of higher education may participate in one or both
programs. Loans are available to students regardless of income. However,
borrowers with low family incomes are eligible for loans with additional
interest subsidies. For low-income borrowers, the Federal Government
subsidizes loan interest costs while borrowers are in school, during a
six-month grace period after graduation, and during certain deferment
periods.
In 2006, over 9 million borrowers will receive over 15.1 million loans
totaling over $95 billion. Of this amount, more than $62 billion is for
new loans, and the remainder reflects the consolidation of existing
loans. Loan levels have risen dramatically over the past 10 years as a
result of rising educational costs and an increase in eligible
borrowers.
The FFEL program provides loans through an administrative structure
involving over 3,500 lenders, 35 State and private guaranty agencies,
roughly 50 participants in the secondary market, and approximately 6,000
participating schools. Under FFEL, banks and other eligible lenders loan
private capital to students and parents, guaranty agencies insure the
loans, and the Federal Government reinsures the loans against borrower
default. In 2006, FFEL lenders will make over 11.5 million loans
totaling over $72 billion in principal, roughly a third of which involve
consolidations of existing loans. Lenders bear two percent of the
default risk, and the Federal Government is responsible for the
remainder. The Department also makes administrative payments to guaranty
agencies and, at certain times, pays interest subsidies on behalf of
borrowers to lenders.
The William D. Ford Direct Student Loan program was authorized by the
Student Loan Reform Act of 1993. Under the Direct Loan program, the
Federal Government provides loan capital directly to more than 1,100
schools, which then disburse loan funds to students. In 2006, the Direct
Loan program will generate almost 3.6 million loans with a total value
of nearly $23 billion, including over $7 billion in consolidations of
existing loans. The program offers a variety of flexible repayment plans
including income-contingent repayment, under which annual repayment
amounts vary based on the income of the borrower and payments can be
made over 25 years with any residual balances forgiven.
The Administration is strongly committed to the lender-based FFEL
program and expects it to continue as the primary source of loans to
students in the years ahead. In addition, the Administration will
continue to maintain a DL program to ensure that no eligible student is
denied access to student loans in the event a student or school cannot
find a suitable lender.
However, problems in the structures of the current student loan
programs prevent them from meeting current policy and program
objectives. Specifically, the Federal Government assumes almost all of
the risk for the loans, while federal subsidies to intermediaries
lenders and guaranty agencies are set high enough to allow the less
efficient ones to generate a profit. These problems lead to unnecessary
costs for taxpayers and prevent the program from achieving the
efficiencies the market is designed to provide.
The 2006 Budget proposes a package of reforms to both the FFEL and DL
loan programs to achieve significant cost savings and improve
effectiveness. These reforms will link subsidy payments for lenders and
guaranty agencies more closely to their costs and will modify interest
rates for borrowers who are no longer in school and have just
consolidated their loans. The Budget achieves $34 billion in savings
over ten years by cutting unnecessary subsidies and payments to lenders,
state guaranty agencies, and loan consolidators, and by placing a larger
share of the loan risks on lenders. These savings will be used to
increase the Pell Grant maximum award, pay off the current $4 billion
Pell shortfall, and improve benefits to students in school by increasing
loan limits for first year students and extending the current favorable
interest rate framework.
Sallie Mae
The Student Loan Marketing Association (Sallie Mae) was created as a
shareholder-owned government sponsored enterprise (GSE) by the Education
Amendments of 1972 to expand funds available for student loans by
providing liquidity to lenders engaged in the Federal Family Education
Loan Program (FFELP), formerly the
[[Page 97]]
guaranteed student loan program (GSLP). Sallie Mae was reorganized in
1997 pursuant to the authority granted by the Student Loan Marketing
Association Reorganization Act of 1996. Under the Reorganization Act,
the GSE became a wholly owned subsidiary of SLM Corporation and was
required to be wound down and liquidated by January 30, 2008. On June
30, 2004, the SLM Corporation first purchased FFELP student loans
through non-GSE affiliates and, as a result, the GSE was required by
statute to terminate purchases of FFELP student loans. Accordingly, the
GSE is no longer a source of liquidity for SLM Corporation for the
purchase of student loans, and the GSE-related financing activities have
primarily been limited to refinancing the remainder of its assets
through non-GSE sources. As of September 2004, the Company had
substantially completed the wind-down of the GSE and, on November 1,
2004, SLM Corporation sent notices to the Secretary of Education and the
Secretary of the Treasury that it intended to wind-down and dissolve the
GSE on December 31, 2004 or as soon as practicable thereafter, three
years in advance of the statutory deadline. The dissolution was
completed on December 29, 2004.
All GSE debt that remains outstanding upon completion of these wind-
down activities will be defeased through the creation of a fully
collateralized trust. The collateral, consisting of cash and financial
instruments backed by the full faith and credit of the U.S. government,
will generate cash flows that provide for the interest and principal
obligations of the defeased debt.
Business and Rural Development Credit Programs and GSEs
The Federal Government guarantees small business loans to promote
entrepreneurship. The Government also offers direct loans and loan
guarantees to farmers who may have difficulty obtaining credit elsewhere
and to rural communities that need to develop and maintain
infrastructure. Two GSEs, the Farm Credit System and the Federal
Agricultural Mortgage Corporation, increase liquidity in the
agricultural lending market.
Small Business Administration
The Small Business Administration (SBA) helps entrepreneurs start,
sustain, and grow small businesses. As a ``gap lender'' SBA works to
supplement market lending and provide access to credit where private
lenders are reluctant to do so without a Government guarantee.
Additionally, SBA assists home- and business-owners cover the uninsured
costs of recovery from disasters.
The 2006 Budget requests $307 million, including administrative funds,
for SBA to leverage more than $25 billion in financing for small
businesses and disaster victims. The 7(a) General Business Loan program
will support $16.5 billion in guaranteed loans while the 504 Certified
Development Company program will support $5.5 billion in guaranteed
loans. SBA will supplement the capital of Small Business Investment
Companies (SBICs) with $3 billion in long-term loans for venture capital
investments in small businesses.
To continue to serve the needs of small businesses, SBA will focus
program management in three areas:
1) Targeting economic assistance to the neediest small businesses
SBA seeks to target assistance more effectively to credit-worthy
borrowers who would not be well-served by the commercial markets in the
absence of a Government guarantee to cover defaults. SBA is actively
encouraging financial institutions to increase lending to start-up
firms, low-income entrepreneurs, and borrowers in search of financing
below $150,000. Preliminary evidence shows that SBA's outreach for the
7(a) program has been successful. Average loan size has decreased from
$258,000 in 2000 to $167,000 in 2004, while the number of small
businesses served has grown from 43,748 to 81,133 during the same time
period.
2) Improving program and risk management
Improving management by measuring and mitigating risks in SBA's $57
billion business loan portfolio is one of the agency's greatest
challenges. As the agency delegates more responsibility to the private
sector to administer SBA guaranteed loans, oversight functions become
increasingly important. SBA established the Office of Lender Oversight,
which is responsible for evaluating individual SBA lenders. This office
has made progress in employing a variety of analytical techniques to
ensure sound financial management by SBA and to hold lending partners
accountable for performance. These techniques include financial
performance analysis, industry concentration analysis, portfolio
performance analysis, selected credit reviews, and credit scoring to
compare lenders' performance. The oversight program is also developing
on-site safety and soundness examinations and off-site monitoring of
SBLCs and compliance reviews of SBA lenders. In addition, the office
will develop incentives for lenders to minimize defaults and to adopt
sound performance measures.
Improving risk management also means improving SBA's ability to
estimate more accurately the cost of subsidizing small businesses.
During 2003 and 2004, SBA followed through on its commitment to improve
its accuracy in estimating the cost of its major credit programs by
developing loan-level credit and reestimate models for the Section 504,
Disaster, 7(a), and Secondary Market Guarantee programs. The 2006 Budget
reflects net upward reestimates of the lifetime expected taxpayer costs
for outstanding loans--of $408 million for the 7(a) program, $123
million for the Section 504 program, $267 million for Disaster Loans,
and $922 million for SBIC Participating Securities. A net downward
reestimate of $60 million is also reflected for the SBIC Debentures
program. The 2006 upward trend in reestimates generally reflects
technical corrections to credit subsidy models (e.g., the 7(a) subsidy
model failed to account for purchased interest on defaulted loans),
higher interest rates and the agency's shift from
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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.