[Analytical Perspectives]
[Crosscutting Programs]
[7. Credit and Insurance]
[From the U.S. Government Printing Office, www.gpo.gov]
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7. CREDIT AND INSURANCE
Federal credit 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
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that of the Federal Government, which has general taxing authority. For
some events potentially involving a very large loss concentrated in a
short time period, therefore, Government insurance commanding more
resources can be more credible and effective. Such events include
massive bank failures and some natural and man-made disasters that can
threaten the solvency of private insurers.
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
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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
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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
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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
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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
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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.
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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
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$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.