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



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                         7. CREDIT AND INSURANCE

  Federal credit programs offer direct loans and loan guarantees 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

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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.

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  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

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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

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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

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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

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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

[[Page 75]]

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

[[Page 76]]

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

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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.