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

    [[Page 65]]

                             7. CREDIT AND INSURANCE

      Federal credit programs offer direct loans and loan guarantees to
    support a wide range of activities, primarily housing, education,
    business and community development, and exports. At the end of 2005,
    there were $247 billion in Federal direct loans outstanding and $1,084
    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.
      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 that differ across GSEs. In
    general, GSEs can borrow from Treasury in amounts ranging up to $4
    billion at Treasury's discretion, GSEs' corporate earnings are exempt
    from State and local income taxation, GSE securities are exempt from SEC
    registration, and banks and thrifts are allowed to hold GSE securities
    in unlimited amounts and use them to collateralize public deposits.
    These privileges leave many people with the impression that their
    securities are risk-free. GSEs, however, are not part of the Federal
    Government, and GSE securities are not federally guaranteed. By law, GSE
    securities carry a disclaimer of any U.S. obligation.
      This chapter discusses the roles of these diverse programs and
    assesses their effectiveness and efficiency.
        The first section analyzes the roles of Federal credit and
              insurance programs. Federal programs can 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.
              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 interprets the PART results.
        The third section discusses individual credit programs and
              GSEs classified into four sectors: housing, education,
              business and community development, and exports. The
              discussion focuses on program objectives, recent developments,
              performance, and future plans for each program.
        In a similar format, the final section reviews Federal
              deposit insurance, pension guarantees, disaster insurance, and
              insurance against terrorism and other security-related risks.

               I.  FEDERAL PROGRAMS IN CHANGING FINANCIAL MARKETS

    The Federal Role

      In most cases, private lending and insurance companies efficiently
    meet economic 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.
      Relevant market imperfections include insufficient information,
    limited ability to secure resources, imperfect competition, and
    externalities. The presence of a market imperfection suggests a
    possibility that a well-designed Government program can improve on the
    market outcome, although it does not necessarily mean that Government
    intervention is desirable. Addressing a market imperfection is a complex
    and difficult task.
      Insufficient Information. Financial intermediaries may fail to
    allocate credit to the most deserving borrowers if there is little
    objective information about borrowers. Some groups of borrowers, such as
    start-up businesses and start-up farmers, 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.
    For very irregular events, such as natural and man-made disasters, there
    may not be sufficient information to estimate the probability and
    magnitude of the loss. This pricing difficulty may prevent insurers from
    covering those risks at reasonable premiums.
      Limited Ability to Secure Resources. The ability of private entities
    to absorb losses is more limited than that of the Federal Government,
    which has general tax

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    ing 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.
      Imperfect Competition. Competition can be imperfect in some markets
    because of barriers to entry or economies of scale. Imperfect
    competition may result in higher prices of credit and insurance in those
    markets.
      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.

    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; it has better
    means to secure resources; and it is more competitive. As a result, the
    private market is more willing and able to serve a portion of the
    population 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 or insurance
    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. Credit scoring (an automated process that
    converts relevant borrower characteristics into a numerical score
    indicating creditworthiness), for example, is considered as a
    breakthrough in borrower screening. While credit scoring is widely
    applied to home mortgages and consumer loans, it is applied to a limited
    extent for small business loans and agricultural loans due to the
    difficulty of standardizing unique characteristics of small businesses
    and farmers. With technological advances, such as computer simulation,
    pricing catastrophe risks has become easier, but it remains much more
    difficult than pricing more regular events such as automobile accidents.
    It is still difficult for insurers to estimate the probability of a
    major natural disaster occuring. The difficulty may be greater for man-
    made disasters that lack scientific bases.
      Financial evolution has also alleviated resource constraints faced by
    private entities. Advanced financial instruments have enabled 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. 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.
      Imperfect competition, one possible motivation for Government
    intervention, is much less likely in general, thanks to financial
    deregulation and improved communication and financing 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 more beneficial to small and geographically isolated
    customers, as lower transaction costs make it easier to offer good
    prices to small customers. 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, small lenders
    with limited access to capital can more effectively compete with large
    ones. In addition, there are more financing alternatives for both
    commercial and individual borrowers that used to rely heavily on

    [[Page 67]]

    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, there may be a better way to address 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. 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 posed by the Pension Benefit Guaranty Corporation
    (PBGC) of the Department of Labor. PBGC is facing serious financial
    challenges due to unfavorable developments in recent years and to flaws
    in program structure that the Administration has proposed to remedy.
      Security-related risks heightened after the September 11th attacks
    also pose a challenge. Insurance programs covering security-related
    risks, such as terrorism and war, are difficult to manage because those
    events 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) is a performance evaluation
    tool designed to be consistent across Federal 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 evaluates programs in four areas (program purpose and design,
    strategic planning, program management, and program results) and assigns
    a numerical score (0 to 100) to each category. The overall rating
    (effective, moderately effective, adequate, ineffective, or results not
    demonstrated) is determined based on the numerical scores and the
    availability of reliable data.
      There are 30 credit programs (defined as those involving repayment
    obligations) and 5 insurance programs among 795 programs that have been
    rated by the PART. When appropriately weighted, the overall average
    score for credit and insurance programs is similar to that for other
    programs (see Table ``Summary of PART Scores''). The ratings for credit
    and insurance programs, however, are more clustered around the middle.
    Most credit and insurance programs (77 percent, compared with 55 percent
    for other programs) are rated ``adequate'' or ``moderately effective,''
    while only 2 programs (6 percent, compared with 16 percent for other
    programs) are rated ``effective.'' These results suggest that most
    credit and insurance programs meet basic standards, but need to improve.

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

    Credit and Insurance Programs
      Average..........................................................       77.1       69.4        84.8       53.0
      Standard Deviation...............................................       20.4       23.6        19.6       18.1

    All Others Excluding Credit and Insurance Programs
      Average..........................................................       86.3       73.4        81.4       47.1
      Standard Deviation...............................................       19.3       25.2        18.0       26.6
    ----------------------------------------------------------------------------------------------------------------

      Looking across evaluation criteria, for both credit and insurance
    programs and other programs, the scores are high in program purpose and
    design and in program management, while low in program results. Relative
    to other programs, however, credit and insurance programs scored low in
    program purpose and design and high in program results.

    [[Page 68]]

      The PART indicates that most credit and insurance programs have clear
    purposes (not necessarily economically justifiable purposes) and address
    specific needs. 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, such as
    inadequate incentive structures, limiting their effectiveness and
    efficiency.
      Regarding strategic planning, credit and insurance programs show
    strengths in accomplishing short-term goals. Weaknesses are found in
    pursuing long-term performance goals, conducting stringent performance
    evaluation, and tying budgets to performance outcomes. Many programs,
    however, have taken meaningful steps to correct their strategic planning
    deficiencies.
      In the program management category, credit and insurance programs are
    strong in basic financial and accounting practices, such as spending
    funds for intended purposes, and in collaborating with related programs.
    However, some programs show weaknesses in more sophisticated financial
    management, such as evaluating risks--a critical skill for the effective
    management of credit and insurance programs.
      Program results, the most important category of performance, are a
    weak area for credit and insurance programs despite a higher average
    score than that of other programs. In particular, many credit and
    insurance programs lack objectives evidences of program effectiveness
    and achieving results. This finding points to a strong need for results-
    driven management.

    Common Features

      There are some key features that distinguish credit and insurance
    programs from other programs. Credit and insurance programs are intended
    to address imperfections in financial markets. They also face various
    risks, such as uncertain default rates and erratic claim rates.
    Understanding common features in relation to the PART should help to
    interpret PART results and to devise adequate steps to improve
    performance.
      Program Purpose and Design. The most important role of credit and
    insurance programs is to serve those target populations that are not
    effectively served by the private sector. Financial markets, however,
    have been evolving to serve those populations better. Thus, to refocus
    programs appropriately, it is important to examine the effect of
    financial evolution.
      Lending and insurance are complex businesses involving screening
    applicants, financing, servicing, and monitoring. Given these
    complexities, the Government can significantly benefit from partnership
    with the private sector that combines the Government's and private
    entities' strengths. It takes a careful program design to realize the
    potential benefit from such partnership. In particular, the private
    partner's profit should be closely tied to its contribution to the
    program's effectiveness and efficiency. Without proper incentives,
    private entities do not perform as intended. For example, private
    lenders are generally better at screening borrowers, but they may not
    screen borrowers effectively if the Government provides a 100-percent
    loan guarantee.
      Strategic Planning. Financial markets change rapidly, and credit and
    insurance programs need to adapt to new developments quickly. For
    example, adopting new technologies is important. Private lenders are
    increasingly applying advanced technologies to credit evaluation.
    Falling behind, Federal credit programs can be left with much riskier
    borrowers as private entities attract better-risk borrowers away from
    Federal programs.
      Program Management. Risk management is a critical element of credit
    and insurance programs. The cashflow is uncertain both for credit and
    insurance programs. The default rate and the claim rate can turn out to
    be significantly different than expected. Credit programs also face
    prepayment and interest rate risks. These risks must be carefully
    managed to ensure that the program cost stays within a reasonable range.
    Effective risk management requires that program managers thoroughly
    understand the characteristics of beneficiaries and vigilantly monitor
    new developments. Given these needs for accurate and timely information,
    collecting and processing data may be more important for credit and
    insurance programs than for most other programs.
    ------------------------------------------------------------------------

                      President's Management Agenda Program Initiative: Improved Credit Management

    As one of the world's largest lenders, with a portfolio of more than $1.3 trillion in outstanding direct loans

    At the same time, the Government must ensure that it is effectively serving its intended borrowers. While these
     primary goals may occasionally conflict, agencies can achieve both in large part through effective risk
     identification, careful portfolio monitoring through information reporting, and tracking administrative costs
     through the credit lifecycle.

    The five major credit agencies (the Departments of Agriculture, Education, Housing and Urban Development,
     Veterans Affairs, and the Small Business Administration) and Treasury will be included in a new President's
     Management Agenda initiative to improve credit program management. Agencies will be rated on their performance
     in the areas of loan origination, servicing and portfolio monitoring, and liquidation/debt collection. This
     effort will be supported by a Credit Council comprised of the Office of Management and Budget 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.

    ------------------------------------------------------------------------
      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 and insurance 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 and insurance
    programs need to be interpreted in conjunction with the accuracy of cost
    estimation.
       The net outcome of a credit or an insurance 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

    [[Page 69]]

    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.

                          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 mortgage borrowers in general.

    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,
    nearly 2.5 million minority families have become homeowners. The
    Department of Housing and Urban Development's (HUD's) Federal Housing
    Administration (FHA) helped almost 450,000 of these first-time minority
    homebuyers through its loan insurance funds, mainly the Mutual Mortgage
    Insurance (MMI) Fund. FHA mortgage insurance guarantees mortgage loans
    that provide 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, 77.5 percent of FHA-insured loans
    were to first-time homeowners, and 35.0 percent were to minority
    homebuyers. In 2005, FHA insured almost $58 billion in purchase and
    refinance mortgages for more than 478,000 households. Nearly 80 percent
    of these homebuyers were buying their first homes, almost 100,000 were
    minorities.
      While FHA has been a primary mortgage source for first-time and
    minority buyers since the 1930s, its loan volume has fallen
    precipitously in the past three years. This is due in part to lower
    interest rates that have made uninsured mortgages affordable for more
    families. Moreover, private lenders--aided by automated underwriting
    tools that allow them to measure risks more accurately--have expanded
    lending to people who previously would have had no option but FHA--those
    with few resources to pay for downpayments and/or weaker credit
    histories than the private sector considered safe. The development of
    new products and underwriting approaches has allowed private lenders to
    offer loans to more homebuyers. While this is a positive development
    when the private sector is offering favorable terms, some borrowers
    either end up paying too much or receiving unfair terms.
      As private lenders have expanded their underwriting to cover more and
    more buyers, changes have taken place in the composition of FHA's
    business. First, the percentage of FHA-insured mortgages with initial
    loan-to-value (LTV) ratios of 95 percent or higher has increased
    substantially, from 38.6 percent in 1995 to 80.7 percent in 2005.
    Second, the percentage of FHA loans with downpayment assistance from
    seller-finance non

    [[Page 70]]

    profit organizations has grown rapidly, from 0.3 percent in 1998 to 31
    percent in 2005. Recent studies show that these loans are riskier than
    those made to borrowers who received downpayment assistance from other
    sources. In FY 2005, FHA's cumulative default claim rate for its core
    business is projected to have risen from approximately 8 percent to 10
    percent
      The FHA single-family mortgage program was assessed in 2005 using the
    PART rating tool. The assessment found that the program was meeting its
    statutory objective to serve underserved borrowers while maintaining an
    adequate capital reserve. However, the program lacked quantifiable
    annual and long-term performance goals that would measure FHA's ability
    to achieve its statutory mission. In addition, both the PART assessment
    and subsequent GAO and IG reports noted that the program's credit model
    does not accurately predict losses to the insurance fund, and that
    despite FHA efforts to deter fraud in the program, it has not
    demonstrated that these steps have reduced such fraud.
      In response to these findings, in 2006 FHA will measure its
    performance against goals, such as the percentage of FHA Single Family
    loans for first-time and minority homeowners, and performance goals for
    fraud detection and prevention. While FHA has taken steps to improve the
    accuracy of its annual actuarial review claim and prepayment estimates,
    it will continue to develop a credit model that more accurately and
    reliably predicts claims costs.

    Proposals for Program Reform

      In order to enable FHA to fulfill its mission in today's changing
    marketplace, the Administration will introduce legislation that will
    give FHA the ability to respond to current challenges to homeownership
    among its traditional target borrowers: low and moderate-income first-
    time homebuyers. FHA has already taken steps, within its current
    authority, to streamline its paperwork requirements and remove
    impediments to its use by lenders and buyers. However, these additional
    tools will enable it to expand homeownership opportunities to its target
    borrowers on an actuarially sound basis.
      To remove two large barriers to homeownership--lack of savings for a
    downpayment and impaired credit--the Administration proposes two new FHA
    mortgage products. The Zero Downpayment mortgage will allow first-time
    buyers with a strong credit record to finance 100 percent of the home
    purchase price and closing costs. For borrowers with limited or weak
    credit histories, a second program, Payment Incentives, will initially
    charge a higher insurance premium and reduce premiums after a period of
    on-time payments.
      FHA's current nearly flat premium, or fee, structure--charging uniform
    premiums regardless of the borrower's risk of default as indicated by
    the percentage of downpayment to the loan amount or borrower credit
    quality--means that loans to creditworthy borrowers subsidize loans to
    less creditworthy borrowers. The former may be paying proportionately
    too much premium, while the latter are paying too little.
      For 2007, FHA is proposing to introduce tiered risk-based pricing as a
    way to more fairly price its guarantee to individual borrowers, and at
    the same time eliminate the incentive for higher risk borrowers to use
    FHA because they are undercharged. FHA will base each borrower's
    mortgage insurance premiums upon the risk that the borrower poses to the
    FHA mortgage insurance fund. FHA proposes to base its mortgage insurance
    premiums upon a borrower's consumer credit score from Fair, Isaac, and
    Company (FICO), amount of downpayment, and source of downpayment (the
    borrower's own resources, relatives, employer, non-profit organization
    or public agency). Mortgage insurance premiums will be based on FHA's
    historical experience with similar borrowers. This change will decrease
    premiums for many of FHA's traditional borrowers, thereby increasing
    their access to homeownership.
      This price structure has many advantages. First, unlike the subprime
    market, FHA would price a borrower's risk via the mortgage insurance
    premium, not in the interest rate. With mortgage insurance, borrowers
    would pay a market rate of interest, and, as a result, would pay lower
    monthly payments and lower total costs than they would if they paid a
    higher mortgage interest rate throughout the life of the loan. Second,
    using this pricing structure, FHA would promote price transparency. Each
    borrower would know why they are paying the premium that they are being
    charged and would know how to lower their borrowing costs--i.e., by
    raising their FICO score or their downpayment, both matters under their
    control. Third, using risk-based pricing, FHA could annually review the
    performance of its programs in conjunction with the preparation of its
    credit subsidy estimates and could adjust its premiums as necessary to
    assure the financial soundness of the MMI Fund.
      A reformed FHA will adhere to sound management practices that include
    a new framework of standards and incentives tied to principles of good
    credit program management. At least annually, FHA will determine the
    volume and credit subsidy of each product it guarantees. These estimates
    will determine whether the credit subsidy rate will meet the target
    credit subsidy rate, and whether policy steps are required to ensure
    that it does.
      To ensure transparency, FHA proposes to run the MMI Fund so that it
    maintains a target weighted-average credit subsidy rate. To determine
    the target subsidy rate, FHA will perform probabilistic or scenario
    analyses to ensure that the reestimated subsidy rate will not exceed an
    agreed upon upward bound.
      The proposed reforms will enable FHA to better meet its objective of
    serving first-time and low-income home buyers by managing its risks more
    effectively.

    VA Housing Program

      The Department of Veterans Affairs (VA) assists veterans, members of
    the Selected Reserve, and active

    [[Page 71]]

    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 2005, VA provided $23 billion in guarantees to assist
    149,399 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 84,208
    zero down payment loans in 2005.
      To help veterans retain their homes and avoid the expense and damage
    to their credit resulting from foreclosure, VA intervenes aggressively
    to reduce the likelihood of foreclosures when loans are referred to VA
    after missing three payments. VA's successful actions resulted in 48.4
    percent of such delinquent loans avoiding foreclosure in 2005.

    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
    2005, nearly $4.2 billion in assistance was provided by RHS for
    homeownership loans and loan guarantees; $3.05 billion of guarantees
    went to 31,700 households, of which 30 percent went to very low and low-
    income families (with income 80 percent or less than median area
    income).
      For 2007, RHS will increase the guarantee fee on new 502 guaranteed
    loans to 3 percent from 2 percent. This allows the loans to be less
    costly for the Government without a significant additional burden to the
    borrowers, given that they can finance the fee as part of the loan. This
    will be coupled with language that will ensure that the RHS guarantee is
    the only Federal home loan product for which the borrower qualifies.
    This will ensure that the RHS home loan guarantee program is not
    redundant with similar home loan guarantee programs at HUD or VA. The
    guarantee fee for refinance loans remains 0.5 percent. Funding in 2007
    is requested at $3.5 billion for purchase loans and $99 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 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 requires graduation to private credit as the borrower's
    income and equity in their home increase 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 2007, RHS
    expects to provide $1.2 billion in loans with a subsidy rate of 10.03
    percent.
      RHS offers multifamily housing loans and guarantees to provide rural
    rental housing, including farm labor housing. Direct loans are provided
    to construct, rehabilitate, and repair multi-family rural rental housing
    for very low- and low-income, elderly or handicapped residents as well
    as migrant farm laborers. To help achieve affordable rents, the interest
    rate is subsidized to 1 percent. Many very low- and low-income
    residents' rents are further reduced to 30 percent of their adjusted
    income through rental assistance grants. For 2007, the request for
    rental assistance grants is for two-year contracts, down from four
    years, with a total finding level of $486 million. A two year contract
    term allows the multifamily housing direct loan program to operate
    efficiently. Of the total amount requested, $4 million is expected to be
    used to replenish funds spent for rental assistance for those affected
    by Hurricane Katrina.
      RHS will continue to propose funding and legislative changes to
    address the preservation issues surrounding the over 40-year old
    program. A long-term initiative has been developed to revitalize the
    17,000-property portfolio. During 2007, $74 million will be directed to
    the revitalization initiative, primarily to move existing residents in
    properties leaving the program. No funds are requested for the direct
    rural rental housing program because fixing the current portfolio is the
    first priority. The farm labor housing combined grant and loan level
    will provide $55 million in 2007 for new construction as well as repair
    and rehabilitation. RHS also guarantees multifamily rental housing
    loans. RHS expects to be able to guarantee $198 million in loans for
    2007.

    Government-Sponsored Enterprises in the Housing Market

      Between the years 1932-1970, Congress chartered three companies to
    support the national housing market. These Government-sponsored
    enterprises (``GSEs'') are Fannie Mae, Freddie Mac, and the Federal Home
    Loan Bank System. (The Federal Home Loan Bank System is comprised of 12
    individual banks with shared liabilities.) Together the three
    enterprises currently support, in one form or another, nearly one-half
    of all residential mortgages outstanding in the U.S. today. These
    enterprises are not part of the Federal Government, nor are they fully
    private. The companies were chartered by Congress with a public mission,
    and endowed with certain benefits that give them competitive advantages
    when compared with fully private companies.
      The Administration continues to propose broad reform of the
    supervisory system that oversees Fannie Mae, Freddie Mac, and the
    Federal Home Loan Bank System. The Administration's reform would
    establish a new safety and soundness regulator for the housing GSEs with
    powers comparable to other world-class fi

    [[Page 72]]

    nancial regulators. Comparable authorities include the ability to put a
    GSE into receivership should it fail, flexible authority to set
    appropriate capital standards, and ability to mitigate the risks the
    enterprises currently pose to the financial system and economy.
      Systemic Risk. Systemic risk is the risk that a failure in one part of
    the economy could lead to additional failures in other parts of the
    economy--the risk that a small problem could multiply to a point where
    it could jeopardize the country's economic well-being. The particular
    systemic risk posed by the GSEs is the risk that a miscalculation,
    failure of controls, or other unexpected event at one company could
    unsettle not only the mortgage markets but other vital parts of the
    economy. To understand this risk, one must understand the
    interdependencies among the GSEs and other market participants in the
    financial system. While the interrelationships of the modern financial
    system permit highly efficient management and dispersion of risk, these
    interdependencies, if not disciplined by the regulatory and market
    environment, may allow a failure in one place to immediately disrupt
    many other sectors.
      The GSEs are among the largest borrowers in the world. Lenders invest
    in GSE debt securities, and the value of their investment depends on the
    timely return of their money plus interest. The investors in GSE debt
    include thousands of banks, thousands of institutional investors such as
    insurance companies, pension funds, and foreign governments, and
    millions of individuals through mutual funds and 401k investments. Based
    on the prices paid by these investors, they act as if there is a legal
    requirement that the Federal Government guarantees GSE debt. In fact,
    there is no such guarantee or Federal backing. This perception by
    investors is reinforced by private ratings agencies in their guidance to
    investors. For example, recent guidance noted with regard to Fannie Mae
    and Freddie Mac, ``the firms' strategic importance to the US mortgage
    finance market and global capital markets implies a strong degree of
    Government support that underpins Moody's Aaa senior unsecured ratings
    of both housing GSEs.''
      The market's perception of GSE debt gives the GSEs a competitive
    advantage over other companies in the housing market, and leads to
    reduced market discipline. Because investors act as if there is a legal
    requirement for the Federal Government to back GSE debt, investors on
    average lend their money to the GSEs at interest rates up to 40 basis
    points less ($400 less per year for every $100,000 borrowed) than
    investors lending money to similarly rated, yet fully private,
    companies. In addition, investors do not demand the same financial
    disclosures as for fully private companies. Most of the GSEs either have
    failed to register their securities, or have suspended filing financial
    statements, with the Securities and Exchange Commission. Yet there has
    been no significant impact on the pricing of GSE debt securities. This
    lack of market discipline facilitates the growth of the GSE asset
    portfolios, thereby increasing systemic risk.
      GSE Asset Portfolios. Two of the housing GSEs--Fannie Mae and Freddie
    Mac--have used their funding advantage to amass large asset portfolios.
    Together these portfolios are funded by $1.7 trillion in debt. From 1990
    through 2004, the GSEs' competitive funding advantage enabled them to
    build portfolios of mortgage assets at a rate far exceeding the growth
    of the overall mortgage market, as shown in the graph. In 1990, the GSEs
    held less than five percent of outstanding mortgages in their asset
    portfolios. In 2004, they held 18 percent.

    [[Page 73]]

      In the last decade, the principal source of income for Fannie Mae and
    Freddie Mac has been net interest on their portfolios. From the 1970s to
    the early-1990s, Freddie Mac engaged principally in the business of
    guaranteeing mortgage-backed securities (MBS) for purchase by others,
    with only a limited mortgage asset portfolio. Although Fannie Mae has
    always had a mortgage asset portfolio, it was much smaller prior to the
    last decade. In 2003, the GSEs' income from the MBS guarantee-business
    represented less than 18 percent of the interest income earned on the
    asset portfolios. (Income data for Fannie Mae is not available for 2004
    due to the pending re-audit and restatement of Fannie Mae's financial
    statements.)

      The Federal Home Loan Banks have not to date grown mortgage asset
    portfolios as large as Fannie Mae or Freddie Mac, but the income
    generated by the mortgage portfolios of the Federal Home Loan Banks has
    grown since the mid-1990s. Their principal business remains lending to
    regulated depository institutions and insurance companies engaged in
    residential mortgage finance. These loans, called advances, are on
    favorable terms because like Fannie Mae and Freddie Mac, the Federal
    Home Loan Banks borrow at lower costs than otherwise comparable
    financial institutions. The Federal Home Loan Banks' advance business
    carries interest-rate risk, and the Banks must manage this risk.
      Thin Capital Cushions. Systemic risk is exacerbated because the GSEs
    are not required to hold cushions of capital comparable to the capital
    requirements levied on other large financial institutions.
      The three GSEs hold about one-half the capital held by similar, yet
    fully private, financial institutions. By law, Fannie Mae and Freddie
    Mac are permitted to borrow $97.50 for every $100 of the asset
    portfolio, because their capital requirement is only 2.5 percent for
    these assets. The Federal Home Loan Banks are required to hold about a 4
    percent capital cushion, slightly better but still less than that
    required for commercial banks. Commercial banks must hold a 5 percent
    capital cushion to be classified as well-capitalized, and generally need
    additional capital to meet their risk-based capital requirements. In
    contrast, the risk-based capital requirements for the GSEs have not
    required additional capital above their minimum capital requirements.
    These low capital requirements combined with the funding advantage
    described above have enabled Fannie Mae and Freddie Mac to amass asset
    portfolios without raising as much capital as other financial
    institutions, contributing to the GSEs' rate of growth. It also gives
    them a smaller capital cushion against unexpected changes in the
    economic environment.
      Although the GSEs' mortgage investments are of relatively low default
    risk, other types of risk in the GSEs' asset portfolios are substantial.
    Mortgage portfolios carry considerable interest-rate risk, partly
    because of the prepayment risk caused by the refinance option available
    on most mortgages that allows homeowners to prepay their mortgages at
    any time to take advantage of lower interest rates. This risk can be
    mitigated--for example, through purchase of interest-rate hedges--but
    the GSEs protect themselves against only some of the interest rate risk
    of their portfolios. Moreover, hedges are imperfect. Hedging
    misjudgments would occur even if the GSEs' policy were to fully hedge
    the portfolio because predicting interest-rate movements and mortgage
    refinancing activity is difficult. As

    [[Page 74]]

    GSE asset portfolios have grown in size, the GSEs' participation in the
    market for hedging instruments has become dominant enough to cause
    interest rate spikes in the event that a GSE needs to make large and
    sudden adjustments to its hedging position.
      Systemic risk also is exacerbated because financial institutions that
    lend money to the GSEs may treat these investments favorably. Contrary
    to their other investments, banks are required to hold only a small
    amount of capital against the risk of decline in value or failure of the
    GSE investment. As noted by one rating agency in its guidance to
    investors, the GSEs have a competitive advantage because financial
    institutions have virtually no investment limits for GSE debt. Research
    shows that more than 60 percent of institutions in the banking industry
    hold as assets GSE debt in excess of half of their equity capital.
      Other large financial institutions have more diversified investments,
    carry less debt relative to their assets, and are subject to disclosure
    of their business and operations with the Securities and Exchange
    Commission. In contrast, the GSEs' asset portfolios are highly
    leveraged, bear significant interest-rate risk, and have a dominant
    presence in the markets to hedge these risks. These factors, combined
    with a lack of limits on institutions lending to the GSEs, help explain
    the systemic risk posed by the GSEs.
      GSE Asset Portfolios in the Marketplace. As demonstrated above, the
    asset portfolios are profit-makers for Fannie Mae and Freddie Mac. In
    addition, the GSEs claim that their asset portfolios are necessary to
    maintain a liquid market for their securities and mortgage investments
    in general. But the market for mortgage-backed securities is robust and
    liquid, with $250 billion traded daily. The GSEs also claim that their
    asset portfolios can protect the market in the event of a decline by
    providing an injection of liquidity. Although the GSEs could use their
    funding advantage to help limit a market decline by purchasing MBS, it
    is not necessary for the GSEs to hold an asset portfolio of such
    investments prior to the decline to provide this liquidity.
      The GSEs also claim that by issuing debt to purchase their own
    mortgage-backed securities, they are attracting foreign investment in
    the US mortgage market that could not otherwise be gained. But there
    exists a healthy and growing appetite of foreign investors for mortgage-
    backed securities, as well as a sophisticated marketplace able to
    transform mortgage-backed securities into the appealing features of debt
    securities. In addition, the large amounts of GSE debt may compete to
    some degree with US Treasury securities, which has the potential to
    raise the cost of Federal borrowing.
      Finally, Fannie Mae and Freddie Mac claim that their asset portfolios
    expand opportunities for, and lower the cost of, lending to groups
    traditionally underserved by the private market. These include minority
    and low-income borrowers. HUD sets annual goals for the GSEs' purchases
    of mortgages to underserved groups. Meeting HUD's goals, however, does
    not require the GSEs to hold these mortgages as assets. Most of these
    mortgages could be securitized and sold to investors, contributing to
    the expansion of affordable housing as well as any mortgages held by the
    GSEs.
      Mitigating Systemic Risk. The Budget proposes a new strengthened GSE
    regulator as an independent agency. This proposal and others currently
    before Congress include differing provisions with respect to the power
    of a new regulator to require the GSEs to limit the size of their asset
    portfolios, and to specify under what conditions the regulator should
    require such a limitation.
      Mitigating systemic risk requires taking action before a crisis
    occurs. Thus a new GSE regulator that is limited in its powers cannot
    properly mitigate systemic risk. When limited to consideration of the
    safety and soundness risk of a particular enterprise, for example, the
    regulator may not fully consider potential consequences to others in the
    mortgage markets and the larger economy. A world-class regulator for the
    GSEs must be equipped with the power to limit the systemic risk posed by
    a GSE before any safety and soundness event at a particular GSE occurs.
      Congress can ensure that the GSE asset portfolios do not place the US
    financial system at risk by instructing a new GSE regulator that asset
    portfolios are a significant source of systemic risk, and should be
    limited by the GSE regulator accordingly. This does not mean reducing
    the size of the mortgage market. The GSEs could still guarantee
    mortgage-backed securities for sale to other investors. The mortgage
    market will grow whether mortgages are owned by investors or by the
    GSEs.
      A new regulator with appropriate powers would reduce systemic risk by
    requiring the GSEs over time to dispose of certain assets, leaving only
    those that provide a specific public benefit, such as a pipeline for
    mortgage securitization and affordable housing mortgages not suitable
    for securitization. These public benefit assets characterize only a
    small percentage of GSE assets, and thus would decrease the size of the
    asset portfolios and effectively mitigate the systemic risk posed by the
    GSEs to the US economy.

                       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, was privatized in 2004.
      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

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    while borrowers are in school, during a six-month grace period after
    graduation, and during certain deferment periods.
      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. 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. 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.
      Last year, the Administration worked to improve the way the loan
    programs operate by eliminating unnecessary subsidies, expanding risk-
    sharing to reduce costs, and improving the financial stability of the
    guaranty agency system. In response, Congress passed reconciliation
    legislation which will reduce excess subsidies in FFEL and help make
    both the Direct Loan and FFEL programs more effective. The reforms
    include a reduction in the percentage of Federal guarantee provided
    against default in recognition of the strong repayment record for
    student loans today and an elimination of unnecessary and costly loan
    subsidy provisions that allowed some loan holders to have exorbitant
    financial returns on loans funded through tax-exempt securities.

             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, as well as renters,
    cover the uninsured costs of recovery from disasters.
      The 2007 Budget requests $436 million, including administrative funds,
    for SBA to leverage more than $28 billion in financing for small
    businesses and disaster victims. The 7(a) General Business Loan program
    will support $17.5 billion in guaranteed loans while the 504 Certified
    Development Company program will support $7.5 billion in guaranteed
    loans for fixed-asset financing. SBA will supplement the capital of
    Small Business Investment Companies (SBICs) with $3 billion in long-
    term, guaranteed loans for venture capital investments in small
    businesses. At the end of 2005, the outstanding balance of business
    loans totaled $63 billion.
      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. SBA's outreach for the 7(a) program has been successful.
    Average loan size has decreased from $232,000 in 2001 to $160,000 in
    2005, while the number of small businesses served has grown from 43,000
    to 89,000 during the same time period.
      Improving management by measuring and mitigating risks in SBA's $63
    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. In the past few years, SBA established the
    Office of Lender Oversight, which is responsible for evaluating
    individual SBA lenders. This office employs a variety of analytical
    techniques to ensure sound financial management by SBA and to hold
    lending partners accountable for performance. These techniques include
    portfolio performance analysis, selected credit reviews, credit scoring
    to compare lenders' performance, and industry concentration analysis.
    The oversight program is also developing on-site safety and soundness
    examinations and off-site monitoring of Small Business Lending Companies
    and compliance reviews of SBA lenders.
      To operate more efficiently, SBA has implemented an automated loan
    origination system for the Disaster Loan program. The system eliminates
    the paper intensive processes that had been used for decades by the
    Office of Disaster Assistance. Savings are projected at approximately $5
    million per year under the new system. 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
    streamlined its 7(a) guarantee processing function. Similarly, SBA has
    also centralized its loan liquidation functions for guaranteed programs
    resulting in a 78 percent reduction in related administrative costs.
    These

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    efforts have allowed the agency to reduce staffing levels while
    improving customer service.
      The 2007 Budget proposes to continue providing preferential loan terms
    to victims of disasters. However, in order to contain the escalating
    costs of the loans while matching borrowers' assistance needs, the
    Budget proposes to adopt graduated interest rates for the Disaster Loan
    program. During the first five years after a disaster, interest rates
    will remain deeply subsidized, as they are currently structured,
    although interest rate caps would be eliminated. Thereafter, rates would
    graduate to those of comparable-maturity Treasury instruments. This
    structure would continue to provide borrowers with deep interest
    subsidies when they need them most--immediately after a disaster--and
    after five years the subsidies would be reduced for the remainder of the
    loan period.
      In addition, the 2007 Budget builds upon the success of eliminating
    credit subsidy requirements for the 7(a) loan program by proposing that
    borrowers cover the costs of administering Federal guarantees on
    business loans greater than $1 million. This will make these loans self-
    financing and reduce the need for taxpayer support by about $7 million.

    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 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 2007 President's Budget is $1.4
    billion. These funds are available to communities of 10,000 or fewer
    residents. 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. Communities typically receive
    a grant/loan combination. The grant may be up to 75 percent of project
    costs; however, many projects are viable with 70 percent or more of the
    projects costs financed with a loan. The 2007 Budget reflects a
    significant change in the method for determining the interest rate
    charged on such loans, from a three-tiered structure (poverty,
    intermediate, and market) depending on community income to an interest
    rate that is 60 percent of the market rate not to exceed 5 percent. This
    change is expected to substantially reduce the loan repayment costs for
    most communities, at a lower loan to grant ratio. The community facility
    program is targeted to rural communities with fewer than 20,000
    residents. It will have a program level of $522 million in 2007.
      USDA also provides grants, direct loans, and loan guarantees to assist
    rural businesses, including cooperatives, and to increase employment and
    diversify the rural economy. In 2006, USDA proposes to provide almost $1
    billion in loan guarantees to rural businesses that serve communities of
    50,000 or less. USDA also provides rural business 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. Overall, USDA expects to
    retain or create over 73,000 jobs through its business programs in 2007,
    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 (DLT).
      The Budget includes $3.8 billion in direct electric loans, $690
    million in direct telecommunications loans, $356 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.
      The Rural Telephone Bank is in the process of dissolving. All stock
    will be redeemed during 2006 and no new loans will be provided. Loans
    approved in prior years, but not disbursed will still be available for
    borrowers at modified terms to reflect the bank's dissolution.

    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 3.1 percent in 2005, compared to
    3.4 percent in 2004. 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,

    [[Page 77]]

    losses on guaranteed farm loans remain low with default rates of 0.45
    percent in 2005, as compared to 0.69 percent in 2004. 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 2005, FSA provided loans and loan guarantees to approximately
    26,000 family farmers totaling $3 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 low crop/livestock prices and some
    regional production problems. In 2007, FSA proposes to make $3.4 billion
    in direct and guaranteed loans through discretionary programs. In
    addition, FSA proposes to increase fees on many of its guaranteed loan
    programs to reduce the cost of the program and bring the fees in line
    with other Federal guaranteed loan programs.
      To improve program effectiveness further, FSA conducted in 2005 an in-
    depth review of its direct 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. Contingent on availability
    of adequate resources in 2006, FSA will conduct a similar study of its
    guaranteed loan program.

    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

      The financial condition of the System's banks and associations has
    continued to improve. The ratio of capital to assets increased to 17.1
    percent at year-end 2004 from an already high level of 16.1 percent at
    year-end 2001. As of September 30, capital consisted of $2 billion in
    restricted capital held by the Farm Credit System Insurance Corporation
    (FCSIC) and $20.7 billion of unrestricted capital--a record level.
    Nonperforming loans decreased, and earnings increased, although rising
    short-term interest rates moderately squeezed interest margins. The
    examinations by the Farm Credit Administration (FCA), the FAC's Federal
    regulator, also show the strong financial condition of FCS institutions.
    As of September 2005, all FCA institutions had one of the top two
    examination ratings (1 or 2 in a 1-5 scale). Assets grew at a brisk pace
    (over 7 percent annual rate) in recent years, while the number of FCS
    institutions decreased due to consolidation. In September 2002, there
    were seven banks and 104 associations; by September 2005, there were
    five banks and 96 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 the joint and several liability of the System
    banks. On September 30, 2005, the assets in the Insurance Fund totaled
    $2.029 billion. Of that amount, $40 million was allocated to the
    Allocated Insurance Reserve Accounts (AIRAs). On September 20, 2005, the
    Insurance Fund as a percentage of adjusted insured debt was 1.87 percent
    in the unallocated Insurance Fund and 1.91 percent including the AIRAs.
    This was below the Secure Base target of 2 percent. During 2005, growth
    in System debt has outpaced the capitalization of the Insurance Fund
    that occurs through investment earnings and the accrual of premiums. In
    addition, the Insurance Fund paid out $231 million toward the retirement
    of the remaining Financial Assistance Corporation (FAC) bonds. On June
    10, 2005, the FAC repaid its remaining debt obligations of $325 million
    and also repaid all interest advanced by the U.S. Treasury ($440
    million).
      Over the past 12 months, the System's loans outstanding have grown by
    $8.3 billion, or 8.8 percent, while over the past three years they have
    grown $15.3 billion, or 17.4 percent. As required by law, all borrowers
    are also stockholder owners of System banks and associations. As of
    September 30, 2005, the System has more than 461,000 stockholders. Loans
    to young, beginning, and small farmers and ranchers represented 12.7,
    19.1, and 31.0 percent, respectively, of the total dollar volume of farm
    loans outstanding at the end of 2004. The percentage of loans to
    beginning farmers increased in 2004, while loans to young and small
    farmers were slightly lower. Young, beginning, and small farmers are not
    mutually exclusive groups, and thus, cannot be added across 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 associated with the
    agricultural sector, including concentration risk, changes in real
    estate values, weather-related catastrophes, possible changes to
    government programs, volatile commodity prices, animal and plant
    diseases, and uncertain prospects of off-farm employment.

    Farmer Mac

      Farmer Mac was established in 1987 to facilitate a secondary market
    for farm real estate and rural housing loans. The Farm Credit System
    Reform Act of 1996 transformed Farmer Mac from a guarantor of securities

    [[Page 78]]

    backed by loan pools into a direct purchaser of mortgages, enabling it
    to form pools to securitize. This change increased Farmer Mac's ability
    to provide liquidity to agricultural mortgage lenders. Since then,
    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, AgVantage bond assets, and real estate owned)
    as of September 30, 2005, totaled $5.1 billion. That volume represents a
    decrease of 7.5 percent from program activity at September 30, 2004.
    Farmer Mac attributes the decline to ample liquidity among rural lenders
    and the generally strong financial position of farmers currently. Of
    total program activity, $2.1 billion were on-balance sheet loans and
    agricultural mortgage-backed securities, and $3.0 billion were off-
    balance sheet obligations. Total assets were $4.3 billion at the close
    of the third quarter, with nonprogram investments accounting for $2.0
    billion of those assets. Farmer Mac's net income for first three
    quarters of 2005 was $22.4 million, an increase of $2.4 million or 11.6
    percent over the same period in 2004.

                          International Credit Programs

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

    Leveling the Playing Field

      Federal export credit programs counter subsidies that foreign
    governments, largely in Europe and Japan, provide their exporters,
    usually through export credit agencies (ECAs). The U.S. Government has
    worked since the 1970's to constrain official credit support through a
    multilateral agreement in the Organization for Economic Cooperation and
    Development (OECD). This agreement has significantly constrained direct
    interest rate subsidies and tied-aid grants. Further negotiations
    resulted in a multilateral agreement that standardized the fees for
    sovereign lending across all ECAs beginning in April 1999. Fees for non-
    sovereign lending, however, continue to vary widely across ECAs and
    markets, thereby providing implicit subsidies.
      The Export-Import Bank attempts to ``level the playing field''
    strategically 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. A loan or credit may
    not be made for more than 6 months in any 12-month period unless the
    President gives Congress a written statement that unique or emergency
    circumstances require the loan or credit be for more than 6 months.

    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

    [[Page 79]]

    OPIC finance in developing countries. OPIC has also created a number of
    investment funds that provide equity to local companies with strong
    development potential.

    Ongoing Coordination

      International credit programs are coordinated through two groups to
    ensure consistency in policy design and credit implementation. The Trade
    Promotion Coordinating Committee (TPCC) works within the Administration
    to develop a National Export Strategy to make the delivery of trade
    promotion support more effective and convenient for U.S. exporters.
      The Interagency Country Risk Assessment System (ICRAS) standardizes
    the way in which agencies budget for the cost associated with the risk
    of international lending. The cost of lending by the agencies is
    governed by proprietary U.S. Government ratings, which correspond to a
    set of default estimates over a given maturity. The methodology
    establishes assumptions about default risks in international lending
    using averages of international sovereign bond market data. The strength
    of this method is its link to the market and an annual update that
    adjusts the default estimates to reflect the most recent risks observed
    in the market.
      For 2007, 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 2007.

    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.
      While the deposit insurance system for banks and thrifts today is
    generally sound and well managed, inherent weaknesses in the system
    prompted the President to propose reforms, including the establishment
    of a new combined, stronger Federal Deposit Insurance Corporation (FDIC)
    insurance fund and increased flexibilities for the FDIC regarding fund
    levels and the authority to charge premiums. These new authorities would
    allow the FDIC to better manage the fund and help avoid strain on
    financial institutions by stabilizing industry costs over time instead
    of having a potential for sharp premium increases when the economy may
    be under stress. Many of these reforms, including the merger of the
    insurance funds, were included in the Deficit Reduction Act of 2005,
    which the Budget assumes will be enacted before publication.
      The FDIC insures deposits in banks and savings associations (thrifts).
    The National Credit Union Administration (NCUA) insures deposits
    (shares) in most credit unions (certain credit unions are privately
    insured). FDIC and NCUA insure deposits up to $100,000 per account.
    Under the Deficit Reduction Act of 2005, the deposit insurance ceiling
    will be changed for various accounts, including an increase for
    retirement accounts of up to $250,000. Beginning in 2010, and every five
    years thereafter, FDIC and NCUA will have the authority to increase
    deposit insurance coverage limits for

    [[Page 80]]

    non-retirement accounts based on inflation if the Boards determine
    prudent. As of September 30, 2005, FDIC insured $3.8 trillion of
    deposits at 8,867 commercial banks and thrifts and NCUA insured $515
    billion of deposits (shares) at 8,795 credit unions.

    Current Industry and Insurance Fund Conditions

      For the quarter ending September 30, 2005, insured banks and thrifts
    continued to report record-high earnings, outpacing the previous
    quarter's net earnings by $1.4 billion. In the year ending September 30,
    2005, industry net income totaled $134 billion--a nine percent increase
    over the $123 billion income reported for the previous year. 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 those regions.
      In 2005, no banks or thrifts failed. In comparison, during the
    previous year, five banks and thrifts, with combined assets of $175
    million dollars, failed. As of September 30, 2005, the FDIC classified
    68 institutions with $21 billion in assets as ``problem institutions,''
    compared to 95 institutions with $25 billion in assets one year earlier.
      Under the Deficit Reduction Act, the FDIC's Bank Insurance Fund (BIF)
    and its Savings Association Insurance Fund (SAIF) will be merged into
    the near Deposit Insurance Fund (DIF). At the end of September 2005, the
    SAIF reserve ratio (ratio of insurance reserves to insured deposits)
    stood at 1.30 percent--well above the statutory target of 1.25 percent.
    However, a surge in insured deposits reduced the reserve ratio of BIF to
    1.25 percent as of September 2005, when the latest statistics are
    available. While this just meets the statutory target, it raises the
    likelihood that all BIF-insured institutions could be assessed premiums
    in 2006 because of the requirement to maintain the reserve ratio at the
    statutory target. Under the Deficit Reduction Act, the FDIC will have
    more flexibility as to when it can charge premiums. Under the Act, the
    FDIC is authorized to charge risk-based premiums on any member
    institution to manage fund reserves and can set the reserve ratio at the
    beginning of each year within a range between 1.15 and 1.50 percent of
    estimated insured deposits. When an insurance fund is expected to remain
    above the statutory target, the FDIC is authorized to charge deposit
    insurance premiums only on institutions that are not well capitalized or
    well managed, with a maximum premium of 27 cents per $100 of assessable
    deposits for the riskiest institutions. Due to the strong financial
    condition of the industry, less than 10 percent of banks and thrifts
    paid insurance premiums in 2004.
      During 2005, 13 Federally-insured credit unions with $148 million in
    assets failed (including assisted mergers). In comparison, during 2004,
    22 Federally-insured credit unions with $120 million in assets failed.
    The National Credit Union Share Insurance Fund (NCUSIF) ended fiscal
    year 2005 with assets of $6.3 billion and an equity ratio of 1.27
    percent, below the NCUA-set target ratio of 1.30 percent. Each insured
    credit union is required to deposit and maintain an amount in the NCUSIF
    equal to one percent of its member share accounts in the fund. The
    insurance premium charge was waived again during 2005 because the ratio
    stayed above 1.25 percent. NCUA is required to assess a premium if the
    ratio falls below 1.20 percent and is authorized to do so if the ratio
    falls below 1.25 percent.
      The Federal banking regulators (the Board of Governors of the Federal
    Reserve System, the Federal Deposit Insurance Corporation, the Office of
    the Comptroller of the Currency, and the Office of Thrift Supervision)
    continue to work on a rulemaking that would implement the
    ``International Convergence of Capital Measurement and Capital
    Standards: A Revised Framework'' (Basel II). The original Basel Capital
    Accord (Basel I) is an international agreement establishing a uniform
    capital standard across nations. It adopted a risk-based capital
    requirement that applies a few risk weights to broad categories of
    assets. The Federal banking regulators issued capital rules based on
    Basel I in 1989. Basel II would improve the risk-based capital
    requirement in several ways, including refining risk categories. U.S.
    regulators are considering requiring the largest banks that have complex
    financial structures and expertise to use an internal ratings-based
    approach to calculate credit risk capital requirements, and an advanced
    measurement approach to calculate operational risk capital requirements.
    The rule, if adopted, would apply to banks that hold the overwhelming
    majority of U.S. banking assets. The regulators are using Quantitative
    Impact Study 4 data recently obtained from banks likely to be covered by
    the rule to help develop the rulemaking, including the implementation
    schedule and transition provisions.

                               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 meets the legal criteria to transfer its obligations to the pension
    insurance program. PBGC's claims exposure is the amount by which
    qualified benefits exceed assets in insured plans. In the near term, the
    risk of loss stems from financially distressed firms with underfunded
    plans. In the longer term, loss exposure results from the possibility
    that currently healthy firms become distressed and currently well-funded
    plans become underfunded due to inadequate contributions, poor
    investment results, or increased liabilities.
      Losses to the PBGC and benefit losses to workers and retirees are
    exacerbated by structural flaws in the statutory plan funding
    requirements and in the design of the insurance program. The pension
    system is replete with moral hazards that allow the buildup of unfunded
    pension promises even in plans with weak sponsors, where the risk of
    plan termination is high. At the same time, PBGC lacks the standard
    insurance industry safe

    [[Page 81]]

    guards against moral hazards--such as underwriting standards and risk-
    based premiums.
      PBGC monitors troubled companies with underfunded plans and acts to
    protect the interests of the pension insurance program's stakeholders
    where possible. Such protections include initiating termination of an
    underfunded plan in appropriate circumstances. Under its Early Warning
    Program, PBGC works with companies to strengthen plan funding or
    otherwise protect the insurance program against avoidable losses.
    However, PBGC's authority to prevent undue risks to the insurance
    program is limited.
      The combination of the flawed design of the pension insurance system
    and adverse economic conditions has resulted in PBGC's single-employer
    program incurring substantial losses from underfunded plan terminations
    in 2001 through 2005. The table below shows the ten largest plan
    termination losses to date. As a result of these losses, the program's
    deficit at 2005 year-end stood at $22.8 billion, \1\ compared to a $9.7
    billion surplus at 2000 year-end.
    ---------------------------------------------------------------------------
      \1\ The 2005 year-end single-employer program deficit of $22.8 billion
    was less than the $23.3 billion deficit at the end of 2004 because
    increased losses from new claims were offset by new premiums, favorable
    liability revaluations due to increasing interest rates, and investment
    returns. There is no assurance that these results will continue.
    ---------------------------------------------------------------------------

                         LARGEST 10 CLAIMS AGAINST THE PBGC'S SINGLE-EMPLOYER PROGRAM, 1975-2005
    ----------------------------------------------------------------------------------------------------------------
                                                                                                         Percent  of
                                                                   Fiscal Years  of                         Total
                            Top 10 Firms                          Plan  Terminations  Claims  (by firm)     Claims
                                                                                                         (1975-2005)
    ----------------------------------------------------------------------------------------------------------------

      1.  United Airlines.......................................               2005      $7,093,803,951       22.7%
      2.  Bethlehem Steel.......................................               2003       3,654,380,116       11.5%
      3.  US Airways............................................         2003, 2005       2,861,901,511        9.0%
      4.  LTV Steel*............................................   2002, 2003, 2004       1,959,679,993        6.2%
      5.  National Steel........................................               2003       1,161,019,567        3.7%
      6.  Pan American Air......................................         1991, 1992         841,082,434        2.7%
      7.  Weirton Steel.........................................               2004         690,181,783        2.2%
      8.  Trans World Airlines..................................               2001         668,377,105        2.1%
      9.  Kemper Insurance......................................               2005         566,128,387        1.8%
      10.   Kaiser Aluminum.....................................               2004         565,812,015        1.8%
                                                                 ---------------------------------------------------
    Top 10 Total................................................  ..................     20,062,366,861       63.3%
    All Other Total.............................................  ..................     11,646,148,178       36.7%
                                                                 ---------------------------------------------------
        TOTAL...................................................  ..................    $31,708,515,039      100.0%
    ----------------------------------------------------------------------------------------------------------------
    Sources: PBGC Fiscal Year Closing File (9/30/05), PBGC Case Administration System and PBGC Participant System
      (PRISM).
    Due to rounding, percentages may not add up to 100 percent.
    Data in this table have been calculated on a firm basis and include all plans of each firm.
    Values and distributions are subject to change as PBGC completes its reviews and establishes termination dates.
    * Does not include 1986 termination of a Republic Steel plan sponsored by LTV.

      Additional risk exposure remains for the future because of economic
    uncertainties and significant underfunding in single-employer pension
    plans, which, on a termination basis, exceeded $450 billion at the end
    of 2005, the same as a year earlier but now concentrated among larger
    plans. This exposure is higher than the $350 billion at the end of 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, was $108 billion at September 30, 2005. The comparable
    estimates for 2004 and 2003 were $96 billion and $82 billion,
    respectively. Several large companies in the airline and automotive
    industries recently filed for bankruptcy with a potential exposure to
    PBGC in the billions of dollars.
      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 stood at $335 million at the end of 2005, up from
    $236 million in 2004. Estimated underfunding in multiemployer plans
    approximated over $200 billion at year-end, up from over $150 billion
    and $100 billion in 2004 and 2003, respectively.
      The agency has sufficient liquidity to meet its obligations for a
    number of years; however, neither the single-employer nor multiemployer
    program has the resources to satisfy fully the agency's long-term
    obligations to plan participants. As of September 30, 2005, the PBGC's
    single-employer and multiemployer programs together had assets of $57.6
    billion to cover liabilities of $80.7 billion, a shortfall of $23.1
    billion.
       In February 2005 the Administration proposed comprehensive reforms to
    strengthen funding for workers' defined-benefit pensions; provide more
    accurate infor

    [[Page 82]]

    mation about pension liabilities and plan underfunding; and enable PBGC
    to meet its obligations to participants in terminated pension plans. The
    reforms would:
        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 re-examine 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 forgo 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.
      In late December 2005, the Senate approved a conference report on
    budget reconciliation that contains a premium increase for both the
    single-employer and multiemployer insurance programs; House action on
    the conference report is expected early in 2006. In addition,
    comprehensive pension bills (S. 1783 passed by the Senate on November
    16, 2005, and H.R. 2830 passed by the House on December 15, 2005) are
    expected to be considered by a Conference Committee early in 2006. The
    Administration is evaluating the bills in light of its pension reform
    goals and is committed to pension reform that would strengthen funding
    requirements and restore PBGC to solvency.

                               Disaster Insurance

    Flood Insurance

       The Federal Government provides flood insurance through the National
    Flood Insurance Program (NFIP), which is administered by the Federal
    Emergency Management Agency 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. In January 2006, the program had 4.7 million policies in more
    than 20,100 communities with $811 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 affordable 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.
      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
    floodplains and have mortgages from federally regulated lenders. These
    strategies have resulted in policy growth of 5 percent in the last 12
    months.
      DHS also has a multi-pronged strategy for reducing future flood
    damage. The NFIP offers flood mitigation assistance grants to assist
    flood victims to rebuild to current building codes including base flood
    elevations, thereby reducing future flood damage costs. In addition, two
    newly enacted grant programs will help reduce the number of repetitive
    loss properties through acquisition, relocation, or elevation, not only
    helping owners of high-risk property, but reducing a disproportionate
    drain on the National Flood Insurance Fund. As the new repetitive loss
    grants are implemented, FEMA will work to ensure that all of the flood
    mitigation grant programs are closely integrated, resulting in better
    coordination and communication with State and local governments.
    Further, through the Community Rating System, DHS adjusts premium rates
    to encourage community and State mitigation activities beyond those
    required by the NFIP. These efforts, in addition to the minimum NFIP
    requirements for floodplain management, save the country well over $1
    billion annually in avoided flood damages.
      The program's reserve account, which is a cash fund, has sometimes had
    expenses greater than its revenue. The program's goal of providing
    affordable insurance does not permit the accumulation of large cash
    reserves. Currently, structures built prior to flood mapping and NFIP
    floodplain management requirements pay less than fully actuarial rates.
    These structures make up less than 25 percent of the total 4.7 million
    policies in force.
       Mostly because of the four major hurricanes in 2004, the NFIP handled
    74,000 claims nationwide, resulting in payments totaling more than $2
    billon, the highest loss year since the program began in 1968. All but
    $300 million of these payments were made with the reserve in the fund.
    However, this record loss year was surpassed in 2005 by a factor of more
    than 10 because of hurricanes Katrina, Rita, and Wilma. These three
    storms are expected to result in over 200,000 claims with an estimated
    payment totaling more than $23 billion. As a result, the Administration
    and Congress have worked to increase the borrowing authority to make
    certain that all claims could be paid.
      The Administration is also working with Congress to improve the NFIP
    based on the following principles: protecting the NFIP's integrity by
    covering existing commitments; phasing out subsidized premiums in order
    to charge fair and actuarially sound premiums; increasing program
    participation incentives and improving enforcement of mandatory
    participation in the pro

    [[Page 83]]

    gram; increasing risk awareness by educating property owners; and
    reducing future risks by implementing and enhancing mitigation measures.
    The catastrophic nature of the 2005 hurricane season has also triggered
    an examination of the program, and the Administration is working with
    Congress to reform the program to further mitigate the impact of flood
    damages and losses.

    Crop Insurance

      Subsidized Federal crop insurance administered by USDA's Risk
    Management Agency (RMA) assists farmers in managing 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.
      The 2007 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 points on policies with
    a coverage level of 75 percent or above (80 percent for GRP). In
    addition, the proposal reduces the Administrative and Operating
    reimbursement on all buy-up coverage by 2 percentage points and
    increases the net book quota share to 22 percent, but provides a ceding
    commission to the companies of 2 percent. These changes are expected to
    be in effect in 2008 and will save $140 million a year. This proposal
    was also included in the 2006 Budget.
      In addition, the 2007 Budget includes a proposal to implement a
    participation fee in the Federal crop insurance program. The proposed
    participation fee would initially be used to fund modernization of the
    existing information technology (IT) system and would supplement the
    annual appropriation provided by Congress. Subsequently, the fee would
    be shifted to maintenance and would be expected to reduce the annual
    appropriation. The participation fee would be charged to insurance
    companies participating in the Federal crop insurance program; based on
    a rate of about one-half cent per dollar of premium sold, the fee is
    expected to be sufficient to generate about $15 million annually
    beginning in 2008. The existing IT system is nearing the end of its
    useful life and recent years have seen increases in ``down-time''
    resulting from system failures. Over the years, numerous changes have
    occurred in the Federal crop insurance program; including, the
    development of revenue and livestock insurance which have greatly
    expanded the program and taxed the IT system due to new requirements,
    such as daily pricing, which were not envisioned when the existing IT
    system was designed. These new requirements contribute to increased
    maintenance costs and limit RMA's ability to comply with Congressional
    mandates pertaining to data reconciliation with the Farm Service Agency.
    The participation fee will alleviate these problems.
      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. 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 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. For the ten principal crops, which account for about
    80 percent of total liability, over 75 percent of eligible acres
    participated in the crop insurance program.
      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 2005, revenue products accounted for about 54 percent of policies
    earning

    [[Page 84]]

    premium, 52 percent of net insured acres, and 62 percent of total
    program liability.
      USDA also continues to expand coverage. In 2005, a sugar beet stage
    removal pilot and a Silage Sorghum pilot were introduced. In addition,
    RMA made Adjusted Gross Revenue-Lite available in five additional
    States, and expanded Livestock Risk Protection. RMA also submitted two
    new risk management tools for pasture, rangeland and forage protection
    for consideration. It is expected in 2006 that the Livestock Gross
    Margin pilot program will be expanded to include cattle. RMA is also
    making substantial improvements to the Florida Fruit Tree pilot program
    to enhance coverage and make it more effective for loss due to
    hurricane. RMA also expanded the Group Risk Income Protection plans for
    cotton, wheat and grain sorghum for the 2006 crop year. RMA continues to
    pursue a number of avenues to increase program participation among
    underserved States and commodities by working on declining yield issues
    and looking at discount programs for good experienced producers who pose
    less risk.
      For more information and additional crop insurance program details,
    please reference RMA's web site: (www.rma.usda.gov).

                    Insurance Against Security-Related 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 on many new construction
    projects, increasing business costs for the insurance that was
    available, and substantially shifting 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, three-year Federal program that
    provided a system of shared public and private compensation for insured
    commercial property and casualty losses arising from acts of terrorism
    (as defined by the Act). Under the Act, insurance companies included in
    the program were required to make available to their policyholders
    coverage for losses from acts of terrorism. In the event of a terrorist
    attack on private businesses and others covered by this program, the
    Federal Government would cover 90 percent of the insured losses above
    each insurance company's deductible (as specified in the Act). The Act
    also provided authority for the Department of the Treasury to recoup
    Federal payments via surcharges on policyholders.
      The Act required the Department of the Treasury to conduct a study on
    the effectiveness of the program and to report the results to Congress
    by June 30, 2005. Treasury found that the Act had achieved its goals of
    supporting the insurance industry during a transitional period and had
    stabilized the private insurance market. Extending the Act in its then-
    current form was likely to hinder further development of the terrorism
    risk insurance market by crowding out innovation and capacity building.
    As a result, the Administration sought significant reforms to the
    program.
      In December 2005, Congress extended the program for two years, through
    December 31, 2007, and the President signed it into law. The 2005 Act
    continues to require insurance company participants to make available
    terrorism risk insurance through the fifth and final year. But, the 2005
    Act significantly reduces taxpayers' exposure by excluding certain lines
    of insurance from Federal coverage: Commercial automobile, burglary and
    theft, surety, professional liability, and farm owners multiple peril
    are removed from the program altogether. In addition, the 2005 Act
    increases insurers' deductibles from 15 percent of direct earned
    premiums for calendar year 2005 to 17.5 percent in 2006 and 20 percent
    in 2007. The extension also decreases the Federal co-payment for insured
    losses above the insurers' deductibles from 90 percent of insured losses
    in calendar year 2005 and 2006 to 85 percent of insured losses in 2007.
      Finally, the new legislation increases the trigger amount for Federal
    payments, currently at $5 million in aggregate insured losses from an
    act of terrorism. After March 31, 2006, no Treasury payments can be made
    unless the aggregate industry insured losses exceed $50 million in
    calendar year 2006 or $100 million in calendar year 2007. Neither the
    Department of the Treasury nor any insurer will be liable for any amount
    exceeding the statutory annual cap of $100 billion in aggregate insured
    losses. Above that amount, the Act states that Congress will determine
    the procedures that would govern any further payments.

                           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 one-time 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. DOT also
    offered airlines short duration third-party liability war risk insurance
    at subsidized rates because coverage was initially withdrawn by private
    insurers followed by a period of marketplace disruption. Currently,
    aviation war risk insurance coverage is generally available from private
    insurers, albeit at significantly higher costs. However, commercial
    insurance coverage for occurrences involving weapons of mass destruction
    is now being withdrawn from the market. Because of this program,
    airlines receive financial protection from war risk occur

    [[Page 85]]

    rences and are able to meet conditions imposed by aircraft liens and
    leases.
      The Homeland Security Act of 2002 (HSA) included airline war risk
    insurance legislation. The HSA and subsequent authorization and
    appropriation acts directed the continuation of third party liability
    war risk insurance policies in effect on June 19, 2002 through August
    31, 2006 at the premium rate in effect on June 19, 2002. The Secretary
    is authorized to limit the third party liability of air carriers and
    aircraft and aircraft engine manufacturers to $100 million, when the
    Secretary certifies that the loss is from an act of terrorism. The acts
    further required the scope of insurance coverage to include war risk
    hull loss and passenger and crew liability at a total policy premium not
    to exceed twice that charged for third party liability. Consequently,
    the President has issued several Presidential Determinations, the most
    recent on December 22, 2005, authorizing the continued provision of
    aviation war risk insurance through August 31, 2006 and the DOT has
    issued policies to conform to HSA requirements.
      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 FY 2005, the fund earned approximately $164
    million in premiums for insurance provided by DOT, and it is anticipated
    that $144 million in premiums will also be earned in FY 2006. No claims
    have been paid by the program since its expansion in 2001. At the end of
    2005, the balance of the Aviation Insurance Revolving Fund available for
    payment of future claims was $568 million. The balance in the fund is
    sufficient to pay small claims, but would be inadequate to meet the
    coverage limits of the largest policies in force ($4 billion) or a
    series of large claims. The Federal Government would pay any claims by
    the airlines that exceed the balance in the aviation insurance revolving
    fund. The Administration does not support a straight extension of this
    program, which crowds out private sector mechanisms for managing risk.
    Looking forward, the Administration is committed to working with
    Congress to ensure that air carriers more equitably share in the risks
    associated with this program.

    [[Page 86]]

                        Table 7-1.  ESTIMATED FUTURE COST OF OUTSTANDING FEDERAL CREDIT PROGRAMS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                       Estimated                        Estimated
                                                      Outstanding     Future Costs     Outstanding     Future Costs
                      Program                            2004           of 2004           2005           of 2005
                                                                    Outstanding \1\                  Outstanding \1\
    ----------------------------------------------------------------------------------------------------------------

    Direct Loans: \2\
      Federal Student Loans.......................             107                8             113               11
      Farm Service Agency (excl. CCC), Rural                    43               10              43                9
       Development, Rural Housing.................
      Rural Utilities Service and Rural Telephone               32                3              34                2
       Bank.......................................
      Housing and Urban Development...............              13                2              12                2
      Export-Import Bank..........................              12                5              10                5
      Public Law 480..............................               9                5               9                4
      Agency for International Development........               8                3               8                3
      Commodity Credit Corporation................               7                3               3                1
      Federal Communications Commission...........               4                4               *                *
      Disaster Assistance.........................               3                1               4                1
      VA Mortgage.................................               2                *               1                *
      Other Direct Loan Programs..................              13                2              11                3
                                                   -----------------------------------------------------------------
        Total Direct Loans........................             251               46             247               41
                                                   -----------------------------------------------------------------
    Guaranteed Loans: \2\
      FHA Mutual Mortgage Insurance Fund..........             384                1             336                2
      VA Mortgage.................................             351                4             206                3
      Federal Family Education Loan Program.......             245               23             289               31
      FHA General/Special Risk Insurance Fund.....              91                4              90                3
      Small Business..............................              57                2              73                2
      Export-Import Bank..........................              36                2              36                2
      International Assistance....................              21                2              22                2
      Farm Service Agency (excl. CCC), Rural                    29                1              30                1
       Development, Rural Housing.................
      Commodity Credit Corporation................               4                *               2                *
      Maritime Administration.....................               3                *               3                *
      Air Transportation Stabilization Program....               2                1               1                1
      Government National Mortgage Association      ..............                *  ..............                *
       (GNMA) \3\.................................
      Other Guaranteed Loan Programs..............               8                3               8                1

                                                   -----------------------------------------------------------------
        Total Guaranteed Loans....................           1,231               43           1,096               48
                                                   -----------------------------------------------------------------
          Total Federal Credit....................           1,482               89           1,343               89
    ----------------------------------------------------------------------------------------------------------------
    * $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 data are excluded from the totals because they are secondary guarantees on loans guaranteed by FHA, VA
      and RHS.

    [[Page 87]]

                                      Table 7-2.  REESTIMATES OF CREDIT SUBSIDIES ON LOANS DISBURSED BETWEEN 1992-2005 \1\
                                                     (Budget authority and outlays, in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                       Program                      1995     1996     1997     1998     1999     2000     2001     2002     2003     2004     2005     2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                    DIRECT LOANS:

    Agriculture:
      Agriculture credit insurance fund.........       28        2      -31       23  .......      331     -656      921       10     -701     -147       -2
      Farm storage facility loans...............  .......  .......  .......  .......  .......  .......  .......       -1       -7       -8        7       -1
      Apple loans...............................  .......  .......  .......  .......  .......  .......  .......       -2        1  .......        *        *
      Emergency boll weevil loan................  .......  .......  .......  .......  .......  .......  .......  .......        1        *        *        3
      Agricultural conservation.................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......
      Distance learning and telemedicine........  .......  .......  .......  .......  .......  .......  .......        1       -1       -1        1  .......
      Rural electrification and                        61      -37       84  .......      -39  .......      -17      -42      101      265      143  .......
       telecommunications loans.................
      Rural telephone bank......................  .......  .......       10  .......       -9  .......       -1  .......       -3       -7       -6  .......
      Rural housing insurance fund..............      152       46      -73  .......       71  .......       19      -29     -435      -64     -200  .......
      Rural economic development loans..........  .......  .......        1  .......       -1        *  .......       -1       -1  .......       -2  .......
      Rural development loan program............        1  .......  .......  .......       -6  .......  .......       -1       -3  .......       -3  .......
      Rural community advancement program \2\...  .......  .......        8  .......        5  .......       37        3       -1      -84      -34  .......
      P.L. 480..................................  .......      -37       -1  .......  .......  .......      -23       65     -348       33      -43     -239
      P.L. 480 Title I food for progress credits       84      -38  .......  .......  .......  .......  .......  .......     -112      -44  .......  .......

    Commerce:
      Fisheries finance.........................  .......  .......  .......  .......  .......  .......      -19       -1       -3  .......        1      -14

    Defense:
      Military housing improvement fund.........  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        *       -4

    Education:
      Federal direct student loan program: \3\
        Volume reestimate.......................  .......  .......  .......  .......       22  .......       -6  .......       43  .......  .......  .......
        Other technical reestimate..............  .......        3      -83      172     -383   -2,158      560  .......    3,678    1,999      855    2,827
      College housing and academic facilities     .......  .......  .......  .......  .......  .......       -1  .......  .......  .......  .......  .......
       loans....................................

    Homeland Security:
      Disaster assistance.......................  .......  .......  .......  .......  .......       47       36       -7       -6        *        4        *

    Interior:
      Bureau of Reclamation loans...............  .......  .......  .......  .......  .......        3        3       -9      -14  .......       17        1
      Bureau of Indian Affairs direct loans.....  .......  .......  .......  .......        1        5       -1       -1        2        *        *        *
      Assistance to American Samoa..............  .......  .......  .......  .......  .......  .......  .......  .......  .......        *        *        2

    State
      Repatriation loans........................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -3

    Transportation:
      High priority corridor loans..............  .......  .......  .......       -3  .......  .......  .......  .......  .......  .......  .......  .......
      Alameda corridor loan.....................  .......  .......  .......  .......  .......      -58  .......  .......  .......      -12  .......  .......
      Transportation infrastructure finance and   .......  .......  .......  .......  .......  .......       18  .......  .......  .......        3      -11
       innovation...............................
      Railroad rehabilitation and improvement     .......  .......  .......  .......  .......  .......  .......  .......  .......       -5      -14      -11
       program..................................

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

    Veterans Affairs:
      Veterans housing benefit program fund.....       30       76      -72      465     -111      -52     -107     -697       17     -178      987      -47
      Native American veteran housing...........  .......  .......  .......  .......  .......  .......  .......  .......       -3        *        *        *
      Vocational Rehabilitation Loans...........  .......  .......  .......  .......  .......  .......  .......  .......        *        *        *       -1

    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       -7
      U.S. Agency for International Development:
        Micro and small enterprise development..  .......  .......  .......  .......  .......  .......  .......        *  .......        *  .......  .......
      Overseas Private Investment Corporation:
        OPIC direct loans.......................  .......  .......  .......  .......  .......  .......  .......  .......       -4      -21        3       -7
      Debt reduction............................  .......  .......  .......  .......  .......       36       -4  .......        *      -47     -104       54

    Small Business Administration:
      Business loans............................  .......  .......  .......  .......  .......  .......        1       -2        1       25  .......      -16
      Disaster loans............................  .......  .......  .......     -193      246     -398     -282      -14      266      589      196       61

    Other Independent Agencies:
      Export-Import Bank direct loans...........      -16       37  .......  .......  .......     -177      157      117     -640     -305      111     -257
      Federal Communications Commission.........  .......  .......  .......    4,592      980   -1,501     -804       92      346      380      732      -24

                  LOAN GUARANTEES:

    Agriculture:
      Agriculture credit insurance fund.........       14       12      -51       96  .......      -31      205       40      -36      -33      -22     -162

    [[Page 88]]

      Agriculture resource conservation           .......  .......  .......  .......  .......  .......        2  .......        1       -1        *        *
       demonstration............................
      Commodity Credit Corporation export             103     -426      343  .......  .......  .......   -1,410  .......      -13     -230     -205     -366
       guarantees...............................
      Rural development insurance fund..........  .......  .......       -3  .......  .......  .......  .......  .......  .......  .......  .......  .......
      Rural housing insurance fund..............       10        7      -10  .......      109  .......      152      -56       32       50       66  .......
      Rural community advancement program.......  .......  .......      -10  .......       41  .......       63       17       91       15       29  .......

    Commerce:
      Fisheries finance.........................  .......  .......  .......       -2  .......  .......       -3       -1        3        *        1        *
      Emergency steel guaranteed loans..........  .......  .......  .......  .......  .......  .......  .......  .......       50        *        3      -75
      Emergency oil and gas guaranteed loans....  .......  .......  .......  .......  .......  .......        *        *        *        *        *       -1

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

    Education:
      Federal family education loan program: \3\
      Volume reestimate.........................  .......      535       99  .......      -13      -60      -42  .......      277  .......  .......  .......
      Other technical reestimate................      421       60  .......  .......     -140      667   -3,484  .......   -2,483   -3,278    1,348    6,837

    Health and Human Services:
      Heath center loan guarantees..............  .......  .......  .......  .......  .......        3  .......        *        *  .......        1        *
      Health education assistance loans.........  .......  .......  .......  .......  .......  .......  .......  .......       -5      -37      -33      -18

    Housing and Urban Development:
      Indian housing loan guarantee.............  .......  .......  .......  .......  .......  .......       -6        *       -1        *       -3       -1
      Title VI Indian guarantees................  .......  .......  .......  .......  .......  .......  .......  .......       -1        1        4        *
      Community development loan guarantees.....  .......  .......  .......  .......  .......  .......  .......  .......  .......       19      -10       -2
      FHA-mutual mortgage insurance.............  .......  .......     -340  .......    3,789  .......    2,413   -1,308    1,100    5,947    1,979    2,842
      FHA-general and special risk..............  .......     -110      -25      743       79  .......     -217     -403       77      352      507      238

    Interior:
      Bureau of Indian Affairs guaranteed loans.  .......  .......       31  .......  .......  .......      -14       -1       -2       -2        *       15

    Transportation:
      Maritime guaranteed loans (title XI)......  .......  .......  .......  .......      -71       30      -15      187       27      -16        4      -76
      Minority business resource center.........  .......  .......  .......  .......  .......  .......  .......        1  .......        *        *  .......

    Treasury:
      Air transportation stabilization program..  .......  .......  .......  .......  .......  .......  .......  .......      113     -199      292     -109

    Veterans Affairs:
      Veterans housing benefit fund program.....      167      334     -706       38      492      229     -770     -163     -184   -1,515     -462     -843

    International Assistance Programs:
      U.S. Agency for International Development:
        Development credit authority............  .......  .......  .......  .......  .......  .......  .......       -1  .......        1       -3       -2
        Micro and small enterprise development..  .......  .......  .......  .......  .......  .......  .......  .......  .......        2       -2       -3
        Urban and environmental credit..........       -1       -7  .......      -14  .......  .......  .......       -4      -15       48       -2       -5
        Assistance to the new independent states  .......  .......  .......  .......  .......  .......  .......      -34  .......  .......  .......  .......
         of the former Soviet Union.............
        Loan Guarantees to Israel...............  .......  .......  .......  .......  .......  .......  .......  .......  .......      -76     -111      188
        Loan Guarantees to Egpyt................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        7
      Overseas Private Investment Corporation:
        OPIC guaranteed loans...................  .......  .......  .......  .......  .......  .......  .......        5       77       60     -212      -21

    Small Business Administration:
      Business loans............................  .......      257      -16     -279     -545     -235     -528     -226      304    1,750    1,034     -390

    Other Independent Agencies:
      Export-Import Bank guarantees.............      -59       13  .......  .......  .......     -191   -1,520     -417   -2,042   -1,133     -655   -1,164

                                                 -----------------------------------------------------------------------------------------------------------
    Total.......................................      995      727     -832    5,642    4,518   -3,641   -6,427   -1,854     -142    3,468    6,008    9,189
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * Less than $500,000.
    \1\Excludes interest on reestimates. Additional information on credit reform subsidy rates is contained in the Federal Credit Supplement.
    \2\Includes rural water and waste disposal, rural community facilities, and rural business and industry programs.
    \3\Volume reestimates in mandatory programs represent a change in volume of loans disbursed in the prior years.

    [[Page 89]]

                                       Table 7-3.  DIRECT LOAN SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2005-2007
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2005 Actual                    2006 Enacted                  2007 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.......................      7.38         69       935      6.42         67     1,052      9.50         95     1,008
      Farm storage facility loans..............................     -1.43         -1        72     -0.84         -1        67      0.25  .........        74
      Rural community advancement program......................      6.81        113     1,650      6.09         78     1,287     14.28        184     1,287
      Rural electrification and telecommunications loans.......     -0.96        -47     4,837     -0.51        -31     6,028     -0.81        -36     4,528
      Rural telephone bank.....................................     -1.83         -3       175  ........  .........  ........  ........  .........  ........
      Distance learning, telemedicine, and broadband program...      2.11          2       114      2.42         29     1,219      2.90          9       327
      Rural housing assistance grants..........................     46.76          3         6     46.76          3         6     47.82  .........  ........
      Farm labor...............................................     47.06         16        33     44.59         17        38     47.95         20        42
      Rural housing insurance fund.............................     14.70        191     1,288     14.46        215     1,515     10.45        136     1,294
      Rural development loan fund..............................     46.38         16        34     43.02         15        34     44.07         15        34
      Rural economic development loans.........................     18.79          5        25     19.97          5        25     21.84          8        35
      Public law 480 title I direct credit and food for             57.55         17        30     54.14         16        30  ........  .........  ........
       progress................................................

    Commerce:
      Fisheries finance........................................     -9.52         -9        91     -2.60         -5       158     -8.08  .........         5

    Defense--Military:
      Defense family housing improvement fund..................     19.23         40       208     25.34        150       592     28.40        215       757

    Education:
      College housing and academic facilities loans............  ........  .........        39  ........  .........        56  ........  .........        56
      Federal direct student loan program......................      3.32      1,071    31,857      2.05        599    29,221      0.16         41    24,807

    Homeland Security:
      Disaster assistance direct loan..........................  ........  .........  ........     73.17        750     1,025      1.18  .........        25

    Housing and Urban Development:
      FHA-mutual mortgage insurance............................  ........  .........         5  ........  .........        50  ........  .........        50

    State:
      Repatriation loans.......................................     69.73          1         1     64.99          1         1     60.14          1         1
      Contributions to international organizations.............  ........  .........  ........      0.47          6     1,200  ........  .........  ........

    Transportation:
      Federal-aid highways.....................................     13.04         18       138      6.18        149     2,400      5.05        121     2,400
      Railroad rehabilitation and improvement program..........  ........  .........       130  ........  .........       200  ........  .........  ........

    Treasury:
      Community development financial institutions fund........     36.52          2         7     37.47          3         7  ........  .........  ........

    Veterans Affairs:
      Housing loans............................................     -2.57         -5       165      5.08         19       384      2.93         17       605
      Vocational rehabilitation program........................      1.14  .........         3      1.59  .........         3      2.00  .........         4

    International Assistance Programs:
      Debt restructuring.......................................  ........        435  ........  ........         64  ........  ........        183  ........
      Overseas Private Investment Corporation..................      6.56         22       335     10.27         15       146      4.28         15       350

    Small Business Administration:
      Disaster loans...........................................     12.86        163     1,271     14.64        671     4,587     13.18        118       900
      Business loans...........................................     10.25          2        18      7.17          1        20  ........  .........  ........

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

                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A      2,121    43,467       N/A      2,853    51,401       N/A      1,159    38,639
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
    N/A = Not applicable.

    [[Page 90]]

                                      Table 7-4. LOAN GUARANTEE SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2005-2007
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2005 Actual                    2006 Enacted                  2007 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.......................      3.27         72     2,195      2.68         77     2,880      1.10         27     2,498
      Commodity Credit Corporation export loans................      5.07        152     3,001      4.13        128     3,107      3.61        115     3,167
      Rural community advancement program......................      3.91         34       876      3.77         44     1,200      3.94         50     1,273
      Rural electrification and telecommunications loans.......  ........  .........  ........      0.09  .........        99  ........  .........  ........
      Distance learning, telemedicine, and broadband program...  ........  .........  ........  ........  .........  ........      4.63          1        30
      Rural housing insurance fund.............................      1.14         36     3,142      1.21         62     5,137      0.61         23     3,762
      Rural business investment................................  ........  .........  ........      7.72          5        65  ........  .........  ........
      Renewable energy.........................................      5.73          1        10      6.45         11       177      6.49          2        35

    Defense--Military:
      Defense family housing improvement fund..................      6.06         10       165  ........  .........  ........  ........  .........  ........

    Education:
      Federal family education loan............................     11.09     11,130   100,405      9.87      9,839    99,649      7.27      6,125    84,287

    Health and Human Services:
      Health resources and services............................      5.35          1        17      3.50          1        15  ........  .........  ........

    Housing and Urban Development:
      Indian housing loan guarantee fund.......................      2.58          3       103      2.42          2       116      2.35          6       251
      Native Hawaiian housing loan guarantees..................      2.58  .........         2      2.42          1        36      2.35          1        43
      Native American housing..................................     10.32          1         4     12.26          1        10     11.99          2        15
      Community development loan guarantees....................      2.30          8       337      2.20          6       276  ........  .........  ........
      FHA-mutual mortgage insurance............................     -1.80     -1,044    58,017     -1.70       -839  \2\ 48,5     -0.96       -845  \2\ 86,0
                                                                                                                           94                             39
      FHA-general and special risk.............................     -0.85       -169    19,652     -1.65       -282  \2\ 17,1     -3.38       -247  \2\ 7,37
                                                                                                                           65                              0

    Interior:
      Indian guaranteed loan...................................      6.76          5        85      4.75          5       112      6.45          5        87

    Transportation:
      Minority business resource center program................      2.08  .........         7      1.85  .........        18      1.82  .........        18
      Federal-aid highways.....................................  ........  .........  ........      3.67          7       200      3.90          8       200
      Maritime guaranteed loans (Title XI).....................     27.54         38       140      7.64          5        65  ........  .........  ........

    Veterans Affairs:
      Housing loans............................................     -0.32        -74    22,544     -0.32       -116    36,110     -0.30       -114    37,681

    International Assistance Programs:
      Loan guarantees to Israel................................  ........  .........       750  ........  .........     1,000  ........  .........     1,000
      Loan guarantees to Egypt.................................  ........  .........     1,250  ........  .........  ........  ........  .........  ........
      Development credit authority.............................      5.09         10       199      3.90         10       257      5.49         13       238
      Overseas Private Investment Corporation..................     -3.13        -53     1,694     -6.28        -64     1,025     -1.88        -30     1,600

    Small Business Administration:
      General business loans...................................      0.01          3    19,939  ........  .........    27,500  ........  .........    28,000

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................      1.09        152    13,936      1.76        243    13,828      0.25         44    17,477

    Presidio Trust:
      Presidio Trust...........................................  ........  .........  ........  ........  .........  ........      0.32  .........        20
                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A     10,316   248,470       N/A      9,146   258,641       N/A      5,186   275,091
                                                                --------------------------------------------------------------------------------------------
          ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENTS

    GNMA:
      Guarantees of mortgage-backed securities loan guarantee..     -0.23       -218   112,519     -0.23       -205  \2\ 89,0     -0.27       -235  \2\ 86,0
                                                                                                                           00                             00

    SBA:
      Secondary market guarantee...............................  ........  .........    10,000  ........  .........    12,000  ........  .........    12,000
                                                                --------------------------------------------------------------------------------------------
        Total, secondary guaranteed loan commitments...........       N/A       -218   122,519       N/A       -205   101,000       N/A       -235    98,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
    \2\ Loan levels do not include standby commitment authority.
    N/A = Not applicable.

    [[Page 91]]

                                                 Table 7-5.  SUMMARY OF FEDERAL DIRECT LOANS AND LOAN GUARANTEES
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Actual                                                Estimate
                                               -------------------------------------------------------------------------------------------------------------
                                                   1998       1999       2000       2001       2002       2003       2004       2005       2006       2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Direct Loans:
      Obligations.............................       28.8       38.4       37.1       39.1       43.7       45.4       42.0       56.3       62.6       49.1
      Disbursements...........................       28.7       37.7       35.5       37.1       39.6       39.7       38.7       50.6       54.6       45.6
      New subsidy budget authority............       -0.8        1.6       -0.4        0.3          *        0.7        0.4        2.1        2.9        1.2
      Reestimated subsidy budget authority \1\        7.3        1.0       -4.4       -1.8        0.5        2.9        2.6        3.8        3.3  .........
      Total subsidy budget authority..........        6.5        2.6       -4.8       -1.5        0.5        3.5        3.0        6.0        6.1        1.2

    Loan guarantees:
      Commitments \2\.........................      218.4      252.4      192.6      256.4      303.7      345.9      300.6      248.5      258.3      234.6
      Lender disbursements \2\................      199.5      224.7      180.8      212.9      271.4      331.3      279.9      221.6      240.6      245.7
      New subsidy budget authority............        3.3          *        3.6        2.3        2.9        3.8        7.3       10.1        8.9        5.0
      Reestimated subsidy budget authority \1\       -0.7        4.3        0.3       -7.1       -2.4       -3.5        2.0        3.5        6.9  .........
      Total subsidy budget authority..........        2.6        4.3        3.9       -4.8        0.5        0.3        9.3       13.6       15.8        5.0
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * Less than $50 million.
    \1\ Includes interest on reestimate.
    \2\ To avoid double-counting, totals exclude GNMA secondary guarantees of loans that are guaranteed by FHA, VA, and RHS, and SBA's guarantee of 7(a)
      loans sold in the secondary market.

    [[Page 92]]

                     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                                               ---------------------------------
                                                       2005       2006      2007       2005        2006       2007
                                                     actual     estimate  estimate   actual      estimate   estimate
    ----------------------------------------------------------------------------------------------------------------
                 DIRECT LOAN WRITEOFFS

    Agriculture:
      Agricultural credit insurance fund..........        132        135       135        1.84       2.04       2.16
      Commodity Credit Corporation fund...........         24   ........  ........        1.15  .........  .........
      Rural community advancement program.........          4          4         4        0.05       0.04       0.04
      Rural development insurance fund............          3          1         1        0.14       0.05       0.05
      Rural housing insurance fund................         90        113       108        0.35       0.45       0.44
      P.L.480.....................................         61        189  ........        0.69       2.30  .........
      Debt reduction (P.L.480)....................          4   ........  ........        0.76  .........  .........

    Commerce:
      Economic development revolving fund.........          1          1         1        7.14      10.00      16.66

    Education:
      Student financial assistance................          6          6         6        1.85       1.85       1.85

    Homeland Security:
      Disaster Assistant Direct Loan Program              127   ........  ........       97.69  .........  .........
       Account....................................

    Housing and Urban Development:
      Revolving fund (liquidating programs).......  ..........         1         1  ..........      16.66      25.00
      Guarantees of mortgage-backed securities....  ..........        36        27  ..........      65.45      48.21

    Interior:
      Indian direct loan..........................          4          2         1       18.18      11.76       7.14

    Labor:
      Pension benefit guaranty corporation fund...         31         87        93  ..........  .........  .........

    Veterans Affairs:
      Veterans housing benefit program............         10          7         7        0.90       0.69       0.52

    International Assistance Programs:
      Military debt reduction.....................          7   ........  ........        2.76  .........  .........
      Overseas Private Investment Corporation.....  ..........         8         8  ..........       1.29       1.08

    Small Business Administration:
      Disaster loans..............................         51         63        60        1.66       1.72       0.91
      Business loans..............................  ..........         4         2  ..........       2.18       1.22

    Other Independent Agencies:
      Export-Import Bank..........................        102         33        36        1.02       0.36       0.45
      Debt reduction (ExIm Bank)..................         38         20  ........        3.46       1.89  .........
      Spectrum auction program....................      3,346   ........       418       77.56  .........      96.53
      Tennessee Valley Authority fund.............          1          1         1        1.88       2.08       1.85
                                                   -----------------------------------------------------------------
        Total, direct loan writeoffs..............      4,042        711       909        1.84       0.32       0.38
                                                   -----------------------------------------------------------------

       GUARANTEED LOAN TERMINATIONS FOR DEFAULT

    Agriculture:
      Agricultural credit insurance fund..........         61         58        58        0.58       0.56       0.54
      Commodity Credit Corporation export loans...        190        163       181        4.53       6.62       6.02
      Rural community advancement program.........         87        101       117        1.86       2.14       2.30
      Rural electrification and telecommunications  ..........         3         3  ..........       0.66       0.56
       loans......................................
      Rural housing insurance fund................        260        275       280        1.87       1.87       1.69

    Defense--Military:
      Procurement of ammunition, Army.............  ..........         8  ........  ..........      30.76  .........
      Family housing improvement fund.............  ..........         5         6  ..........       1.23       1.50

    Education:
      Federal family education loan...............      4,724      5,527     6,320        1.92       1.91       1.88

    Health and Human Services:
      Health education assistance loans...........         23         29        26        0.95       1.69       1.82

    Housing and Urban Development:
      Indian housing loan guarantee...............  ..........         4         4  ..........       2.08       2.00
      Title VI Indian Federal guarantees program..  ..........         1         2  ..........       1.25       2.38
      FHA--Mutual mortgage insurance..............      6,757      6,463     6,639        1.76       1.92       1.98
      FHA--General and special risk...............      1,408      2,394     1,138        1.55       2.66       1.27

    Interior:
      Indian guaranteed loan......................          3          1         1        0.89       0.31       0.30

    [[Page 93]]

    Transportation:
      Maritime guaranteed loan (Title XI).........  ..........        35        35  ..........       1.12       1.15

    Treasury:
      Air transportation stabilization program....        125          9  ........        7.33       0.94  .........

    Veterans Affairs:
      Veterans housing benefit program............      1,076      2,628     2,515        0.30       1.27       1.22

    International Assistance Programs:
      Micro and small enterprise development......          1          1         1        1.31       7.14       9.09
      Urban and environmental credit program......         33         21        29        1.79       1.27       1.87
      Development credit authority................  ..........         1         2  ..........       0.59       0.72
      Overseas Private Investment Corporation.....         38         45        45        0.98       1.25       1.25

    Small Business Administration:
      General business loans......................      1,551      1,903     2,102        2.69       2.59       2.53
      Pollution control equipment.................  ..........         1  ........  ..........      25.00  .........

    Other Independent Agencies:
      Export-Import Bank..........................        182        211       253        0.50       0.58       0.64
                                                   -----------------------------------------------------------------
        Total, guaranteed loan terminations for        16,519     19,887    19,757        0.98       1.31       1.27
         default..................................
                                                   -----------------------------------------------------------------
        Total, direct loan writeoffs and               20,561     20,598    20,666        1.08       1.19       1.15
         guaranteed loan terminations.............
                                                   =================================================================

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

    Agriculture:
      Agricultural credit insurance fund..........          3          1         1        7.69       2.85       2.85

    Commerce:
      Federal ship financing fund.................          1   ........  ........        4.17  .........  .........

    Education:
      Federal family education loan...............        863      1,006     1,071        4.02       4.52       4.72

    Housing and Urban Development:
      FHA--Mutual mortgage insurance..............  ..........        10         1  ..........       1.84       1.72
      FHA--General and special risk...............        226          8         6        4.80       0.13       0.08

    Interior:
      Indian guaranteed loan......................          4          2         2       25.00      15.38      18.18

    Treasury:
      Air transportation stabilization program....  ..........       102  ........  ..........      76.11  .........

    International Assistance Programs:
      Overseas Private Investment Corporation.....         84          4         3       38.35       2.56       1.47

    Small Business Administration:
      Business loans..............................        221        276       276        5.02       4.47       3.74
      Pollution control equipment.................         29   ........  ........       59.18  .........  .........

    Other Independent Agencies:
      Export-Import Bank..........................         51   ........  ........       25.37  .........  .........
                                                   -----------------------------------------------------------------
        Total, writeoffs of loans receivable......      1,482      1,409     1,360        3.64       3.53       3.22
    ----------------------------------------------------------------------------------------------------------------
    \1\ For direct loans and loan guarantees, outstanding loans equal the 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 94]]

                          Table 7-7. APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   2005         2006         2007
                                Agency and Program                               Actual       Actual      Estimate
    ----------------------------------------------------------------------------------------------------------------
                             DIRECT LOAN OBLIGATIONS

    Agriculture:
      Agricultural credit insurance fund.....................................        1,112          953          930
      P.L. 480 direct credit.................................................           30           30  ...........

    Commerce:
      Fisheries finance......................................................           91           64            5

    Education:
      Historically black college and university capital financing............          193          222          170

    Homeland Security:
      Disaster assistance direct loans.......................................           25        1,025           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  ...........

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

    Veterans Affairs:
      Native American loans..................................................           50           30           30
      Vocational rehabilitation..............................................            3            3            4

    Small Business Administration:
      Business loans.........................................................           18           20  ...........
                                                                              --------------------------------------
        Total, limitations on direct loan obligations........................        1,634        3,659        1,265
                                                                              --------------------------------------

                            LOAN GUARANTEE COMMITMENTS

    Agriculture:
      Agricultural credit insurance fund.....................................        2,201        2,797        2,498

    Housing and Urban Development:
      Indian housing loan guarantee fund.....................................          145           99          104
      Title VI Indian federal guarantees.....................................           18           18           15
      Native Hawaiian housing loan guaranteed................................           37           35           35
      Community development loan guarantees..................................          275          138  ...........
      FHA-general and special risk...........................................       35,000       35,000       35,000
      FHA-mutual mortgage insurance..........................................      185,000      185,000      185,000

    Interior:
      Indian loans...........................................................           85          112           87

    Transportation:
      Minority business resource center......................................           18           18           18
      Maritime guaranteed loan (Title XI)....................................          140           65  ...........

    Veterans Affairs:
      Housing loans..........................................................  ...........            1  ...........

    International Assistance Programs:
      Loan guarantees to Israel..............................................        3,000  ...........  ...........
      Development credit authority...........................................  ...........          700          700
      Loan guarantees to Egypt...............................................        2,000  ...........  ...........

    Small Business Administration:
      General business loans.................................................       19,939       27,500       28,000
                                                                              --------------------------------------
        Total, limitations on loan guarantee commitments.....................      247,858      251,483      251,457
                                                                              ======================================

            ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS

    Housing and Urban Development:
      Guarantees of mortgage-backed securities...............................      200,000      200,000      100,000

    Small Business Administration:
      Secondary market guarantee.............................................       10,000       12,000       12,000
                                                                              --------------------------------------
        Total, limitations on secondary guaranteed loan commitments..........      210,000      212,000      112,000
    ----------------------------------------------------------------------------------------------------------------
    \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 95]]

           Table 7-8.  FACE VALUE OF GOVERNMENT-SPONSORED LENDING \1\
                            (In billions of dollars)
    ------------------------------------------------------------------------
                                                               Outstanding
                                                           -----------------
                                                              2004     2005
    ------------------------------------------------------------------------

               Government Sponsored Enterprises

    Fannie Mae \2\........................................      N/A      N/A
    Freddie Mac \3\.......................................    1,481      N/A
    Federal Home Loan Banks \4\...........................      N/A      N/A
    Farm Credit System....................................       87       92
    ------------------------------------------------------------------------
    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 2001-2004. The restatement is not likely to be completed
      prior to the second half of calendar year 2006.
    \3\ While financial data for 2004 is presented here, Freddie Mac
      announced on November 8, 2005 that it would reduce net income for the
      first half of calendar year 2005 and expects to release full-year 2005
      results by March 2006.
    \4\ Financial data for the Federal Home Loan Banks are not presented
      here because following discussions with the Securities and Exchange
      Commission, six of the twelve Federal Home Loan Banks have announced
      their intent to restate their 2001-2004 financial statements.

    [[Page 96]]

      Table 7-9.  LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
                                     (GSEs)
                            (In millions of dollars)
    ------------------------------------------------------------------------
                            Enterprise                               2005
    ------------------------------------------------------------------------

                             LENDING \1\

    Federal National Mortgage Association: \2\
      Portfolio programs:
        Net change..............................................         N/A
        Outstandings............................................         N/A
      Mortgage-backed securities:
        Net change..............................................         N/A
        Outstandings............................................         N/A

    Federal Home Loan Mortgage Corporation: \3\
      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..............................................       1,853
        Outstandings............................................      25,121
      Farm credit banks:
        Net change..............................................       6,039
        Outstandings............................................      66,802
      Federal Agricultural Mortgage Corporation:
        Net change..............................................        -423
        Outstandings............................................       5,126

    Federal Home Loan Banks: \4\
      Net change................................................         N/A
      Outstandings..............................................         N/A

    Less guaranteed loans purchased by:
      Federal National Mortgage Association: \2\
        Net change..............................................         N/A
        Outstandings............................................         N/A
      Other: \4\
        Net change..............................................         N/A
        Outstandings............................................         N/A

                            BORROWING \1\

    Federal National Mortgage Association: \2\
      Portfolio programs:
        Net change..............................................         N/A
        Outstandings............................................         N/A
      Mortgage-backed securities:
        Net change..............................................         N/A
        Outstandings............................................         N/A

    Federal Home Loan Mortgage Corporation: \3\
      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..............................................       1,840
        Outstandings............................................      28,466
      Farm credit banks:
        Net change..............................................       9,549
        Outstandings............................................      81,361
      Federal Agricultural Mortgage Corporation:
        Net change..............................................         504
        Outstandings............................................       3,928

    Federal Home Loan Banks: \4\
      Net change................................................         N/A

    [[Page 97]]

      Outstandings..............................................         N/A

                           DEDUCTIONS \1\

    Less borrowing from other GSEs: \5\
      Net change................................................         N/A
      Outstandings..............................................         N/A
    Less purchase of Federal debt securities: \5\
      Net change................................................         N/A
      Outstandings..............................................         N/A
    Federal National Mortgage Association: \2\
      Net change................................................         N/A
      Outstandings..............................................         N/A
    Other: \5\
      Net change................................................         N/A
      Outstandings..............................................         N/A
    ------------------------------------------------------------------------
    N/A = Not available.
    \1\ 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.
    \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 2001-2004. The restatement is not likely to be completed
      prior to the second half of calendar year 2006.
    \3\ Freddie Mac announced on November 8, 2005 that it would reduce net
      income for the first half of calendar year 2005 and expects to release
      full-year 2005 results by March 2006.
    \4\ Financial data for the Federal Home Loan Banks are not presented
      here because following discussions with the Securities and Exchange
      Commission, six of the twelve Federal Home Loan Banks have announced
      their intent to restate their 2001-2004 financial statements.
    \5\ Totals and subtotals have not been calculated because a substantial
      portion of the total is subject to the above-described restatements.