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

    [[Page 67]]

                             7. CREDIT AND INSURANCE

      Federal credit and insurance programs are alternatives to direct
    spending programs as means of achieving a variety of policy objectives.
    Federal credit programs offer direct loans and loan guarantees to
    support a wide range of activities including housing, education,
    business and community development, and exports. At the end of 2006,
    there were $251 billion in Federal direct loans outstanding and $1,120
    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 permits certain privately owned companies,
    called Government-Sponsored Enterprises (GSEs), to operate under Federal
    charters for the purpose of enhancing credit availability for targeted
    sectors. GSEs increase liquidity by guaranteeing and securitizing loans,
    as well as by providing direct loans. In return for advancing certain
    social goals and possibly improving economic efficiency, GSEs enjoy
    various special privileges, such as possible borrowing from Treasury at
    Treasury's discretion, exemption from State and local income taxation,
    and favorable regulatory treatments of their securities. These
    privileges may leave observers with the impression that GSE 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 emphasizes the roles of Federal credit and
              insurance programs in addressing market imperfections that may
              prevent the private market from efficiently providing credit
              and insurance. Federal programs are more useful where market
              imperfections remain serious even though the continued
              evolution and deepening of financial markets may have in part
              corrected many of the imperfections.
        The second section interprets the results of the Program
              Assessment Rating Tool (PART) for credit and insurance
              programs in relation to their distinguishing features.
        The third section discusses individual credit programs and
              GSEs intended to support 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 their 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 do not effectively address market imperfections
    can be unnecessary, 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; to help 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. Although these imperfections can cause inefficiencies,
    the presence of a market imperfection does not mean that Government
    intervention will be always effective. To be effective, a credit or
    insurance program should be carefully designed to reduce inefficiencies
    in the targeted area without causing inefficiencies elsewhere.

      Insufficient Information. Financial intermediaries may fail to
    allocate credit to the most deserving borrowers if there is little
    objective information about some of the borrowers. Some groups of
    borrowers, such as start-up businesses and some families, 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

    [[Page 68]]

    that of the Federal Government, which has general taxing authority. For
    some events potentially involving a very large loss concentrated in a
    short time period, therefore, Government insurance commanding more
    resources can be more credible and effective. Such events include
    massive bank failures and some natural and man-made disasters that can
    threaten the solvency of private insurers.
      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. Education, for example, generates positive externalities
    because the general public benefits from the high productivity and good
    citizenship of a well-educated person. Pollution, from which other
    people suffer, is clearly a negative externality. 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 through
    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 efficiency-improving
    consolidation by removing geographic and industry barriers.
      These changes have reduced market imperfections. 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 need for the Federal government to address the information problem
    has diminished steadily over the years. 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 risk more
    objectively and accurately. Also, potential borrowers tend to have
    access to a much wider array of possible local, national, and global
    lenders. As a result, most borrowers can easily obtain credit at a fair
    interest rate reflecting their risk. 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. It is also possible that banking consolidation adversely
    affects those borrowers with unique characteristics; small, local banks
    could serve those borrowers better if they had more borrower-specific
    information gained through long-term relations. 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 with confidence the probability of a major natural
    disaster occurring. The difficulty may be greater for man-made disasters
    that lack scientific bases.
      Financial evolution has also improved private insurers' ability to
    deal with catastrophic losses. Using financial derivatives such as
    options, swaps, and futures, private entities can 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. However, the market
    for catastrophe-related derivatives is still small, and it has not
    eliminated the difficulty of absorbing catastrophic losses yet. To
    address this difficulty, reinsurance may be preferred to direct
    provision of insurance because it involves less intervention.
      Imperfect competition is much less likely to justify Federal
    involvement than was the case only a few years ago due 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 further lowered the cost of financial transactions and
    reduced the importance of physical location. These developments have
    been especially beneficial to small and geographically isolated
    customers who could not afford to bear large transactions costs and
    otherwise had limited access to

    [[Page 69]]

    financial services. In addition, there are more financing alternatives
    for both commercial and individual borrowers that used to rely heavily
    on banks. Venture capital, for example, has become a much more important
    financing source for small businesses. Finance companies have also
    become a prominent player both in business and consumer financing.
      Problems related to externalities may persist because the price
    mechanisms that drive the private market by definition 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 any 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 economy and 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
    the Federal Home Loan Banks, could shake the entire financial market. A
    more visible risk to the Budget today is posed by the Pension Benefit
    Guaranty Corporation (PBGC). PBGC has a large shortfall in assets and
    projected earnings relative to the claims it is already obligated to pay
    due to unfavorable developments in recent years and to flaws in program
    structure that the Administration proposes to remedy.

                II.  PERFORMANCE OF CREDIT AND INSURANCE PROGRAMS

      The Program Assessment Rating Tool (PART) has evaluated 977 Federal
    programs, including 34 credit programs and seven insurance programs. 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.
      The ratings for credit and insurance programs are clustered around the
    middle; 78 percent of credit and insurance programs (compared with 58
    percent for other programs) are rated ``adequate'' or ``moderately
    effective,'' while only seven percent (17 percent for other programs)
    are rated ``effective.'' These results suggest that most credit and
    insurance programs meet basic standards, but need to improve. In
    individual categories, credit and insurance programs have scored
    noticeably low in program purpose and design and high in program results
    relative to other programs.

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

    Credit and Insurance Programs
      Average..........................................................       78.5       74.2        86.0       55.7
      Standard Deviation...............................................       19.9       24.0        18.4       19.0

    All Others Excluding Credit and Insurance Programs
      Average..........................................................       87.1       75.0        82.2       48.2
      Standard Deviation...............................................       18.4       24.6        17.9       26.6
    ----------------------------------------------------------------------------------------------------------------

      Some key features 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. Interpreting PART
    results in relation to these features should help to identify
    fundamental problems and to devise effective solutions.

      Program Purpose and Design. To be effective, credit and insurance
    programs should serve those who deserve to be served but are left out by
    the private market due to market imperfections. Extending credit to
    those who are not creditworthy, for example, would result in economic
    inefficiencies and large budget costs. Lending to those who can obtain
    credit at a reasonable rate in the private market would be unnecessary
    and might interfere with the market mechanism. To achieve intended
    outcomes without causing unintended consequences, therefore, credit and
    insurance programs need to be carefully designed; they should target the

    [[Page 70]]

    intended beneficiaries, and all parties in the transaction should face
    the correct incentives.
      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 offer inadequate incentive
    structures.

      Strategic Planning. Financial markets have been evolving to serve
    target populations of Federal programs better and increasingly apply
    advanced technologies to risk assessments. Credit and insurance programs
    need to adapt to these new developments quickly. Falling behind, Federal
    programs can be left with many beneficiaries who do not really need
    Government help and with those who post greater risk as private entities
    attract better-risk beneficiaries away from Federal programs.
      In subcategories of strategic planning, while most credit and
    insurance programs effectively execute short-term strategies, they are
    less effective in pursuing long-term goals that may be more critical in
    adapting to new developments. Other weaknesses are found in conducting
    stringent performance evaluation and tying budgets to performance
    outcomes.

      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 the program cost stays within a reasonable range.
      Credit and insurance programs show strengths in basic financial and
    accounting practices, such as spending funds for intended purposes and
    controlling routine costs. However, some weaknesses are found in areas
    that are more critical for effective risk management, such as collecting
    timely information and using sophisticated financial tools.

      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
    estimate 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.
      Program results, the most important category of performance, are
    generally weak for credit and insurance programs despite a higher
    average score than that of other programs. Many credit and insurance
    programs have difficulty in achieving performance goals and lack
    objective evidences of program effectiveness. These problems may partly
    result from the difficulty of measuring net outcomes. With reliable
    outcome measures, it should be easier to set achievable goals and
    demonstrate effectiveness.

                          III.  CREDIT IN FOUR SECTORS

                        Housing Credit Programs and GSEs

      Through housing credit programs, the Federal Government promotes
    homeownership among various target groups, including low-income people,
    minorities, veterans, and rural residents. Housing GSEs increase
    liquidity in the mortgage market.

    Federal Housing Administration

      In June 2002, the President issued America's Homeownership Challenge
    to increase the number of first-time minority homeowners by 5.5 million
    through 2010. During the first three and a quarter years since the goal
    was announced, nearly 2.5 million minority families have become
    homeowners. Through 2006, the Department of Housing and Urban
    Development's (HUD's) Federal Housing Administration (FHA) helped almost
    542,000 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 2006, FHA endorsed purchase and refinance mortgages for
    more than 425,000 households. For purchase mortgages, over 79 percent
    were for first-time homebuyers and about 31 percent were for minority
    buyers. FHA also endorsed over 76,000 home equity conversion mortgages
    for elderly homeowners.
      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 four 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

    [[Page 71]]

    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 that the private sector considered too
    risky. 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
    borrowers, FHA's business has changed. First, the percentage of FHA-
    insured mortgages with initial loan-to-value (LTV) ratios of 95 percent
    or higher has increased substantially, from 62.7 percent in 1995 to 78
    percent in 2006. Second, the percentage of FHA loans with downpayment
    assistance from seller-financed nonprofit organizations has grown
    rapidly, from 0.3 percent in 1998 to nearly 33 percent in 2006. Recent
    studies show that these loans are riskier than those made to borrowers
    who received downpayment assistance from other sources. In 2006, FHA's
    cumulative default claim rate for its core business is projected to have
    risen from approximately 10 percent to 12 percent.
      The FHA single-family mortgage program was assessed in 2005 using the
    PART. 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 and subsequent reports
    by the General Accountability Office and the Inspector General 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, FHA measured its 2006 performance
    against new goals, such as the percentage of FHA Single Family loans for
    first-time and minority homeowners, and exceeded its goals. FHA has also
    improved the accuracy of its annual actuarial review claim and
    prepayment estimates. In 2007, it will continue to develop performance
    goals for fraud detection and prevention.

    Proposals for Program Reform

      In order to enable FHA to fulfill its mission in today's changing
    marketplace, the Administration has introduced 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, additional
    reforms will enable it to expand homeownership opportunities to its
    target borrowers on an actuarially sound basis.
      To remove two large barriers to homeownership--having limited savings
    for a downpayment or impaired credit--the Administration again proposes
    new FHA mortgage products. These products will replace the current flat
    premium structure with one that varies with the risk of default as
    indicated by the percentage of downpayment to the loan amount or
    borrower credit quality. This will create more opportunities for
    potential homeowners who may face limited mortgage options. For example,
    first-time buyers with a strong credit record but little savings could
    finance a higher percent of the purchase than FHA currently allows.
    Alternatively, a borrower with a poor credit history could qualify for
    more favorable terms by accumulating savings for a larger downpayment.
      This flexible premium structure, which is tiered risk-based pricing,
    is a way to more fairly price the FHA guarantee to individual borrowers.
    It creates incentives (lower premium payments) for borrowers to take
    steps to improve their credit or save more for a downpayment. At the
    same time it eliminates the current incentive for higher risk borrowers
    to use FHA because they are undercharged relative to the risk they pose.
    FHA proposes to base its mortgage insurance premiums upon a borrower's
    consumer credit score from Fair, Isaac, and Company (FICO), and on the
    amount and source of downpayment (e.g., 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, FHA will reflect a
    borrower's risk via the mortgage insurance premium, not through a higher
    interest rate as done in the subprime market. With mortgage insurance,
    borrowers will pay a market rate of interest, and, as a result, will
    incur lower monthly payments and lower total costs than if they paid a
    higher mortgage interest rate throughout the life of the loan. Second,
    by using this pricing structure, FHA will promote price transparency.
    Each borrower will know why they are paying the premium that they are
    being charged and will know how to lower their borrowing costs--i.e., by
    raising their FICO score or their downpayment. Third, risk-based pricing
    will allow FHA to review the performance of its programs annually in
    conjunction with the preparation of its credit subsidy estimates and
    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. Further, the proposed reforms will better
    enable FHA to meet its objective of serving first-time and low-income
    home buyers by managing its risks more effectively.

    [[Page 72]]

    VA Housing Program

      The Department of Veterans Affairs (VA) assists veterans, members of
    the Selected Reserve, and active duty personnel to purchase homes as
    recognition of their service to the Nation. The program substitutes the
    Federal guarantee for the borrower's down payment. In 2006, VA provided
    $23.5 billion in guarantees to assist 135,151 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 downpayment loans. VA provided 90,399
    zero downpayment loans in 2006.
      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 54
    percent of such delinquent loans avoiding foreclosure in 2006.

    Rural Housing Service

      The U.S. Department of Agriculture's Rural Housing Service (RHS)
    offers direct and guaranteed loans and grants to help very low- to
    moderate-income rural residents buy and maintain adequate, affordable
    housing. The single-family guaranteed loan program guarantees up to 90
    percent of a private loan for low- to moderate-income (115 percent of
    median income or less) rural residents. In 2006, nearly $4.3 billion in
    assistance was provided by RHS for homeownership loans and loan
    guarantees; $3.07 billion in guarantees went to more than 31,000
    households, of which 30 percent went to very low and low-income families
    (with income 80 percent or less than median area income).
      Additionally in 2006, Hurricane Supplemental loans and guarantees
    totaling $260 million allowed nearly 2,500 households to obtain homes.
    In addition, $19 million of low-interest loans and grants was used to
    repair more than 2,300 homes of families in need. In addition, RHS
    granted moratoriums on payments, and sheltered survivors in its
    inventory properties to provide relief.
      Historically, RHS has offered both direct and guaranteed homeownership
    loans. Beginning in 2008, RHS will only offer guaranteed loans. The
    budget provides no funding for the 502 direct single family housing loan
    program. The direction of Rural Development's single-family housing
    mortgage assistance over the last two decades has been towards
    guaranteed loans. The single-family housing guaranteed loan program was
    newly authorized in 1990 at $100 million and has grown into a $3 billion
    plus loan program annually, equaling that of the Veterans Affairs (VA)
    guaranteed housing loan program. Meanwhile the single-family direct loan
    program has been stagnant at approximately a $1 billion loan level.
      Solely utilizing guarantees for single-family housing mortgage is
    consistent with the other Federal homeownership programs. In fact, there
    are no Federal single family direct loan home ownership programs for
    urban areas. Furthermore, financial markets have become more efficient
    and increased the reach of mortgage credit to lower credit qualities and
    incomes. While some rural areas remain isolated from broad credit
    availability, these areas are shrinking as broadband internet access and
    correspondent lending grow. Therefore, relying on the private banking
    industry to provide this service, with a guarantee from the Federal
    government, is a more efficient way to deliver that assistance.
      To replace the loss of assistance to the very low- to low-income rural
    borrowers still seeking assistance for mortgage credit, the
    Administration expects to propose legislation to authorize a subsidized
    guaranteed single-family housing program.
      For the already established 502 guarantee programs in 2008, RHS will
    increase the guarantee fee on new 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. The guarantee fee for refinance
    loans remains 0.5 percent. Funding in 2008 is requested at an increased
    amount of $4.8 billion for purchase loans to compensate for no funding
    for direct loans.
      RHS also offers multifamily housing loans and guarantees to provide
    rural rental housing, including farm labor housing. The farm labor
    housing combined grant and loan level will provide $18 million in 2008
    for new construction as well as repair and rehabilitation. RHS also
    expects to be able to guarantee $200 million in multifamily housing
    construction loans for 2008. 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 2008, $28 million will
    be directed to the revitalization initiative, primarily to assist
    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.
      RHS partnered with its multifamily program borrowers and made
    available all the vacant units in the loan portfolio to house evacuees
    from Hurricanes Katrina and Rita. Costs were covered by an emergency
    allotment of rental assistance for a six-month period. Multifamily
    Programs instituted a number of waivers designed to ease the regulatory
    burden for housing evacuees on an emergency basis. RHS housed over 3,000
    families in RHS-financed housing

    Government-Sponsored Enterprises in the Housing Market

      Homeownership has long been recognized as an important part of the
    American economy and part of the American dream. However, it has not
    always been within reach for the average American. During the Great
    Depression, housing markets were in turmoil. A typical mortgage required
    a downpayment of around 50 percent and a balloon payment of principal
    within a few years. Limitations in financial and communication
    technology

    [[Page 73]]

    and restrictions on financial institutions made it difficult for surplus
    funds in one part of the country to be shifted to other parts of the
    country to finance residential housing. Starting in 1932, the Congress
    responded by creating a series of entities and programs that together
    promoted the development of long-term, amortizing mortgages and
    facilitated the movement of capital to support housing finance.
      A key element of this response was the creation of the Federal Housing
    Administration in 1934. Another element was the establishment of several
    entities designed to develop secondary mortgage markets and to
    facilitate the movement of capital into housing finance. These entities,
    known today as Government-Sponsored Enterprises (GSEs), were chartered
    by the Congress with a public mission, and endowed with certain benefits
    that give them competitive advantages when compared with fully private
    companies.
      The Federal Home Loan Bank System, created in 1932, is comprised of
    twelve individual banks with shared liabilities. Together they lend
    money to financial institutions--mainly banks and thrifts--that are
    involved in mortgage financing to varying degrees, and they also finance
    some mortgages on their own balance sheets. The Federal National
    Mortgage Association, or Fannie Mae, created in 1938, and the Federal
    Home Loan Mortgage Corporation, or Freddie Mac, created in 1970, were
    established to support the stability and liquidity of a secondary market
    for residential mortgage loans. Together these three GSEs currently are
    involved, in one form or another, with nearly one half of the $10-plus
    trillion residential mortgages outstanding in the U.S. today. Their
    market share peaked at 54 percent in 2003, after which management and
    internal control problems started to surface.
      As with other financial institutions, the Congress also established
    regulatory regimes to ensure the safety and soundness of the housing
    GSEs. The Office of Federal Housing Enterprise Oversight (OFHEO),
    established in 1992 as an independent agency within the Department of
    Housing and Urban Development, oversees Fannie Mae and Freddie Mac. The
    Federal Housing Finance Board (FHFB), established in 1989, oversees the
    Federal Home Loan Bank system. Numerous reports and studies have pointed
    to various shortcomings with the current regulatory structure for the
    housing GSEs. The Administration is proposing to strengthen this
    structure and combine OFHEO and FHFB into a new regulator.

    Mission

      The mission of the housing GSEs is to support certain aspects of the
    U.S. mortgage market. Fannie Mae and Freddie Mac's mission is to promote
    affordable housing, respond to private capital markets, and provide
    liquidity and stability to the secondary mortgage market. Currently,
    they engage in two major lines of business.

                1. Credit Guarantee Business--Fannie Mae and Freddie Mac
              guarantee the timely payment of principal and interest on
              mortgage-backed securities (MBS). They create MBS by either
              buying and pooling whole mortgages or by entering into swap
              arrangements with mortgage originators. Over time these MBS
              held by the public have averaged about one-quarter of the U.S.
              mortgage market.

                2. Mortgage Investment Business--Fannie Mae and Freddie Mac
              manage retained mortgage portfolios composed of their own MBS,
              MBS issued by others, and whole mortgages. As of June 30,
              2006, these retained mortgages totaled $1.4 trillion. Given
              Fannie Mae and Freddie Mac's serious accounting, internal
              control, risk management, and systems problems, the growth of
              these portfolios is temporarily constrained through consent
              agreements with OFHEO.

      The mission of the Federal Home Loan Bank System is broadly defined as
    housing finance, and the System also has specific requirements to
    support affordable housing. The Federal Home Loan Banks have not grown
    mortgage asset portfolios as large as Fannie Mae or Freddie Mac. Their
    principal business remains lending to regulated depository institutions
    and insurance companies engaged in residential mortgage finance to
    varying degrees.

    Risks That GSEs Face and Cause

      Like other financial institutions, the GSEs face a full range of
    risks, including market (interest rate) risk, credit risk, and
    operational risk. Several of the Federal Home Loan Banks and Fannie Mae
    have faced serious market risks due to inadequate hedging. More
    recently, Fannie Mae and Freddie Mac have faced serious operational
    risk. Due to earnings manipulation, poor accounting systems, lack of
    proper controls, lack of proper risk management, and misapplication of
    accounting principles, earnings at Fannie Mae were misstated by $6.3
    billion through June of 2004, and at Freddie Mac by $5.0 billion through
    December of 2002.
      The GSEs also pose risks to the financial system. Systemic risk is the
    risk that unanticipated problems at a financial institution or group of
    institutions could lead to problems more widely in the financial system
    or 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 and mortgage finance
    markets but other vital parts of the financial system and economy. To
    understand this risk, one must understand the interdependencies among
    the GSEs and other market participants in the financial system and the
    lack of market discipline imposed on the GSEs because investors perceive
    that the GSEs are implicitly backed by the U.S. Government.
      The GSEs are among the largest borrowers in the world. As of September
    2006 their combined debt and guaranteed MBS totaled $5.2 trillion,
    higher than the total publicly held debt of the United States. The inves

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    tors in GSE debt include thousands of banks, 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 the Federal
    Government guarantees GSE debt. In fact, there is no such guarantee or
    Federal backing of GSE debt.
      Because investors act as if there is an ``implicit guarantee'' by the
    Federal Government to back GSE debt, investors on average lend their
    money to the GSEs at interest rates roughly 30 to 40 basis points less
    ($300-$400 less per year for every $100,000 borrowed) than to other
    highly rated privately held companies. In addition, investors do not
    demand the same financial disclosures as for other privately owned
    companies. Neither Fannie Mae nor Freddie Mac currently file quarterly
    earnings reports with the Securities and Exchange Commission, though
    Fannie Mae is required to and Freddie Mac volunteered to. 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.

    Retained Asset Portfolios Have Significantly Grown While Achieving
    Little for the GSEs' Housing Mission

      Fannie Mae and Freddie Mac have used their funding advantage to amass
    large retained asset portfolios. Together these GSEs have more than $1.5
    trillion in debt outstanding, almost entirely for the purpose of funding
    these portfolios. From 1990 through 2005, the GSEs' competitive funding
    advantage enabled them to increase their portfolios of mortgage assets
    ten-fold, which far exceeds the growth of the overall mortgage market.
    Due to the risks associated with the portfolios, the Administration is
    proposing that the new regulatory structure empower the regulator to
    address and mitigate these risks.
      As chart 7-1 shows, almost 54 percent of Fannie Mae and Freddie Mac's
    combined retained mortgage portfolio at the end of 2005 was comprised of
    holdings of their own guaranteed MBS, which could easily be sold.

      The function of these portfolio holdings is largely to increase
    profits, not facilitate affordable housing. In 1992, the Congress
    broadened Fannie Mae and Freddie Mac's mission to include promoting
    affordable housing. To measure this performance, the Congress mandated
    that HUD establish three affordable housing goal targets that Fannie Mae
    and Freddie Mac must meet each year. HUD has also implemented home
    purchase subgoals to encourage homeownership opportunities for first-
    time homeowners and minority homeowners. Given that Fannie Mae and
    Freddie Mac have a mission to help more families achieve homeownership
    as well as to expand rental opportunities, their retained portfolios
    should be tied to that mission. However, currently only about 30 percent
    of Fannie Mae and Freddie Mac's retained portfolio holdings would be
    eligible to qualify for any of the affordable housing goals. About half
    of the MBS issued by others and whole loans qualify toward their
    affordable housing goals. Their performance under the housing goals over
    time indicate that Fannie

    [[Page 75]]

    Mae and Freddie Mac should be doing more to help mission-targeted
    families achieve homeownership or acquire affordable rental housing.

    Debt Issuance Subject to Treasury Approval

      Fannie Mae and Freddie Mac fund their portfolios by issuing debt, and
    the U.S. Department of the Treasury has the responsibility to review and
    approve these GSEs' debt-issuances. The Treasury Department's debt
    approval authority is contained in Fannie Mae's and Freddie Mac's
    Charter Acts, and the Department has approved Fannie Mae and Freddie
    Mac's debt on a regular basis. Treasury is developing a more formalized
    approach to their debt approval authority. As part of that approach,
    Treasury is developing new debt approval procedures to enhance the
    clarity, transparency, standardization, and documentation of Fannie
    Mae's and Freddie Mac's debt issuances.

    Thin Capital Cushions Need Reform

      The risks of the GSEs' large portfolios are exacerbated because they
    are not required to hold cushions of capital against potential losses
    comparable to the capital requirements for other large financial
    institutions. Where commercial banks that are part of a financial
    holding company must hold a 5 percent capital-to-total assets cushion,
    Fannie Mae and Freddie Mac's requirement is half that, while FHLB's is 4
    percent. The risk-based capital requirements for the GSEs also differ
    dramatically from those applicable to commercial banks. This highlights
    an important shortcoming of the statutory framework governing Federal
    oversight of the GSEs. The minimum capital and risk-based capital rules
    for the GSEs were written into law in 1992. Much has changed since then
    with regard to financial risk analysis, risk modeling, and capital
    requirements for comparable financial institutions. The reforms proposed
    by the Administration would repeal the statutory risk-based capital
    stress test, and would provide the new GSE regulator with the authority
    and flexibility to establish new risk-based capital requirements for the
    GSEs to help ensure that they operate with sufficient capital and
    reserves to support the risks that arise in the operations and
    management of each enterprise. A world-class regulator needs the
    flexibility and authority to change both the risk-based and minimum
    capital requirements without undue restriction in response to changing
    conditions.
      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 risk that homeowners may prepay their mortgages through
    refinancing or home sales. 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 because predicting interest-
    rate movements and mortgage refinancing activity is difficult. As 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.

    New Activities and Technological Development Require Oversight

      Over the last decade, Fannie Mae and Freddie Mac have begun engaging
    in a wide range of new activities that were not anticipated when their
    charters were written. To address these changes, HUD developed a new
    activity review initiative under its general regulatory authority. HUD
    has reviewed a number of business initiatives at Fannie Mae and Freddie
    Mac, including international activities; partnership offices; senior
    housing; skilled nursing facilities; employer assisted housing plans;
    third party real-estate-owned programs; Commercial Mortgage-Backed
    Securities (CMBS); Asset-Backed Securities (ABS); multifamily variable-
    rate bond certificates; and whole loan REMICs. HUD concluded that some
    of these activities were not authorized. For example, HUD's review of
    the GSEs' Commercial MBS programs resulted in OFHEO seeking Freddie
    Mac's divestiture of certain CMBS holdings, and HUD ordered Fannie Mae
    to end its third party Real-Estate-Owned program based on its review. In
    2007, HUD will complete a Financial Activities Review that will provide
    a baseline of information on Fannie Mae's and Freddie Mac's business and
    program activities. As part of this review, HUD will examine specific
    transactions to determine whether they are consistent with Fannie Mae's
    and Freddie Mac's charter authorities. The Administration proposes to
    move this authority to the new regulator.
      Because of their enormous presence in the secondary market, Fannie Mae
    and Freddie Mac are able to exert significant leverage in the primary
    mortgage market. First, their unparalleled size in the residential
    mortgage market gives the GSEs a unique level of access to market
    information. The applicability of that information to the management of
    mortgage risk gives them a competitive edge in the development of new
    technology that can change relationships between primary market
    participants as well as the distribution of economic returns between the
    primary and secondary markets. Second, their funding advantage enables
    the GSEs to borrow at reduced rates in order to make investments in new
    areas at below-market prices, thus discouraging competition while
    gaining experience in those areas.
      Through the development and delivery of new technology to the industry
    and by leveraging their funding advantage, there is potential for the
    GSEs to expand their business beyond the limitations of their Charter
    Acts, which prohibits both Fannie Mae and Freddie Mac from originating
    mortgages. Loan origination is the central function of the primary
    mortgage market, and the GSEs' charter acts clearly restrict them to the
    secondary mortgage market. However, technological advancements have
    blurred the line that defines where

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    the primary market ends and the secondary market begins. A new level of
    clarity is required to establish the permissible activities under the
    Enterprises' charter acts, including the development of intellectual
    property.

    New Regulatory Authority

      The Administration continues to support broad reform of the GSE
    supervisory system. In particular, the Administration supports
    establishing a new regulator for all three of the housing GSEs that
    would combine safety and soundness authority with oversight of their
    respective housing missions. The new regulator must have enhanced powers
    comparable to those of other world-class financial regulators,
    including, among others, the ability to put a GSE into receivership
    should it fail, authority to establish and adjust appropriate capital
    standards, and new product authority. A new regulator must also have
    clear authority to address and mitigate the risks posed by the GSEs'
    retained portfolios. Finally, a new regulatory structure must ensure
    that the GSEs are adhering to their affordable housing mission.

                            Education Credit Programs

      The Federal Government guarantees loans through intermediary agencies
    and makes direct loans to students to encourage postsecondary education
    enrollment. 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 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 3,600 lenders, 35 State and private guaranty agencies,
    and over 5,000 participating schools. In the FFEL program, 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 three 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 nearly 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.
      In 2006, the Congress passed reconciliation legislation reducing
    excess subsidies in the FFEL program and helping to make both programs
    more effective. The reforms included 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. In recognition of the fact that federal subsidies
    remain higher than necessary to ensure that loans are available to
    students in this profitable and competitive market, the 2008 Budget
    proposes to reduce interest subsidies paid to FFEL lenders by 50 basis
    points. The 2008 Budget also proposes to reduce default insurance from
    97 percent to 95 percent, and increase the origination fee lenders pay
    on consolidation loans. To rationalize federal subsidies to guaranty
    agencies, the Administration proposes to shift the basis of account
    maintenance fee payments from the balance of loans guaranteed to a cost-
    per-unit formula, and reduce the amount guaranty agencies can retain on
    the defaulted loans they collect. These savings will be used to provide
    significant benefits to students such as raising the Pell Grant maximum
    award to $5,400, increasing Academic Competitiveness Grant awards by 50
    percent, and offering higher loan limits.

             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 helps home and business-owners, as well as renters,
    cover the uninsured costs of recovery from disasters through its direct
    loan program.
      The 2008 Budget requests $464 million, including administrative funds,
    for SBA to leverage more than $29 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

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    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 2006, the outstanding balance of business
    loans totaled $67 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 about $230,000 in 2001 to $152,000
    in 2006, while the annual number of new loans has grown from 43,000 to
    over 90,000 during the same time period.
      During the past few years, SBA has implemented several initiatives to
    streamline operations by increasingly delegating responsibilities to
    lenders and centralizing operations while managing and mitigating risk.
    In 2003, SBA implemented a state-of-the-art Lender Loan Monitoring
    System (LLMS) under the newly formed Office of Lender Oversight. This
    office uses LLMS to evaluate individual SBA lenders by tracking the
    expected risk of SBA guaranteed loans in their portfolios relative to
    expected performance of those loans. The 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 lender risk reviews,
    credit scoring to compare lenders' performance, and industry
    concentration analysis. Starting in FY 2004, SBA began consolidating its
    loan making, servicing and liquidating functions from 69 District
    Offices into several combined centers. Consolidation has reduced costs,
    increased timeliness of processing, and standardized how loans are
    handled. In 2006, SBA completed the elimination of its several billion
    dollar backlog of loan liquidations resulting from defaulted guarantees.
    In 2007, SBA is working with contractor support to identify additional
    processes that could be reengineered to reduce costs, improve quality,
    and expedite processing.
      To address major challenges in making and disbursing loans resulting
    from the 2005 Gulf Coast hurricanes, SBA initiated the Accelerated
    Disaster Response Initiative to identify and implement process
    improvements to quicken the delivery of disaster assistance. As a result
    of customer feedback and analysis of best business practices, SBA
    piloted a case management approach. Using case management, in which a
    team of SBA staff work with a borrower from initial application through
    loan disbursement, SBA can better serve disaster applicants and monitor
    the processing of loans. SBA has also implemented numerous productivity
    metrics to track the status of loans in processing and identify areas
    that require management intervention or additional resources.
      By 2008, SBA expects to implement an Internet-based loan application
    system that will facilitate the collection of data from disaster victims
    and speed processing. This investment complements investments that SBA
    made through 2006 in the Disaster Credit Management System.
      The Budget proposes to build upon the success of the zero-subsidy 7(a)
    program by making the Microloan program self-financing through modest
    increases to the interest rate paid by program intermediaries. The
    Administration is also proposing authorizing legislation to enable the
    secondary market guarantee (SMG) program to charge nominal fees on
    lenders seeking to pool loans; fees are expected to be less than or
    comparable to fees in other secondary market programs and will help
    stabilize the program from the need to make frequent administrative
    changes.

    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 this Budget is $1.5 billion. These
    funds are available to communities of 10,000 or fewer residents. The
    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 five
    percent. This change is expected to reduce the loan repayment costs
    substantially 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 $512 million in
    2008.
      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 2008, USDA proposes to provide $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 one
    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 38,795 jobs in 2008 through its Business and Industry
    guarantee and the IRP loan programs.

    [[Page 78]]

    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 $4.1 billion in direct electric loans for
    distribution, transmission, and modification of existing generation
    facilities, $690 million in direct telecommunications loans, $300
    million in broadband loans, and $25 million in DLT grants.
      Since 1992, RUS electric loans have been used primarily to finance
    transmission, distribution, and upgrades to generation facilities.
    During this time, generation has been deregulated and has become a more
    commercial operation. With the increased needs for all aspects of
    electricity provision and to ensure adequate funding for rural areas,
    RUS loans will continue to focus on transmission, distribution, and
    upgrading generation facilities. Construction of new generation
    facilities should be financed through the commercial market.
      The Rural Telephone Bank successfully dissolved in FY2006. All stock
    was redeemed during 2006. Loans approved in prior years, but not
    disbursed are still available for borrowers.

    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 2.9 percent in 2006, compared to
    3.1 percent in 2005. FSA-guaranteed farm loans are made to more
    creditworthy borrowers who have access to private credit markets.
    Because the private loan originators must retain 10 percent of the risk,
    they exercise care in examining the repayment ability of borrowers. As a
    result, losses on guaranteed farm loans remain low with default rates of
    0.4 percent in 2006, as compared to 0.45 percent in 2005. 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 2006, FSA provided loans and loan guarantees to approximately
    27,730 family farmers totaling $3.15 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. In 2008, FSA
    proposes to make $3.4 billion in direct and guaranteed loans through
    discretionary programs.
      FSA uses the Farm Business Plan (FBP) to perform financial planning,
    analysis, and management of the loan portfolio. Several enhancements of
    the web equity FBP were put into service in 2006. These include a youth
    loan credit action and availability of additional reports. In 2007, the
    FBP will be modified to enable credit reports to be ordered on
    applicants to expedite application processing. FSA is continuing its
    comprehensive project to streamline all farm loan program regulations,
    handbooks, and information collections. This is a major effort to
    streamline the program and reduce the burden for both applicants and the
    Agency, resulting in an improvement in loan processing efficiencies.

    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 remain
    sound. The ratio of capital to assets decreased to 15.7 percent as of
    September 30, 2006 from 16.8 percent for the same period ended in 2005
    as asset growth outpaced capital growth. As of September 30, 2006,
    capital consisted of $2.2 billion in restricted capital held by the Farm
    Credit System Insurance Corporation (FCSIC) and $22.0 billion of
    unrestricted capital--a record level. Nonperforming loans decreased, and
    earnings increased, although rising short-term interest rates and
    competitive conditions compressed interest margins. The examinations by
    the Farm Credit Administration (FCA), the System's Federal regulator,
    also show the strong financial condition of FCS institutions. As of
    September 2006, all FCS institutions had one of the top two examination
    ratings (1 or 2 in a 1-5 scale). Assets grew at a brisk pace (9.5
    percent annual rate) over the past four years, while the number of FCS
    institutions decreased due to consolidation. In September 2002, there
    were seven banks and 104 associations; by September 2006, 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. As of September 30, 2006, the assets in the

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    Insurance Fund totaled $2.243 billion. Of that amount $40 million was
    allocated to the Allocated Insurance Reserve Accounts (AIRAs). As of
    September 30, 2006, the Insurance Fund as a percentage of adjusted
    insured debt was 1.78 percent in the unallocated Insurance Fund and 1.81
    percent including the AIRAs. This was below the Secure Base target of 2
    percent. During 2006, growth in System debt outpaced the capitalization
    of the Insurance Fund that occurs through investment earnings and the
    accrual of premiums.
      Over the 12 month period, ending September 30, 2006, the System's
    loans outstanding grew by $12.6 billion, or 12.3 percent, while over the
    past three years they grew by $24.6 billion, or 26.9 percent. As
    required by law, borrowers are also stockholder owners of System banks
    and associations. As of September 30, 2006, the System had 459,635
    stockholders. Loans to young, beginning, and small farmers and ranchers
    represented 12.3, 19.4, and 29.2 percent, respectively, of the total
    dollar volume of farm loans outstanding at the end of 2005. The
    percentage of loans to beginning farmers increased in 2005, while
    percentages 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
    legislative 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 its
    portfolio concentration on agriculture and rural America. While this
    sector is currently healthy, it is subject to risk due to rapidly rising
    farm real estate prices, volatile commodity prices and input costs,
    uncertainty regarding changes in government farm policy and trade
    agreements, weather-related catastrophes, animal and plant diseases, and
    off-farm employment opportunities.

    Farmer Mac

      Farmer Mac was established in 1988 to facilitate a secondary market
    for farm real estate and rural housing loans. The Farm Credit System
    Reform Act of 1996 expanded Farmer Mac's role from a guarantor of
    securities backed by loan pools to 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.
      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, 2006, totaled $7.1 billion. That volume represents
    an increase of 38 percent from program activity at September 30, 2005.
    Of total program activity, $2.1 billion were on-balance sheet loans and
    agricultural mortgage-backed securities, and $5.0 billion were off-
    balance sheet obligations. Total assets were $4.9 billion at the close
    of the third quarter, with nonprogram investments accounting for $2.7
    billion of those assets. Farmer Mac's net income for first three
    quarters of 2006 was $23.9 million, a decrease of 39 percent from
    restated amounts for the same period in 2005.
      In November 2006, Farmer Mac restated its financial results for 2005
    and other periods to remove the impact of accounting for derivatives as
    hedges against interest rate movements. As a result, there could be
    significant fluctuation in net income in future periods. However, Farmer
    Mac does not expect the accounting change to impact its ability to carry
    out its business plans or have any effect on its business model.

                          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
    Export Credit Guarantee Programs (also known as 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.

    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

    [[Page 80]]

    a stable system of exchange rates through the International Monetary
    Fund 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 six months in any 12-month period unless the
    President gives the Congress a written statement that unique or
    emergency circumstances require the loan or credit be for more than six
    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. DCA provides non-sovereign loan guarantees in
    targeted cases where credit serves more effectively than traditional
    grant mechanisms to achieve sustainable development. DCA is intended to
    mobilize host country private capital to finance sustainable development
    in line with USAID's strategic objectives. Through the use of partial
    loan guarantees and risk sharing with the private sector, DCA stimulates
    private-sector lending for financially viable development projects,
    thereby leveraging host-country capital and strengthening sub-national
    capital markets in the developing world. While there is clear demand for
    DCA's facilities in some emerging economies, the utilization rate for
    these facilities is still very low.
      OPIC also supports a mix of development, employment, and export goals
    by promoting U.S. direct investment in developing countries. OPIC
    pursues these goals through political risk insurance, direct loans, and
    guarantee products, which provide finance, as well as associated skills
    and technology transfers. These programs are intended to create more
    efficient financial markets, eventually encouraging the private sector
    to supplant OPIC finance in developing countries. OPIC has also created
    a number of investment funds that provide equity to local companies with
    strong development potential.

    Ongoing Coordination

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

    Self-Sufficient Export-Import Bank

      The Budget estimates that the Bank's export credit support will total
    $18.7 billion, and will be funded entirely by receipts collected from
    the Bank's customers. The Bank estimates it will collect $146 million in
    2008 in excess of expected losses on transactions authorized in 2008 and
    prior years. These amounts will be used to: (1) cover the estimated
    costs for that portion of new authorizations where fees are insufficient
    to cover expected losses; and (2) to cover administrative expenses.

                             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. Since its creation,
    the system has undergone a series of reforms, most recently in 2006.
      While the deposit insurance system for banks and thrifts today is
    generally sound and well managed, inherent weaknesses in the system
    prompted the Administration to propose, and the Congress to enact, the
    Deposit Insurance Reform Act (part of the Deficit Reduction Act of 2005)
    in February 2006. This package of reforms had several effects: it
    consolidated the Federal Deposit Insurance Corporation's (FDIC)
    insurance funds (the Bank Insurance Fund and Savings Association
    Insurance Fund) into a new Deposit Insurance Fund, set new parameters on
    how the consolidated fund would be managed, adjusted the way that
    premiums for deposit insurance were calculated to ensure that all banks
    would pay premiums for Federal insurance on their insured deposits, and
    allowed for an increase of the coverage limits for Federal deposit
    insurance. These new authorities allow the FDIC to better manage the
    Deposit Insurance Fund and help avoid strain on financial institutions
    by spreading the cost of deposit insurance over time instead of having a
    potential for sharp premium increases when the economy may be under
    stress. The FDIC issued several new regulations during 2006 to implement
    the reforms in 2007.

    [[Page 81]]

      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 Deposit Insurance Reform Act of 2005, the deposit insurance
    ceiling for retirement accounts will be increased to $250,000. In
    addition, beginning in 2010, and every five years thereafter, FDIC and
    NCUA will have the authority to increase deposit insurance coverage
    limits for retirement and non-retirement accounts based on inflation if
    the Boards of the FDIC and NCUA determine such an increase is warranted.
    As of September 30, 2006, FDIC insured $4.1 trillion of deposits at
    8,743 commercial banks and thrifts, and NCUA insured $529 billion of
    deposits (shares) at 8,462 credit unions.

    Current Industry Conditions

      The banking and thrift sector has been in the midst of a sustained run
    of record profits and strong balance sheets. During calendar year 2006,
    insured banks and thrifts continued to report record-high net earnings,
    with the industry's two highest-ever quarterly profits reported in the
    second and third quarters of 2006. In 2005 and 2006, no banks or thrifts
    failed--the longest period without a failure in the 73-year history of
    the FDIC. As of September 30, 2006, the FDIC classified 47 institutions
    with $4 billion in assets as ``problem institutions'' (institutions with
    the highest risk ratings), a historical low both in the number of
    institutions and dollar-value of assets thus classified.
      Despite these strong fundamentals, some risks remain. In particular,
    the residential real estate market has been showing signs of significant
    weakness in recent months, with several regional markets experiencing
    slower sales and stagnant or even falling property prices. According to
    the National Association of Realtors, U.S. median house prices stayed
    essentially flat during the second half of 2006, after four and half
    years when growth rates nationwide exceeded five percent. In addition,
    after the steady series of interest rate hikes by the Federal Reserve in
    2005 and 2006, higher short-term interest rates are beginning to squeeze
    the interest margins of many banks (The interest margin is the
    difference between the interest rates the banks charge for loans and the
    interest rates that they pay to depositors).
       This tightening has begun to erode the proceeds from banks' core
    business. Not only are higher interest rates squeezing banks, they are
    also squeezing borrowers. During the past few years, banks have issued
    an increasing number of non-traditional mortgages, i.e., loans that have
    adjustable payment terms that allow borrowers to have lower initial
    payments, while their overall debt burden stays constant or even
    increases. Studies have suggested that in the first half of 2006, as
    many as 30 percent of mortgages issued nationally were non-traditional.
    Federal regulators, including the Federal Reserve, Office of the
    Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS),
    and FDIC, and industry analysts have been vocal in highlighting the
    spread of non-traditional lending products, and warned lenders and
    borrowers about the additional risks these products can pose if not
    properly managed. The regulators have raised these issues in testimony
    before Congress and in a variety of public forums, including guidance
    issued to the industry.
      The Office of the Comptroller of the Currency has reported that, as
    competition in lending has intensified, banks have been easing their
    standards for extending loans to individuals and businesses. This has
    led to concerns about maintaining credit quality in the nation's lending
    markets. Separate, but related concerns have arisen in the area of
    ``subprime'' lending--loans to consumers with poor credit histories or
    who belong to groups that may not have previously had access to
    financing. This segment of the market has seen substantial growth in
    recent years, providing greater opportunity to these borrowers, but
    loans to subprime borrowers historically have higher rates of default.
    Although lenders charge higher rates of interest to subprime borrowers
    to compensate for the risk of default, with increased competition the
    spread (or additional interest charged) on subprime lending has fallen
    and may not fully cover the potential risk.
      In order to address some of these potential problems, especially in
    non-traditional mortgages and easing lending standards, during 2006 the
    Federal banking regulators (the Board of Governors of the Federal
    Reserve System, the FDIC, the OCC, and the OTS) issued guidance to banks
    and thrifts on managing exposure to non-traditional mortgages, and on
    the appropriate disclosure to consumers of clear and balanced
    information about the risks of these products. The regulators also
    issued guidance on commercial real estate which sought to mitigate
    potential problems with rising concentrations of lending in commercial
    real estate, an issue of regulatory concern in a number of smaller and
    mid-sized community banks.
      Also worthy of note is the increasing consolidation of the U.S.
    banking industry in recent years. As banks have merged or been acquired,
    the largest institutions have accounted for a growing share of total
    assets--whereas in 1984 depository institutions with over $10 billion in
    assets accounted for 42 percent of total assets in the industry, by 2004
    the share of those institutions had risen to 73 percent. This has
    enabled larger banks and other institutions to diversify more
    effectively and obtain financing from the capital markets, but it has
    also meant that the failure of a single large insured institution could
    put a significant strain on the resources of the Federal deposit
    insurance funds.

    Recent Changes to Federal Deposit Insurance Funds

      Under the Deposit Insurance Reform Act of 2005, the FDIC's Bank
    Insurance Fund (BIF) and its Savings Association Insurance Fund (SAIF)
    were merged into the new Deposit Insurance Fund (DIF) in June 2006.

    [[Page 82]]

    At the end of September 2006, the DIF reserve ratio (ratio of insurance
    reserves to insured deposits) stood at 1.22 percent--$1.2 billion below
    the level that would meet the target reserve ratio. Under new authority
    provided by the passage of the Deposit Insurance Reform Act, the FDIC
    Board voted to establish a new set of premiums for the industry to
    recapitalize the DIF. The new premiums range from a minimum of five
    basis points (five cents per $100 of assessable deposits) up to as high
    as 43 basis points based on the assessed risk of an institution. The
    Deposit Insurance Reform Act of 2005 provided depository institutions
    that had paid deposit insurance premiums prior to 1996 (the last year
    the FDIC collected premiums) with $4.7 billion in credits toward
    premiums, most of which will likely be used by 2009. Taking these
    credits into consideration, the FDIC is expected to collect
    approximately $1.5 billion in new revenue during fiscal 2007 and 2008
    combined.
      The National Credit Union Share Insurance Fund (NCUSIF), the Federal
    fund for credit unions that is analogous to the DIF for banks and
    thrifts, ended fiscal year 2006 with assets of $6.7 billion and an
    equity ratio of 1.29 percent, approaching the NCUA-set target ratio of
    1.30 percent. Over the past five years, the NCUSIF's equity ratio has
    gradually risen from about 1.27 percent, reflecting strong performance
    (and therefore few losses due to failures) in the credit union industry.

    Current Regulatory Issues

      A number of major regulatory initiatives are currently underway in the
    banking sector, which are likely to have a significant impact on the
    banking sector as a whole and, by extension, on the Federal deposit
    insurance system. For example, the Federal banking regulators (the
    Federal Reserve, FDIC, OCC and OTS) continue to work on a rulemaking
    that would implement the ``International Convergence of Capital
    Measurement and Capital Standards: A Revised Framework'' (``Basel II'').
      Since equity capital serves as a cushion against potential losses,
    banks with riskier asset portfolios should hold more equity capital. The
    original Basel Capital Accord (Basel I) adopted in 1989 is an
    international accord among financial regulators establishing a uniform
    capital standard for banks across nations. Under Basel I, bank assets
    are grouped into a small number of broad risk categories. A bank's
    regulatory capital requirement is tied to the amount of its asset
    holdings in each risk category.
      During 2006, the Federal banking regulators proposed two separate but
    related rulemakings to implement the Revised Basel Capital Accord: the
    ``Basel II'' framework and an intermediate ``Basel 1A'' framework.
      In the proposed Basel II rule, U.S. regulators are considering
    requiring the ten or so largest banks (including those that have major
    international operations, complex financial structures and expertise) to
    use an advanced internal ratings-based approach to calculate their
    credit risk capital requirements. The Basel II rulemaking would allow
    for greater sensitivity to risk in the portfolios banks hold. Rather
    than grouping assets into broad risk categories, capital requirements
    would be tied to banks' internal assessments of the likelihood and
    severity of default losses from the assets they hold. The rules are also
    intended to allow capital requirements to more accurately account for
    the benefits or risk-mitigation activities undertaken by banks. The
    rulemaking would also require banks to hold capital to cover operational
    risk, which is not covered under the existing (Basel I) requirements.
      Implementation of the Basel II standard in Europe is scheduled to
    begin during 2007, more than a year before U.S. implementation would
    likely begin, and this delay has led to concerns about a competitive
    imbalance between U.S. and foreign banks. There are also concerns about
    competitive imbalance between U.S. banks, and for that reason, banks
    other than the ten largest U.S. banks would be able to choose between
    adopting the ``Basel II'' standard, the current ``Basel I'' system, and
    an alternative ``Basel 1A'' standard.
      The ``Basel 1A'' standard is intended to be more risk-sensitive than
    Basel I, but easier to implement than Basel II. The ``Basel 1A''
    standard would provide additional risk-sensitivity through use of
    external credit ratings, and internal risk measures for some types of
    assets (i.e., loan-to-value ratios for mortgages). This new standard
    would allow banks to potentially lower their capital requirements and
    provide small- and mid-sized banks a means to stay competitive with the
    larger Basel II banks. The regulators are proposing to make the Basel 1A
    standard optional for banks, meaning that no small or medium-sized bank
    would be required to change its capital regime.
      The proposed text of both rules has been released for public comment,
    and regulators hope to finalize these rules in the near future.

                               Pension Guarantees

      The Pension Benefit Guaranty Corporation (PBGC) insures pension
    benefits of workers and retirees in covered defined-benefit pension
    plans sponsored by private-sector employers. PBGC pays benefits, up to a
    guaranteed level, 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 healthy
    firms become distressed and well-funded plans become underfunded due to
    inadequate contributions, poor investment results, or increased
    liabilities.
      PBGC monitors companies with underfunded plans and acts to protect the
    interests of the pension insurance program's stakeholders where
    possible. Under its Early Warning Program, PBGC works with companies to
    strengthen plan funding or otherwise protect the in

    [[Page 83]]

    surance program from avoidable losses. However, PBGC's authority to
    prevent undue risks to the insurance program is limited.
      As a result of a flawed pension funding system and exposure to losses
    from financially troubled plan sponsors, PBGC's single-employer program
    incurred substantial losses from underfunded plan terminations in 2001
    through 2006. The table below shows the ten largest plan termination
    losses in PBGC's history. Nine of the ten have come in the past five
    years. The program's deficit at 2006 year-end stood at $18.1 billion \1\
    compared to a $9.7 billion surplus at 2000 year-end.
    ---------------------------------------------------------------------------
      \1\ The 2006 year-end single-employer program deficit of $18.1 billion
    was less than the $22.8 billion deficit at the end of 2005. The
    improvement in PBGC's financial condition was driven primarily by the
    airline relief provisions in the Pension Protection Act of 2006, which
    resulted in large plans previously classified as probable terminations
    being changed from the probable classification to the reasonably
    possible classification in FY 2006. This credit was partially offset by
    $3.1 billion in financial losses.
    ---------------------------------------------------------------------------

                   LARGEST TEN CLAIMS AGAINST THE PBGC'S SINGLE-EMPLOYER INSURANCE PROGRAM, 1975-2006
    ----------------------------------------------------------------------------------------------------------------
                                                                                                         Percent  of
                                                                   Fiscal Years  of                         Total
                            Top 10 Firms                          Plan  Terminations  Claims  (by firm)     Claims
                                                                                                         (1975-2005)
    ----------------------------------------------------------------------------------------------------------------

      1.  United Airlines.......................................               2005      $7,484,348,482      22.90%
      2.  Bethlehem Steel.......................................               2003       3,654,380,116      11.20%
      3.  US Airways............................................         2003, 2005       2,690,222,805       8.20%
      4.  LTV Steel *...........................................   2002, 2003, 2004       2,136,698,831       6.50%
      5.  National Steel........................................               2003       1,275,628,286       3.90%
      6.  Pan American Air......................................         1991, 1992         841,082,434       2.60%
      7.  Weirton Steel.........................................               2004         690,181,783       2.10%
      8.  Trans World Airlines..................................               2001         668,377,105       2.00%
      9.  Kaiser Aluminum.......................................               2004         600,009,879       1.80%
      10.   Kemper Insurance....................................               2005         568,417,151       1.70%
                                                                 ---------------------------------------------------
    Top Ten Total...............................................  ..................     20,609,346,871      63.20%
    All Other Total.............................................  ..................     12,017,433,400      36.80%
                                                                 ---------------------------------------------------
      TOTAL.....................................................  ..................    $32,626,780,271     100.00%
    ----------------------------------------------------------------------------------------------------------------
    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.

    Sources: PBGC Fiscal Year Closing File (9/30/06), PBGC Case Administration System, and PBGC Participant System
      (PRISM).

      In February 2005 the Administration proposed comprehensive reforms to
    address structural flaws in the statutory plan funding requirements and
    in the design of the insurance program. The proposal sought to
    strengthen funding for workers' defined-benefit pensions; provide more
    accurate information about pension liabilities and plan underfunding;
    and enable PBGC to meet its obligations to participants in terminated
    pension plans. Many of the President's reforms were incorporated into
    the Deficit Reduction Act (DRA) of 2005, enacted in February 2006, and
    the Pension Protection Act of 2006 (PPA), enacted in August 2006.
      The legislation made significant structural changes to the retirement
    system. But while the PBGC has sufficient liquidity to meet its
    obligations for a number of years, neither the single-employer nor
    multiemployer program has the resources to satisfy fully the agency's
    long-term obligations to plan participants.
      Further reforms are needed to address the $19 billion gap that still
    exists between PBGC's liabilities and its assets. The Budget reproposes
    non-enacted premium reforms from the Administration's comprehensive
    pension reform proposal that were not included in the DRA or the PPA,
    including:
        Authorizing PBGC's Board of Directors to set the variable
              premium rate.
        Extending the variable rate premium to a plan's non-vested
              as well as its vested liabilities.
      These reforms will improve PBGC's financial condition and safeguard
    the future benefits of American workers. The Administration is committed
    to pension reform that will ultimately restore the 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. By

    [[Page 84]]

    the end of 2006, the program had over 5.3 million policies in more than
    20,200 communities with over $1 trillion 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. However, structures built prior to flood mapping and NFIP
    floodplain management requirements, which make up 26 percent of the
    total policies in force, pay less than fully actuarial rates.
      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 nearly 14 percent in 2006
    with nearly 660,000 new policies. The most significant participation
    increases were in vulnerable coastal states, such as Mississippi (58
    percent, 25,371 policy increase), Texas (30 percent, 140,834 policy
    increase), Louisiana (25 percent, 98,096 policy increase), and Florida
    (11 percent, 208,716 policy increase). However, the program has also
    seen significant growth within some in-land states such as Idaho (24
    percent, 1,357 policy increase), based on greater awareness of the need
    for flood insurance protection.
      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
    grant programs targeted toward repetitive and severe repetitive loss
    properties not only help owners of high-risk property, but also reduce
    the disproportionate drain on the National Flood Insurance Fund these
    properties cause through acquisition, relocation, or elevation. As a
    result of the 2005 hurricane season, the number of repetitive and severe
    repetitive loss properties increased significantly, and the Budget
    proposes to expand the severe repetitive loss grant program to mitigate
    the future impact of these high-risk properties. DHS is working 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 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, forcing the NFIP to borrow funds from
    the Treasury in order to meet claims obligations. However, since the
    program began in 1968 until 2005, the program has repaid all borrowed
    funds with interest. However, hurricanes Katrina, Rita, and Wilma
    generated more flood insurance claims than the cumulative number of
    claims from 1968 to 2004. These three storms resulted in over 234,000
    claims with total claims payments expected to be approximately $21
    billion. As a result, the Administration and the Congress have increased
    the borrowing authority to $20.8 billion to date in order to make
    certain that all claims could be paid.
      The catastrophic nature of the 2005 hurricane season has also
    triggered an examination of the program, and the Administration has
    worked with the Congress to improve the program, 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 program;
    increasing risk awareness by educating property owners; and reducing
    future risks by implementing and enhancing mitigation measures. Although
    flood insurance reform was not achieved in 2006, the Administration
    looks forward to continuing to work with the Congress to enact program
    reforms that 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. The 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 a portion of 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 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 the 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

    [[Page 85]]

    to generate about $15 million annually beginning in 2009. 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; the development of revenue and livestock insurance, for
    example, has 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 catastrophic coverage (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. Higher levels of
    coverage, called buy-up coverage, are also available. A premium is
    charged for buy-up coverage. The premium is determined by the level of
    coverage selected and varies from crop to crop and county to county. For
    the 10 principal crops, which account for about 80 percent of total
    liability, the most recent data shows that over 75 percent of eligible
    acres participated in the crop insurance program.
      RMA offers both yield and revenue-based insurance products. 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 or yield crop insurance by adding price
    variability to production history.
      USDA is continuously trying to develop new products or expand existing
    products in order to cover more types of crops. In 2006, a Livestock
    Risk Protection for Lamb pilot was introduced, and Adjusted Gross
    Revenue-Lite was made available in five additional States. In addition,
    two new Group Risk Protection risk management tools for pasture,
    rangeland, and forage protection were approved for the 2007 crop year.
    These innovative pilot programs are based on vegetation greenness and
    rainfall indices and were developed to provide livestock producers the
    ability to purchase insurance protection for losses of forage produced
    for grazing or harvested for hay. RMA also expanded the Group Risk
    Income Protection plans for cotton, wheat, and grain sorghum for the
    2007 crop year. And, it is expected that the Livestock Gross Margin
    pilot program will be expanded to include cattle in 2007. 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 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 (TRIA). 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 offering
    commercial property and casualty insurance policies 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 initially
    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 any Federal payments via
    surcharges on policyholders in future years. In December 2005, the
    Congress passed and the President signed the Terrorism Risk Insurance
    Extension Act, which extended the program for two years, through
    December 31, 2007, and substantially narrowed the scope of the program.
       The 2005 Act significantly reduced taxpayers' exposure by excluding
    certain lines of insurance from Federal coverage: commercial automobile,
    burglary and theft, surety, professional liability, and farm owners
    multiple peril insurance were removed from the program altogether. In
    addition, the 2005 Act increased 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 decreased 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.
      The new legislation also increased the trigger amount for Federal
    payments, from the original $5 million in aggregate insured losses from
    an act of terrorism to

    [[Page 86]]

    $50 million in calendar year 2006 and $100 million in calendar year
    2007. TRIA imposes a cap of $100 billion on total insurer losses from
    terrorist attacks that the Federal program would cover. Under the
    statute, the Congress would determine the procedures to govern any
    payments for losses beyond $100 billion in separate legislation.
      In addition to the reforms to the scope of the program, the 2005 Act
    required the President's Working Group on Financial Markets (PWG) to
    conduct a study on the availability and affordability of terrorism risk
    coverage under the program and to report the results to the Congress by
    September 30, 2006. The PWG report found that the program had achieved
    its goals of supporting the insurance industry post September 11, 2001
    and that the market for terrorism risk insurance (in terms of
    availability and affordability) has improved since September 11, 2001.
    The TRIA program was never intended to be permanent, but rather was
    intended to help stabilize the insurance industry during a time of
    significant transition. It has been successful in providing a temporary
    transition to allow for greater market development.

    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 addition to a number
    of short term responses, the Congress also passed the Homeland Security
    Act of 2002 (P.L. 107-296.) Among other provisions, this Act required
    the Secretary to provide additional war risk insurance coverage to air
    carriers insured for Third-Party War Risk Liability as of June 19, 2002,
    as authorized under existing law. The Continuing Appropriations Act for
    FY 2007, as amended (P.L. 109-383) further extended the requirement to
    provide insurance coverage through the duration of the resolution,
    February 15, 2007, and the program is expected to be continued through
    at least August 31, 2007. Acting on behalf of the Secretary, the FAA
    insurance policies made available under this Act cover: (i) hull losses
    at agreed value; (ii) death, injury, or property loss to passengers or
    crew, the limit being the same as that of the air carrier's commercial
    coverage before September 11, 2001; and (iii) third party liability, the
    limit generally being twice that of such coverage. The Secretary is also
    authorized to limit an air carrier's third party liability to $100
    million, when the Secretary certifies that the loss is from an act of
    terrorism.
      This program provides airlines with financial protection from war risk
    occurrences, and thus allows airlines to meet the basic requirement for
    ``adequate liability coverage'' found in most aircraft leases and in
    government regulation. Without such coverage, many airlines might be
    grounded. Currently, aviation war risk insurance coverage is generally
    available from private insurers, but premiums are significantly higher
    in the private market. Private insurance is also available for third-
    party liability and for occurrences involving weapons of mass
    destruction, albeit to a lesser extent.
      Currently 75 air carriers are insured by the Department of
    Transportation. 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 for these policies are deposited into the Aviation Insurance
    Revolving Fund. In 2006, the Fund earned approximately $169 million in
    premiums for insurance provided by DOT, and it is anticipated that an
    additional $99 million in premiums will be earned in 2007. At the end of
    2006, the balance in the Aviation Insurance Revolving Fund available for
    payment of future claims was $742 million. Although no claims have been
    paid by the Fund since 2001, the balance in the Fund would be inadequate
    to meet either the coverage limits of the largest policies in force ($4
    billion) or to meet a series of large claims in succession. 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. The Administration is committed to
    working with the Congress to reform this program, and to ensure that air
    carriers more equitably share in the risks associated with this program.

    [[Page 87]]

                        TABLE 7-1.  ESTIMATED FUTURE COST OF OUTSTANDING FEDERAL CREDIT PROGRAMS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                       Estimated                        Estimated
                                                      Outstanding   Future Costs of    Outstanding   Future Costs of
                      Program                            2005             2005            2006             2006
                                                                    Outstanding \1\                  Outstanding \1\
    ----------------------------------------------------------------------------------------------------------------
    Direct Loans: \2\
    Federal Student Loans.........................             113               11             116               16
    Farm Service Agency (excl. CCC), Rural                      43                9              43               10
     Development, Rural Housing...................
    Rural Utilities Service and Rural Telephone                 34                2              38                2
     Bank.........................................
    Housing and Urban Development.................              12                2              11                3
    Export-Import Bank............................              10                5               7                2
    Public Law 480................................               9                4               8                4
    Agency for International Development..........               8                3               7                3
    Commodity Credit Corporation..................               3                1               2                1
    Disaster Assistance...........................               4                1               7                2
    VA Mortgage...................................               1  ...............               1  ...............
    Other Direct Loan Programs....................              11                3              12                4

                                                   -----------------------------------------------------------------
    Total Direct Loans............................             247               41             251               47
                                                   -----------------------------------------------------------------

    Guaranteed Loans: \2\
    FHA Mutual Mortgage Insurance Fund............             336                2             317                3
    VA Mortgage...................................             206                3             211                3
    Federal Student Loans.........................             289               31             325               52
    FHA General/Special Risk Insurance Fund.......              90                3              98                1
    Small Business \3\............................              73                2              67                2
    Export-Import Bank............................              36                2              36                2
    International Assistance......................              22                2              22                2
    Farm Service Agency (excl. CCC), Rural                      30                1              31  ...............
     Development, Rural Housing...................
    Commodity Credit Corporation..................               2  ...............               3  ...............
    Maritime Administration.......................               3  ...............               3  ...............
    Air Transportation Stabilization Program......               1                1  ..............  ...............
    Government National Mortgage Association        ..............                *  ..............                *
     (GNMA) \3\...................................
    Other Guaranteed Loan Programs................               8                1               6                1

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

    [[Page 88]]

    Total Guaranteed Loans........................           1,096               48           1,120               66
                                                   -----------------------------------------------------------------

                                                   -----------------------------------------------------------------
    Total Federal Credit..........................           1,343               89           1,371              113
    ----------------------------------------------------------------------------------------------------------------
    * $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. Certain SBA data are excluded from the totals because they are secondary guarantees on SBA's own
      guaranteed loans.

    [[Page 89]]

                                      Table 7-2.  REESTIMATES OF CREDIT SUBSIDIES ON LOANS DISBURSED BETWEEN 1992-2006 \1\
                                                     (Budget authority and outlays, in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                       Program                      1996     1997     1998     1999     2000     2001     2002     2003     2004     2005     2006     2007
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                    DIRECT LOANS:

    Agriculture:
      Agriculture credit insurance fund.........        2      -31       23  .......      331     -656      921       10     -701     -147       -2      -14
      Farm storage facility loans...............  .......  .......  .......  .......  .......  .......       -1       -7       -8        7       -1  .......
      Apple loans...............................  .......  .......  .......  .......  .......  .......       -2        1  .......        *        *        *
      Emergency boll weevil loan................  .......  .......  .......  .......  .......  .......  .......        1        *        *        3  .......
      Distance learning and telemedicine........  .......  .......  .......  .......  .......  .......        1       -1       -1        1        7  .......
      Rural electrification and                       -37       84  .......      -39  .......      -17      -42      101      265      143     -197  .......
       telecommunications loans.................
      Rural telephone bank......................  .......       10  .......       -9  .......       -1  .......       -3       -7       -6      -17  .......
      Rural housing insurance fund..............       46      -73  .......       71  .......       19      -29     -435      -64     -200      109  .......
      Rural economic development loans..........  .......        1  .......       -1        *  .......       -1       -1  .......       -2        *  .......
      Rural development loan program............  .......  .......  .......       -6  .......  .......       -1       -3  .......       -3       -2  .......
      Rural community advancement program \2\...  .......        8  .......        5  .......       37        3       -1      -84      -34      -73  .......
      P.L. 480..................................      -37       -1  .......  .......  .......      -23       65     -348       33      -43     -239      -26
      P.L. 480 Title I food for progress credits      -38  .......  .......  .......  .......  .......  .......     -112      -44  .......  .......  .......

    Commerce:
      Fisheries finance.........................  .......  .......  .......  .......  .......      -19       -1       -3  .......        1      -15      -12

    Defense:
      Military housing improvement fund.........  .......  .......  .......  .......  .......  .......  .......  .......  .......        *       -4       -1

    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    2,674
      College housing and academic facilities     .......  .......  .......  .......  .......       -1  .......  .......  .......  .......  .......       11
       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        *        *        *        1
      Assistance to American Samoa..............  .......  .......  .......  .......  .......  .......  .......  .......        *        *  .......        2

    State
      Repatriation loans........................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       -4

    Transportation:
      High priority corridor loans..............  .......  .......       -3  .......  .......  .......  .......  .......  .......  .......  .......  .......
      Alameda corridor loan.....................  .......  .......  .......  .......      -58  .......  .......  .......      -12  .......  .......  .......
      Transportation infrastructure finance and   .......  .......  .......  .......  .......       18  .......  .......  .......        3      -11        7
       innovation...............................
      Railroad rehabilitation and improvement     .......  .......  .......  .......  .......  .......  .......  .......       -5      -14      -11       -1
       program..................................

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

    Veterans Affairs:
      Veterans housing benefit program fund.....       76      -72      465     -111      -52     -107     -697       17     -178      987      -44      -76
      Native American veteran housing...........  .......  .......  .......  .......  .......  .......  .......       -3        *        *        *        1
      Vocational Rehabilitation Loans...........  .......  .......  .......  .......  .......  .......  .......        *        *        *       -1        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       -6
      U.S. Agency for International Development:
        Micro and small enterprise development..  .......  .......  .......  .......  .......  .......        *  .......        *  .......  .......  .......
      Overseas Private Investment Corporation:
        OPIC direct loans.......................  .......  .......  .......  .......  .......  .......  .......       -4      -21        3       -7       72
      Debt reduction............................  .......  .......  .......  .......       36       -4  .......        *      -47     -104       54       -3

    Small Business Administration:
      Business loans............................  .......  .......  .......  .......  .......        1       -2        1       25  .......      -16       -4
      Disaster loans............................  .......  .......     -193      246     -398     -282      -14      266      589      196       61      258

    Other Independent Agencies:
      Export-Import Bank direct loans...........       37  .......  .......  .......     -177      157      117     -640     -305      111     -257     -227
      Federal Communications Commission.........  .......  .......    4,592      980   -1,501     -804       92      346      380      732      -24       11

                  LOAN GUARANTEES:

    Agriculture:
      Agriculture credit insurance fund.........       12      -51       96  .......      -31      205       40      -36      -33      -22     -162       20

    [[Page 90]]

      Agriculture resource conservation           .......  .......  .......  .......  .......        2  .......        1       -1        *        *  .......
       demonstration............................
      Commodity Credit Corporation export            -426      343  .......  .......  .......   -1,410  .......      -13     -230     -205     -366     -232
       guarantees...............................
      Rural development insurance fund..........  .......       -3  .......  .......  .......  .......  .......  .......  .......  .......       34  .......
      Rural housing insurance fund..............        7      -10  .......      109  .......      152      -56       32       50       66       44  .......
      Rural community advancement program \2\...  .......      -10  .......       41  .......       63       17       91       15       29      -64  .......

    Commerce:
      Fisheries finance.........................  .......  .......       -2  .......  .......       -3       -1        3        *        1        *        1
      Emergency steel guaranteed loans..........  .......  .......  .......  .......  .......  .......  .......       50        *        3      -75      -13
      Emergency oil and gas guaranteed loans....  .......  .......  .......  .......  .......        *        *        *        *        *       -1        *

    Defense:
      Military housing improvement fund.........  .......  .......  .......  .......  .......  .......  .......  .......       -3       -1       -3       -5
      Defense export loan guarantee.............  .......  .......  .......  .......  .......  .......  .......  .......  .......       -5  .......  .......
      Arms initiative guaranteed loan program...  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......       20

    Education:
      Federal family education loan program: \3\
      Volume reestimate.........................      535       99  .......      -13      -60      -42  .......      277  .......  .......  .......  .......
      Other technical reestimate................       60  .......  .......     -140      667   -3,484  .......   -2,483   -3,278    1,348    6,837   -3,399

    Health and Human Services:
      Heath center loan guarantees..............  .......  .......  .......  .......        3  .......        *        *  .......        1        *        *
      Health education assistance loans.........  .......  .......  .......  .......  .......  .......  .......       -5      -37      -33      -18      -20

    Housing and Urban Development:
      Indian housing loan guarantee.............  .......  .......  .......  .......  .......       -6        *       -1        *       -3       -1        *
      Title VI Indian guarantees................  .......  .......  .......  .......  .......  .......  .......       -1        1        4        *       -4
      Community development loan guarantees.....  .......  .......  .......  .......  .......  .......  .......  .......       19      -10       -2        4
      FHA-mutual mortgage insurance.............  .......     -340  .......    3,789  .......    2,413   -1,308    1,100    5,947    1,979    2,842      636
      FHA-general and special risk..............     -110      -25      743       79  .......     -217     -403       77      352      507      238   -1,254

    Interior:
      Bureau of Indian Affairs guaranteed loans.  .......       31  .......  .......  .......      -14       -1       -2       -2        *       15        5

    Transportation:
      Maritime guaranteed loans (Title XI)......  .......  .......  .......      -71       30      -15      187       27      -16        4      -76      -11
      Minority business resource center.........  .......  .......  .......  .......  .......  .......        1  .......        *        *  .......        *

    Treasury:
      Air transportation stabilization program..  .......  .......  .......  .......  .......  .......  .......      113     -199      292     -109      -38

    Veterans Affairs:
      Veterans housing benefit fund program.....      334     -706       38      492      229     -770     -163     -184   -1,515     -462     -842     -525

    International Assistance Programs:
      U.S. Agency for International Development:
        Development credit authority............  .......  .......  .......  .......  .......  .......       -1  .......        1       -3       -2        2
        Micro and small enterprise development..  .......  .......  .......  .......  .......  .......  .......  .......        2       -2  .......       -3
        Urban and environmental credit..........       -7  .......      -14  .......  .......  .......       -4      -15       48       -2       -5      -11
        Assistance to the new independent states  .......  .......  .......  .......  .......  .......      -34  .......  .......  .......  .......  .......
         of the former Soviet Union.............
        Loan Guarantees to Israel...............  .......  .......  .......  .......  .......  .......  .......  .......      -76     -111      188       34
        Loan Guarantees to Egypt................  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......        7       14
      Overseas Private Investment Corporation:
        OPIC guaranteed loans...................  .......  .......  .......  .......  .......  .......        5       77       60     -212      -21     -149

    Small Business Administration:
      Business loans............................      257      -16     -279     -545     -235     -528     -226      304    1,750    1,034     -390     -268

    Other Independent Agencies:
      Export-Import Bank guarantees.............       13  .......  .......  .......     -191   -1,520     -417   -2,042   -1,133     -655   -1,164     -579

                                                 -----------------------------------------------------------------------------------------------------------
    Total.......................................      727     -832    5,642    4,518   -3,641   -6,427   -1,854     -142    3,468    6,008    9,037   -3,111
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * 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 91]]

                                       Table 7-3.  DIRECT LOAN SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2006-2008
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2006 Actual                   2007 Estimate                  2008 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.......................      8.03         80       989      9.47         94       995      9.88         97       977
      Farm storage facility loans..............................     -0.62         -1       111      0.25  .........        74      1.12          1        93
      Rural community advancement program......................      5.90         83     1,406      9.00         90     1,009  ........  .........  ........
      Rural electrification and telecommunications loans.......     -0.50        -31     6,080     -0.71        -38     5,377     -0.51        -24     4,790
      Distance learning, telemedicine, and broadband program...      2.14          7       333      1.94         22     1,155      2.15          6       300
      Rural water and waste disposal...........................  ........  .........  ........  ........  .........  ........     14.20        153     1,080
      Rural community facility.................................  ........  .........  ........  ........  .........  ........      5.55         17       302
      Rural housing assistance grants..........................     46.76          2         4     47.82          4         8  ........  .........  ........
      Farm labor...............................................     44.59          9        20     47.95          5        10     43.26          6        14
      Multifamily housing revitalization.......................     46.76          1         2     47.82          1         2  ........  .........  ........
      Rural housing insurance fund.............................     14.57        199     1,357     13.22        195     1,463     17.23          7        39
      Rural development loan fund..............................     43.02         15        34     44.07         15        33     42.89         14        34
      Rural economic development loans.........................     19.97          5        25     21.84          5        23     22.59          7        33
      Public law 480 title I direct credit and food for             67.92         27        39  ........  .........  ........  ........  .........  ........
       progress................................................

    Commerce:
      Fisheries finance........................................     -3.34         -4       138     -6.21         -5        75    -10.58         -1         8

    Defense--Military:
      Defense family housing improvement fund..................      2.56          2        78     28.40        251       883     26.38         61       233

    Education:
      College housing and academic facilities loans............  ........  .........        15     57.72        179       310  ........  .........  ........
      Federal direct student loan program......................      4.98      1,807    36,305      2.43        474    19,503      2.35        509    21,636

    Health and Human Services:
      State grants and demonstrations..........................    100.00        140       140    100.00          1         1  ........  .........  ........

    Homeland Security:
      Disaster assistance direct loan..........................     75.00        953     1,271      1.18  .........        25      1.73  .........        25

    Housing and Urban Development:
      FHA-mutual mortgage insurance............................  ........  .........         3  ........  .........        50  ........  .........        50

    State:
      Repatriation loans.......................................     64.99          1         1     60.14          1         1     60.22          1         1

    Transportation:
      Federal-aid highways.....................................      8.50          4        42      5.05        121     2,400      5.00         79     1,581
      Railroad rehabilitation and improvement program..........  ........  .........       155  ........  .........       200  ........  .........       600

    Treasury:
      Community development financial institutions fund........     37.47  .........         1     37.47          1         3     37.52          1         2

    Veterans Affairs:
      Housing..................................................      2.27          3       163      5.25         18       335      3.86         20       539
      Native American veteran housing loan.....................    -13.79         -1         4    -13.46         -1         4    -14.48         -1         4
      General operating expenses...............................      1.59  .........         3      2.00  .........         3      2.16  .........         3

    International Assistance Programs:
      Debt restructuring.......................................  ........         29  ........  ........         84  ........  ........        255  ........
      Overseas Private Investment Corporation..................      3.63          7       193      2.74         10       350      3.22         16       500

    Small Business Administration:
      Disaster loans...........................................     14.64      1,286     8,785     17.73        471     2,659     16.27        173     1,064
      Business loans...........................................      7.17          1        20     10.21          1        10  ........  .........        25

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................      1.79          1        56     34.00         17        50     33.01         17        50
                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A      4,625    57,773       N/A      2,016    37,011       N/A      1,414    33,983
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\  Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
    N/A = Not applicable.

    [[Page 92]]

                                      Table 7-4. LOAN GUARANTEE SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS, 2006-2008
                                                                    (In millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2006 Actual                   2007 Estimate                  2008 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.......................      3.12         67     2,147      2.39         65     2,624      2.54         62     2,450
      Commodity Credit Corporation export loans................      4.88         71     1,453      3.00         61     1,990      2.63         63     2,440
      Rural community advancement program......................      3.99         38       933      4.02         48     1,197  ........  .........  ........
      Rural water and waste disposal...........................  ........  .........  ........  ........  .........  ........     -0.82         -1        75
      Rural community facility.................................  ........  .........  ........  ........  .........  ........      3.68          8       210
      Rural housing insurance fund.............................      1.29         41     3,173      1.26         62     4,998      0.57         29     5,049
      Rural business and industry..............................  ........  .........  ........  ........  .........  ........      4.32         43     1,000
      Rural business investment................................      7.72          2        24  ........  .........  ........  ........  .........  ........
      Renewable energy.........................................      6.45          2        24      6.49         10       154      9.69         19       195

    Education:
      Federal family education loan............................     12.74     17,274   135,576      6.65      5,860    88,062      3.88      3,861    99,481

    Energy:
      Title 17 innovative technology loan guarantee program....  ........  .........  ........  ........  .........  ........  ........  .........     9,000

    Health and Human Services:
      Health resources and services............................      3.50  .........         2      3.42  .........         8  ........  .........  ........

    Housing and Urban Development:
      Indian housing loan guarantee fund.......................      2.42          5       190      2.35          5       251      2.42          6       367
      Native Hawaiian Housing Loan Guarantee Fund..............  ........  .........  ........      2.35          1        43      2.42          1        41
      Native American housing block grant......................     12.26          2        13     11.99          2        17     12.12          2        17
      Community development loan guarantees....................      2.20          5       220      2.17          3       136      2.20          1        45
      FHA-mutual mortgage insurance............................     -1.70       -880    51,783     -0.37       -164    44,418     -0.83       -680    81,996
      FHA-general and special risk.............................     -1.74       -504    28,702     -2.01       -413    20,499     -2.54       -242     9,514

    Interior:
      Indian guaranteed loan...................................      4.75          5       117      6.45          5        87      6.52          5        86

    Transportation:
      Minority business resource center program................      1.85  .........         2      1.82  .........        18      2.03  .........        18
      Federal-aid highways.....................................  ........  .........  ........      3.90          8       200      5.90         12       200
      Railroad rehabilitation and improvement program..........  ........  .........  ........  ........  .........  ........  ........  .........       100
      Maritime guaranteed loan (title XI)......................  ........  .........  ........      5.93          4        67  ........  .........  ........

    Veterans Affairs:
      Housing..................................................     -0.32        -73    23,500     -0.36       -102    28,260     -0.37       -108    29,104

    International Assistance Programs:
      Loan guarantees to Israel................................  ........  .........  ........  ........  .........     1,000  ........  .........     1,000
      Development credit authority.............................      3.66          6       159      5.45          6       110      6.03         21       348
      Overseas Private Investment Corporation..................     -1.96        -13       661     -1.22        -12       950     -0.78         -8       950

    Small Business Administration:
      Business loans...........................................  ........  .........    19,936  ........  .........    28,000  ........  .........    28,000

    Export-Import Bank of the United States:
      Export-Import Bank loans.................................      1.16        141    12,094      0.06         10    15,860     -1.95       -367    18,714
                                                                --------------------------------------------------------------------------------------------
        Total..................................................       N/A     16,189   280,709       N/A      5,459   238,949       N/A      2,727   290,400
                                                                --------------------------------------------------------------------------------------------
     ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS

    GNMA:
      Guarantees of mortgage-backed securities loan guarantee..     -0.23       -188    81,739     -0.21       -181    86,000     -0.27       -209    77,400
    SBA:
      Secondary market guarantee...............................  ........  .........     3,633  ........  .........    12,000  ........  .........    12,000
                                                                --------------------------------------------------------------------------------------------
        Total, secondary guaranteed loan commitments...........       N/A       -188    85,372       N/A       -181    98,000       N/A       -209    89,400
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\  Additional information on credit subsidy rates is contained in the Federal Credit Supplement.
    N/A = Not applicable.

    [[Page 93]]

                                                 Table 7-5.  SUMMARY OF FEDERAL DIRECT LOANS AND LOAN GUARANTEES
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Actual                                                Estimate
                                               -------------------------------------------------------------------------------------------------------------
                                                   1999       2000       2001       2002       2003       2004       2005       2006       2007       2008
    --------------------------------------------------------------------------------------------------------------------------------------------------------

    Direct Loans:
      Obligations.............................       38.4       37.1       39.1       43.7       45.4       42.0       56.3       57.8       37.0       34.0
      Disbursements...........................       37.7       35.5       37.1       39.6       39.7       38.7       50.6       46.6       31.4       32.9
      New subsidy budget authority............        1.6      (0.4)        0.3          *        0.7        0.4        2.1        4.7        2.0        1.4
      Reestimated subsidy budget authority \1\        1.0      (4.4)      (1.8)        0.5        2.9        2.6        3.8        3.1        3.6  .........
      Total subsidy budget authority..........        2.6      (4.8)      (1.5)        0.5        3.5        3.0        6.0        7.8        5.5        1.4

    Loan guarantees:
      Commitments \2\.........................      252.4      192.6      256.4      303.7      345.9      300.6      248.5      280.7      239.0      290.4
      Lender disbursements \2\................      224.7      180.8      212.9      271.4      331.3      279.9      221.6      256.0      210.1      256.0
      New subsidy budget authority............          *        3.6        2.3        2.9        3.8        7.3       10.1       17.2        5.2        2.4
      Reestimated subsidy budget authority \1\        4.3        0.3      (7.1)      (2.4)      (3.5)        2.0        3.5        7.0      (6.8)  .........
      Total subsidy budget authority..........        4.3        3.9      (4.8)        0.5        0.3        9.3       13.6       24.2      (1.6)        2.4
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    * 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 94]]

                     Table 7-6. DIRECT LOAN WRITEOFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS
    ----------------------------------------------------------------------------------------------------------------
                                                        In millions of dollars       As a percentage of outstanding
                                                   --------------------------------             loans \1\
                  Agency and Program                                               ---------------------------------
                                                       2006       2007      2008       2006        2007       2008
                                                     Actual     Estimate  Estimate   Actual      Estimate   Estimate
    ----------------------------------------------------------------------------------------------------------------
                 DIRECT LOAN WRITEOFFS

    Agriculture:
      Agricultural credit insurance fund..........         45         78        70        0.67       1.21       1.15
      Commodity Credit Corporation fund...........  ..........  ........        -1  ..........  .........      -0.05
      Rural community advancement program.........          9          4         4        0.10       0.04       0.03
      Rural electrification and telecommunications          9   ........  ........        0.02  .........  .........
       loans......................................
      Rural development insurance fund............          1          1         1        0.05       0.05       0.06
      Rural housing insurance fund................         90         99       112        0.36       0.40       0.45
      Rural development loan fund.................          3          2         1        0.69       0.45       0.21
      Debt restructuring..........................        130   ........  ........       24.95  .........  .........

    Commerce:
      Economic development revolving fund.........          1          1  ........       10.00      14.28  .........

    Education:
      Student financial assistance................         14         14  ........        4.33       4.34  .........
      Perkins loan assets.........................  ..........  ........        54  ..........  .........  .........

    Housing and Urban Development:
      Revolving fund (liquidating programs).......  ..........         1         1  ..........      16.66      25.00
      Guarantees of mortgage-backed securities....          4         24        20       40.00     342.85     285.71

    Interior:
      Indian direct loan..........................  ..........         1         1  ..........       4.34       5.00

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

    Veterans Affairs:
      Veterans housing benefit program............         31          3         3        3.07       0.33       0.25

    International Assistance Programs:
      Debt restructuring..........................  ..........         2        29  ..........       0.81      12.03
      Overseas Private Investment Corporation.....         15          6        15        2.41       0.82       1.78

    Small Business Administration:
      Disaster loans..............................        107         33        61        2.93       0.48       0.85
      Business loans..............................          2          2         2        1.09       1.11       1.28

    Other Independent Agencies:
      Debt reduction (ExIm Bank)..................        776         58       107       73.34      19.07      42.29
      Export-Import Bank..........................      1,112         36        36       12.43       0.58       0.67
      Spectrum auction program....................  ..........        50       150  ..........      11.70      41.89
      Tennessee Valley Authority fund.............          1          1         1        2.08       1.92       1.72
                                                   -----------------------------------------------------------------
        Total, direct loan writeoffs..............      2,437        509       760        1.11       0.22       0.32
                                                   -----------------------------------------------------------------

       GUARANTEED LOAN TERMINATIONS FOR DEFAULT

    Agriculture:
      Agricultural credit insurance fund..........         37         48        48        0.35       0.47       0.45
      Commodity Credit Corporation export loans...         24         52        61        0.97       1.72       1.91
      Rural community advancement program.........        115        135       158        2.44       3.01       3.41
      Rural housing insurance fund................        249        107       242        1.69       0.68       1.52

    Commerce:
      Fisheries finance...........................          4   ........  ........       12.50  .........  .........

    Defense--Military:
      Procurement of ammunition, Army.............         11         15  ........       42.30      78.94  .........
      Family housing improvement fund.............  ..........         7         7  ..........       1.40       1.43

    Education:
      Federal family education loans..............      5,614      6,962     7,671        1.94       2.14       2.12

    Health and Human Services:
      Health education assistance loans...........         16         24        21        0.93       1.74       1.92
      Health center loan guarantees...............  ..........         1  ........  ..........       2.63  .........

    Housing and Urban Development:
      Indian housing loan guarantee...............          1          1         1        0.52       0.27       0.17
      Native American housing block grant.........  ..........         2         2  ..........       2.40       2.17
      FHA--Mutual mortgage insurance..............      5,381      5,722     6,250        1.60       1.80       1.98
      FHA--General and special risk...............      1,034      1,535     1,767        1.15       1.57       1.78

    [[Page 95]]

    Interior:
      Indian guaranteed loans.....................          1          5         5        0.31       1.57       1.47

    Transportation:
      Maritime guaranteed loans (Title XI)........  ..........        35        32  ..........       1.19       1.16

    Veterans Affairs:
      Veterans housing benefit program............      2,207      5,792     5,382        1.07       2.74       2.36

    International Assistance Programs:
      Micro and small enterprise development......          1   ........         1        7.14  .........      16.66
      Urban and environmental credit program......         32         11        12        1.93       0.72       0.86
      Development credit authority................  ..........         2         2  ..........       0.98       0.73
      Overseas Private Investment Corporation.....        118        200        55        3.28       4.94       1.22

    Small Business Administration:
      Business loans..............................      1,200      1,141     1,151        1.63       1.69       1.60

    Other Independent Agencies:
      Export-Import Bank..........................        217        225       225        0.60       0.61       0.58
                                                   -----------------------------------------------------------------
        Total, guaranteed loan terminations for        16,262     22,022    23,093        1.07       1.43       1.44
         default..................................
                                                   -----------------------------------------------------------------
        Total, direct loan writeoffs and               18,699     22,531    23,853        1.08       1.28       1.30
         guaranteed loan terminations.............
                                                   =================================================================

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

    Agriculture:
      Agricultural credit insurance fund..........          3          5         7        5.76       7.81      10.00

    Commerce:
      Fisheries finance...........................          5   ........  ........       13.88  .........  .........

    Education:
      Federal family education loans..............        990      1,121     1,185        4.40       4.57       4.70

    Housing and Urban Development:
      FHA--Mutual mortgage insurance..............  ..........         9         1  ..........       2.25       1.69
      FHA--General and special risk...............        276         25        22        6.23       0.51       0.35

    Interior:
      Indian guaranteed loans.....................          1          2         2        7.69      11.11      10.00

    Treasury:
      Air transportation stabilization guaranteed          39         54  ........       31.20      72.00  .........
       loans......................................

    International Assistance Programs:
      Overseas Private Investment Corporation.....          1          8        11        0.46       2.29       2.98

    Small Business Administration:
      Business loans..............................      1,012        281       279       19.04       5.52       5.35
      Pollution control equipment.................          8   ........  ........       40.00  .........  .........

    Other Independent Agencies:
      Export-Import Bank..........................          4   ........  ........        3.41  .........  .........
                                                   -----------------------------------------------------------------
        Total, writeoffs of loans receivable......      2,339      1,505     1,507        6.18       3.85       3.72
    ----------------------------------------------------------------------------------------------------------------
    \1\ Average of loans outstanding for the year.

    [[Page 96]]

                          Table 7-7. APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS \1\
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                  2006         2007          2008
                                Agency and Program                              Actual      Estimate      Estimate
    ----------------------------------------------------------------------------------------------------------------
                             DIRECT LOAN OBLIGATIONS

    Agriculture:
      Agricultural credit insurance fund.....................................         936          933           917
      P.L. 480...............................................................          39  ............  ...........

    Commerce:
      Fisheries finance......................................................         138           75             8

    Education:
      Historically black college and university capital financing............         208          216   ...........

    Homeland Security:
      Disaster assistance....................................................       1,270           25            25

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

    State:
      Repatriation loans.....................................................           1            1             1

    Transportation:
      Railroad rehabilitation and improvement direct loans...................  ..........  ............          600

    Treasury:
      Community development financial institutions fund......................          11            8             6

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

    Small Business Administration:
      Business loans.........................................................          20           10            25
                                                                              --------------------------------------
        Total, limitations on direct loan obligations........................       2,756        1,401         1,685
                                                                              --------------------------------------

                            LOAN GUARANTEE COMMITMENTS

    Agriculture:
      Agricultural credit insurance fund.....................................       2,147        2,622         2,450

    Energy:
      Title 17 innovative technology loan guarantees.........................  ..........  ............        9,000

    Housing and Urban Development:
      Indian housing loan guarantee fund.....................................         116          158           367
      Title VI Indian Federal guarantees.....................................          17           17            17
      Native Hawaiian Housing Loan Guarantee Fund............................          36           36            41
      Community development loan guarantees..................................         135          136   ...........
      FHA-general and special risk...........................................      35,000       35,000        35,000
      FHA-mutual mortgage insurance..........................................     185,000      185,000       185,000

    Interior:
      Indian guaranteed and insured loans....................................         117           87            86

    Transportation:
      Minority business resource center......................................          18           18            18
      Railroad rehabilitation and improvement loan guarantees................  ..........  ............          100

    International Assistance Programs:
      Development credit authority...........................................         700  ............          700

    Small Business Administration:
      Business loans.........................................................      19,936       28,000        28,000
                                                                              --------------------------------------
        Total, limitations on loan guarantee commitments.....................     243,222      251,074       260,779
                                                                              ======================================

            ADDENDUM: SECONDARY GUARANTEED LOAN COMMITMENT LIMITATIONS

    Housing and Urban Development:
      Guarantees of mortgage-backed securities...............................     200,000      100,000       100,000
    Small Business Administration:
      Secondary market guarantees............................................      12,000       12,000        12,000
                                                                              --------------------------------------

    [[Page 97]]

        Total, limitations on secondary guaranteed loan commitments..........     212,000      112,000       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 98]]

           Table 7-8.  FACE VALUE OF GOVERNMENT-SPONSORED LENDING \1\
                            (In billions of dollars)
    ------------------------------------------------------------------------
                                                               Outstanding
                                                           -----------------
                                                              2005     2006
    ------------------------------------------------------------------------

               Government Sponsored Enterprises

    Fannie Mae \2\........................................      N/A      N/A
    Freddie Mac \3\.......................................      N/A      N/A
    Federal Home Loan Banks...............................      574      621
    Farm Credit System....................................       92      105
    ------------------------------------------------------------------------
    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
      following a restatement of financial data for 2001-2004, audited
      financial results for 2005 and 2006 have not been released.
    \3\ Financial data for Freddie Mac is not presented here because
      following the release of previous earnings restatements, audited
      financial statements for 2005 and 2006 have not been released.

    [[Page 99]]

      Table 7-9.  LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
                                   (GSEs) \1\
                            (In millions of dollars)
    ------------------------------------------------------------------------
                            Enterprise                               2006
    ------------------------------------------------------------------------

                               LENDING

    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..............................................       3,642
        Outstandings............................................      28,763
      Farm credit banks:
        Net change..............................................       9,383
        Outstandings............................................      76,185
      Federal Agricultural Mortgage Corporation:
        Net change..............................................       1,933
        Outstandings............................................       7,059

    Federal Home Loan Banks: \4\
      Net change................................................      21,302
      Outstandings..............................................     743,855

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

                              BORROWING

    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..............................................       4,381
        Outstandings............................................      32,847
      Farm credit banks:
        Net change..............................................      13,015
        Outstandings............................................      94,376
      Federal Agricultural Mortgage Corporation:
        Net change..............................................         623
        Outstandings............................................       4,554

    Federal Home Loan Banks: \4\
      Net change................................................      39,094
      Outstandings..............................................     944,039

    [[Page 100]]

                           DEDUCTIONS \5\

    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: \5\
      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
      following a restatement of financial data for 2001-2004, audited
      financial results for 2006 have not been released.
    \3\ Financial data for Freddie Mac is not presented here because
      following the release of previous earnings restatements, audited
      financial statements for 2006 have not been released.
    \4\ The net change in borrowings is derived from the difference in
      borrowings between 2006 and the Federal Home Loan Banks' audited
      financial statements of 2005.
    \5\ Totals and subtotals have not been calculated because a substantial
      portion of the total is unavailable as described above.